Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 30, 2018, the aggregate market value of the registrant's common stock held by non-affiliates based upon the closing price of such shares on the New York Stock Exchange on such date was approximately $959.4 million.
As of February 15, 2019, 160,408,958 shares of common stock, no par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's Definitive Proxy Statement for its 2019 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended December 31, 2018.
Intrexon®, Trans Ova Genetics®, EnviroFlight®, Oxitec®, Arctic®, ActoBiotics®, ViaGen®, Okanagan Specialty Fruits®, RheoSwitch®, UltraVector®, Design-Build-Test-Learn®, AquAdvantage®, RTS®, and RheoSwitch Therapeutic System® are our and/or our affiliates' registered trademarks in the United States and AquaBounty™, GenVec™, Precigen™, AdenoVerse™, ActoBio Therapeutics™, Progentus™, AttSite™, LEAP™, Florian™ and Precigen Therapeutics™ are our and/or our affiliates' common law trademarks in the United States. This Annual Report on Form 10-K, or Annual Report, and the information incorporated herein by reference contain references to trademarks, service marks and trade names owned by us or other companies. Solely for convenience, trademarks, service marks and trade names referred to in this Annual Report and the information incorporated herein, including logos, artwork, and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, service marks and trade names. We do not intend our use
or display of other companies' trade names, service marks or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Other trademarks, trade names and service marks appearing in this Annual Report are the property of their respective owners. Unless the context requires otherwise, references in this Annual Report to "Intrexon", "we", "us", and "our" refer to Intrexon Corporation.
Special Note Regarding Forward-Looking Statements
This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Annual Report 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 strategy and overall approach to our business model;
our ability to successfully enter new markets or develop additional products, whether independently or with our collaborators;
our ability to successfully enter into optimal strategic relationships with our subsidiaries and operating companies that we may form in the future;
competition from existing technologies and products or new technologies and products that may emerge;
actual or anticipated variations in our operating results;
our current and future joint ventures, or JVs, exclusive channel collaborations, or ECCs, license agreements and other collaborations;
developments concerning our collaborators and licensees;
actual or anticipated fluctuations in our competitors' or our collaborators' and licensees' operating results or changes in their respective growth rates;
our cash position;
market conditions in our industry;
our ability to protect our intellectual property and other proprietary rights and technologies;
our ability to adapt to changes in laws, regulations and policies;
our ability and the ability of our collaborators and licensees to adapt to changes in laws, regulations and policies and to secure any necessary regulatory approvals to commercialize any products developed by us or under our ECCs, license agreements and JVs;
the ability of our collaborators and licensees to protect our intellectual property and other proprietary rights and technologies;
our ability and the ability of our collaborators and licensees to develop and successfully commercialize products enabled by our technologies;
the rate and degree of market acceptance of any products developed by us, our subsidiaries, a collaborator under an ECC or through a JV or license under a license agreement;
the result of litigation proceedings or investigations that we face currently or may face in the future;
our expectations related to the use of proceeds from our public offerings and other financing efforts; and
our estimates regarding expenses, future revenue, capital requirements and needs for additional financing.
Forward-looking statements may also concern our expectations relating to our subsidiaries and other affiliates. We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report.
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 Annual Report, particularly in Item 1A, "Risk Factors," 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, JVs or investments that we may make.
You should read this Annual Report, the documents that we reference in this Annual Report, the audited consolidated financial statements and related notes thereto included in this Annual Report and the documents that we have filed as exhibits to our filings with the Securities and Exchange Commission, or SEC, 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.
We believe we are a leader in the field of synthetic biology, focusing on programming biological systems to alleviate disease, remediate environmental challenges, and provide sustainable food and industrial chemicals. 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.
Synthetic biology is a rapidly evolving discipline that applies engineering principles to biological systems to enable rational, design-based control of cellular function for a specific purpose. Using our suite of proprietary and complementary technologies, we design, build and regulate gene programs, which are DNA sequences that consist of key genetic components. A single gene program or a complex, multi-genic program is fabricated and stored within a DNA vector. Vectors are segments of DNA used as a vehicle to transmit genetic information. DNA vectors can, in turn, be introduced into cells in order to generate a simple or complex cellular system, which are the basic and complex cellular activities that take place within a cell and the interaction of those systems in the greater cellular environment. It is these genetically modified cell systems that can be used to produce biological effector molecules, or be employed directly to enable the development of new and improved products and manufacturing processes across a variety of end markets, including health, food, energy, and environment. 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 subsidiaries, JVs, and collaborators, we seek to create more effective, less costly and more sustainable solutions than can be provided through current industry practices. 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.
While the field of synthetic biology is still emerging, the addressable markets that may benefit from this approach are large and well-established. In health, synthetic biology may provide new approaches to treating diseases, as well as improvements to the manufacture of existing products. It is estimated that in 2018 the global biopharmaceuticals market was over $237 billion. While genetically modified salmon or tilapia may be considered new products, the global market for aquaculture was estimated at more than $170 billion in 2017. Genetically modified agricultural plants are already grown on approximately 180 million hectares around the world and have a global market value greater than $15 billion. In energy, we are working to create novel, highly engineered bacteria that utilize specific energy feedstocks, typically pipeline grade natural gas, to synthesize commercial end products, such as isobutanol for gasoline blending, 2,3 Butanediol for conversion to synthetic rubber and 1,4 Butanediol for polyester. In aggregate, the value of such fuel and chemical products are significant, representing the potential of billions of dollars in estimated market opportunity.
We believe our technologies are broadly applicable across many diverse end markets. Historically, we built our business primarily around the formation of ECCs. An ECC is an agreement with a collaborator to develop products based on technologies in a specifically defined field. Through 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 sales and marketing capabilities. In addition, we have sometimes executed a research collaboration to develop an early-stage program pursuant to which we received reimbursement for our development costs but the exclusive commercial rights, and related access fees, were deferred until completion of an initial research program.
Over time, our strategy has evolved away from ECC-type collaborations to relationships and structures that provide us with more control and ownership over the development process and commercialization path. In these new relationships and structures, we bear more of the responsibility to fund the projects and execute on product candidate development. For example, in October 2018, through our wholly owned subsidiary, Precigen Therapeutics, Inc., or Precigen, we entered into a license agreement, the ZIOPHARM License Agreement, with ZIOPHARM Oncology, Inc., or ZIOPHARM, which terminated and replaced the terms of an ECC with ZIOPHARM. The ZIOPHARM License Agreement gives us development and commercialization control over certain products previously licensed to ZIOPHARM. Additionally, in December 2018, we reacquired the rights to use Chimeric Antigen Receptor T-cell (CAR-T) technologies that were previously licensed to Ares Trading S.A., a wholly owned subsidiary of Merck KGaA, collectively Merck KGaA. See "Notes to the Consolidated Financial Statements - Note 5" appearing elsewhere in this Annual Report for further discussion.
In certain strategic circumstances, we may enter into a JV with a third-party collaborator whereby we may contribute access to our technology, cash or both into the JV, which we will jointly control with our collaborator. Pursuant to a JV agreement, we may be required to contribute additional capital to the JV, and we may be able to receive a higher financial return than we would normally receive from an ECC, to the extent that we and our collaborator are successful in developing one or more products. Additionally, we are increasing the resources that we are expending internally on early-stage proof-of-concept programs where we believe we can leverage our competitive edge in gene program creation and host cell and genome expertise. We are also seeking to partner our more mature programs and capabilities or later-stage assets. In this way, we endeavor to leverage our capital resources and ultimately hope to realize significant value from our mature assets.
As we consider the broad potential applications of our synthetic biology technologies, and consistent with the evolution of our business strategy, we have acquired a number of ventures that are already enabling products that benefit from the application of synthetic biology. Our strategy contemplates the continued acquisition of product-focused companies that we believe may leverage our technologies and expertise in order to expand their respective product applications. We believe that the acquisition of these types of companies allows us to develop and commercialize innovative products and create significant value.
Consistent with the ongoing evolution of our strategy, we routinely consider ways to organize our business and the grouping of our assets to facilitate strategic opportunities.
What is synthetic biology?
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 control 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; 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 polymerase chain reaction and the creation of genetically modified organisms, or GMOs. 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 include 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.
The essence of our approach is to apply synthetic biology by using an iterative process 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 gene programs and cellular systems 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 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, acquired, and integrated a unique suite of technologies, and we continue to expand upon their capabilities. These technologies are complementary in nature and share some or all of 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.
Rationally designed. Our knowledge of biological systems and components allows us to design, build and select gene 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.
Our competitive strengths
We believe that our technologies, our ability to work across multiple host systems 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 across multiple host systems (human, animal, insect, plant, fungi, and bacteria). By virtue of the complementary nature of our technologies, we are able to provide our subsidiaries, JVs, and collaborators with a diverse array of capabilities 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 software platform that combines information technology with advanced statistical analysis for DNA design and genetic engineering, enabling 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 believe 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 21 years, we have accumulated extensive knowledge and experience in the 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 advantages 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 health, food, energy, and environment. 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.
Our evolving business strategy allows us to leverage the broad potential of synthetic biology
We believe our ECC business model was a capital efficient and rapid way for us to initiate our participation in a diversified range of product opportunities and industrial end markets, including health, food, energy, and environment. While our ongoing ECCs continue to allow us to participate in the potential upside from products that are enabled by our technologies across a range of industries, we believe that we are now capable of recognizing additional benefit from the product candidates enabled by our technologies through the formation of a variety of business structures, including operating subsidiaries and JVs. The flexibility of this approach, we believe, will enable us to maximize the value we receive for each particular opportunity within various industries in which we operate.
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.
In order to create a highly functional biological system, we recognize the complexity of cellular processes and the necessity to construct 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 Cell Systems Informatics, which uses statistical modeling and other analytic frameworks to determine the most efficient pathways for an intended biochemical result, and also plays a critical role in our research and development as this database of information allows us to explore new targets of potential interest to our current or future subsidiaries, JVs, and collaborators. Moreover, our bioinformatics and computational modeling platform is central to our Protein Engineering, which focuses on designing enhanced and/or novel protein functionalities, including stability, localization, and catalytic activity.
In addition to creating optimized gene programs via the most efficient cell signaling pathways and in the relevant cellular environments, we have a growing library of genetic components with our UltraVector platform that enable design and assembly of gene programs that facilitate control over the quality, function, and performance of living cells. Our RheoSwitch inducible gene switch provides quantitative dose-proportionate regulation of the amount and timing of target protein expression, thereby providing another mechanism to closely control activity of a newly constructed gene program. Further, our AttSite Recombinases allow for stable, targeted gene integration and expression. Once cells have been engineered for the desired biological output, the LEAP automated platform can be used to identify and purify cells of interest, such as antibody expressing cells and stem cells. Furthermore, our ActoBiotics platform allows for targeted in situ expression of proteins and peptides from engineered microbes. Finally, our AdenoVerse technology platform is comprised of engineered adenovector serotypes that alone and in conjunction with our ability to further manipulate and improve the platform permits greater tissue specificity and target selection. We believe this platform will deliver a gene capacity exceeding 30kb which is three to six times greater than current viral delivery methods.
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.
It is estimated that in 2018 the global biopharmaceuticals market was over $237 billion and is projected to reach greater than $388 billion by 2024. We believe that the unreliable, costly discovery and development process for new medicines is being replaced by the engineering of biology at the genetic, molecular, and cellular level. Our ability to regulate complex gene
programs and cellular systems by applying the principles of science, engineering, and computational bioinformatics with proprietary technologies is being utilized to design new therapies for humans and animals. We are applying our approach to develop targeted gene therapy applications and novel solutions within oncology, rare diseases, active pharmaceutical ingredients, ocular diseases, and infectious diseases, as well as autoimmune, metabolic, and gastrointestinal disorders. All of our human therapeutic product candidates are in the drug discovery, preclinical, or clinical stages of development.
Food and Agriculture
The Food and Agriculture Organization of the United Nations predicts that by 2050 the world's population will grow to almost 10 billion, global demand for food and other agricultural products is expected to increase 50 percent, and global demand for livestock products will increase by 70 percent. We are focused on enabling efficient, high-quality food production that sustainably supports the necessities of our growing population. By applying our suite of technologies, we aim to facilitate development of agricultural, livestock and aquaculture resources that deliver innovative approaches and superior production yields in an environmentally responsible manner.
Energy and Chemicals
Biological production via precise enzymatic conversion represents a promising approach for the efficient production of important energy products. Despite this promise, current attempts to produce "clean" energy are expensive to implement and operate at near break-even yields despite government assistance. Additionally, many alternative energy initiatives start from food sources, such as corn and sugarcane. As a result, these low efficiency processes also compete for arable land and water with the agriculture industry. Using our cellular engineering experience and suite of technologies, we have developed microbial cell lines for bioconversion of methane to higher carbon content compounds. We believe this proprietary platform holds the potential to modernize the existing gas-to-liquids industry by generating important fuels and chemicals at a fraction of the cost of traditional conversion methods. Our bioconversion approach also is being designed to reach an overall balance between sustainable productive yields and attractive economic returns.
To date we have accomplished biological production on a non-commercial scale of six fuel and chemical products that have promise in valuable and relatively large markets. These product opportunities are isobutanol for gasoline blending, 2,3 Butanediol and isoprene for conversion to synthetic rubber, 1,4 Butanediol for polyester, farnesene for diesel fuel and lubricants and isobutyraldehyde for acrylics. In aggregate, the value of such fuel and chemical products are significant, representing the potential of billions of dollars in estimated market opportunity.
Increased globalization has facilitated the spread of pests that affect human and environmental health by carrying disease and damaging crops. In addition, increasing agriculture outputs and employing more industrialized processes to meet the demands of a rapidly growing global population can impact natural resources and affect the environment. We seek to engineer biological solutions that are designed to protect, preserve or restore the environment and promote sustainability of natural resources. These biological approaches may replace products and processes that present an environmental hazard. Examples of products under development include biologically-based approaches that displace petroleum-derived ingredients and polymers, reduce the wasteful practices associated with extracting compounds that occur in limiting amounts in plants and animals, enable toxin-free, species-specific insect control with methods that do not persist in the environment, and facilitate improved sustainability in food systems.
Our business strategy
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. To enable us to maximize the number of these markets we could address, we devised a strategy that allowed us to focus on our core expertise in synthetic biology while developing many different commercial product candidates via collaborations in a broad range of industries or end markets. We built our business primarily around the formation of ECCs, as well as certain research collaborations.
Over time, our strategy has evolved away from ECC-type collaborations to relationships and structures that provide us with more control and ownership over the development process and commercialization path. In these new relationships and structures, we bear more of the responsibility to fund the projects and execute on product candidate development.
For example, effective January 1, 2018, we transferred certain of our gene and cell therapy assets for human health to our wholly owned subsidiary, Precigen. As a further part of this strategic evolution, in October 2018, we entered into the ZIOPHARM License Agreement, which terminated and replaced the terms of an ECC with ZIOPHARM. The ZIOPHARM License Agreement gives us development and commercialization control over certain products previously licensed to ZIOPHARM. Finally, in December 2018, we reacquired the rights to use Chimeric Antigen Receptor T-cell (CAR-T) technologies that were previously licensed to Merck KGaA.
We have acquired a number of ventures that are already enabling products that benefit from the application of synthetic biology. Our strategy contemplates the continued acquisition of product-focused companies that we believe may leverage our technologies and expertise in order to expand their respective product applications. We believe that the acquisition of these types of companies allows us to develop and commercialize innovative products and create significant value.
In certain strategic circumstances, we may enter into a JV with a third party collaborator where we may contribute access to our technology, cash or both into the JV that we will jointly control with our collaborator. Pursuant to a JV agreement, we may be required to contribute additional capital to the JV, and we may be able to receive a higher financial return than we would normally receive from an ECC to the extent that we and our collaborator are successful in developing one or more products. Our gas-to-liquid platform for bioconversion of methane to higher carbon content compounds, which we refer to as our methane bioconversion platform, or MBP, is an example of our implementation of a JV approach. Based on our internally developed work on our MBP technology, we have executed two JV arrangements with related parties for specific end products.
Our operating subsidiaries
To derive value from the broad potential applications of our synthetic biology technologies, and consistent with the evolution of our business strategy, we routinely consider ways to organize our business to facilitate strategic opportunities. For example, we have acquired a number of ventures that are already enabling products that benefit from the application of synthetic biology and that we now operate as subsidiaries. Our strategy contemplates the continued formation and acquisition of such operating subsidiaries. As these enterprises develop, we will determine whether to maintain full ownership, introduce investors via either private or public financing, or seek strategic options to partner or divest the businesses.
Primary wholly owned operating subsidiaries
Precigen is a dedicated discovery and clinical stage biopharmaceutical company advancing the next generation of gene and cellular therapies using precision technology to target urgent and intractable diseases in immuno-oncology, autoimmune disorders, and infectious diseases. Precigen's technologies and technologies licensed from Intrexon enable Precigen to find innovative solutions for affordable biotherapeutics in a controlled manner. Precigen operates as an innovation engine, progressing a preclinical and clinical pipeline of well-differentiated unique therapies toward clinical proof-of-concept and commercialization.
ActoBio Therapeutics, Inc.
ActoBio Therapeutics, Inc., or ActoBio, is pioneering a new class of microbe-based biopharmaceuticals that enable expression and local delivery of disease-modifying therapeutics. The ActoBiotics platform produces biologics through oral or topical administration with treatment applications across many diseases including oral, gastrointestinal, and autoimmune/allergic disorders. This approach is being developed to provide safer and more efficacious treatments than injectable biologicals. ActoBio, both independently and through an ECC, has a strong research and development pipeline with the latest stage candidate in Phase 2b clinical trials and an extensive portfolio of candidates ready for clinical development across a number of potential indications.
Trans Ova Genetics, L.C.
Trans Ova Genetics, L.C., or Trans Ova, is internationally recognized as a provider of industry-leading bovine reproductive technologies. Intrexon and Trans Ova are building upon Trans Ova's original platform with a goal of achieving higher levels of delivered value to dairy and beef cattle producers. Progentus, L.C., or Progentus, a wholly owned subsidiary of Trans Ova, is a provider of bovine embryos. ViaGen, L.C., or ViaGen, a wholly owned subsidiary of Trans Ova, is a provider of cloning technology for livestock species. Exemplar Genetics, LLC, or Exemplar, a wholly owned subsidiary through the combined ownership of Trans Ova, ViaGen and us, is committed to enabling the study of life-threatening human diseases through the
development of miniswine research models and services, as well as enabling the production of cells and organs in its genetically engineered swine for regenerative medicine applications.
Okanagan Specialty Fruits, Inc.
Okanagan Specialty Fruits, Inc. and its affiliates, or Okanagan, is the pioneering agricultural company behind the world's first non-browning apple without the use of any artificial additives. Okanagan is scaling up its commercial supplies of non-browning apples and developing new commercial tree fruit varieties intended to provide benefits to the entire supply chain, from growers to consumers.
Oxitec Limited, or Oxitec, is a pioneering company in biological insect control solutions. Oxitec is developing products that use genetic engineering to control insect pests that spread disease and damage crops. Among the applications of its platform, which uses advanced genetics and molecular biology, Oxitec has developed innovative solutions for controlling Aedes aegypti, a mosquito that is a known vector for the transmission of infectious disease including dengue fever, chikungunya, and Zika and, in conjunction with its collaborators, is pursuing solutions that target certain agricultural crop pests. Oxitec is pursuing regulatory and commercial approvals for its insect solutions in a number of countries, including the United States.
Primary majority-owned operating subsidiary
AquaBounty Technologies, Inc.
AquaBounty Technologies, Inc., or AquaBounty, is focusing on improving productivity in commercial aquaculture, including the development of the AquAdvantage Salmon, or AAS, an Atlantic salmon that has been genetically enhanced to reach market size in less time than conventionally farmed Atlantic salmon and approved by the Food and Drug Administration, or FDA. As of December 31, 2018, we owned approximately 55 percent of AquaBounty. In the future, our ownership stake in AquaBounty may drop below 50 percent, which may result in our deconsolidating AquaBounty.
The following represent our significant JVs as of December 31, 2018:
Intrexon Energy Partners
In March 2014, we and certain investors, or the IEP Investors, including affiliates of Third Security, LLC, or Third Security, a related party, entered into a Limited Liability Company Agreement that governs the affairs and conduct of business of Intrexon Energy Partners, LLC, or Intrexon Energy Partners, a JV formed to optimize and scale-up our MBP technology for the production of certain fuels and lubricants. We also entered into an ECC with Intrexon Energy Partners providing exclusive rights to our technology for the use in bioconversion, as a result of which we received a technology access fee of $25 million while retaining a 50 percent membership interest in Intrexon Energy Partners. The IEP Investors made initial capital contributions, totaling $25 million in the aggregate, in exchange for pro rata membership interests in Intrexon Energy Partners totaling 50 percent. We committed to make additional capital contributions of up to $25 million, and the IEP Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon Energy Partners, have committed to make additional capital contributions of up to $25 million, at the request of the Intrexon Energy Partners' board of managers, or the Intrexon Energy Partners Board, and subject to certain limitations. Intrexon Energy Partners is governed by the Intrexon Energy Partners Board, which has five members. Two members of the Intrexon Energy Partners Board are designated by us and three members are designated by a majority of the IEP Investors. We and the IEP Investors have the right, but not the obligation, to make additional capital contributions above the initial limits when and if solicited by the Intrexon Energy Partners Board.
Intrexon Energy Partners II
In December 2015, we and certain investors, or the IEPII Investors, entered into a Limited Liability Company Agreement that governs the affairs and conduct of business of Intrexon Energy Partners II, LLC, or Intrexon Energy Partners II, a JV formed to utilize our MBP technology for the production of 1,4-butanediol, an industrial chemical intermediate used to manufacture spandex, polyurethane, plastics, and polyester. We also entered into an ECC with Intrexon Energy Partners II providing exclusive rights to our technology for use in the field, as a result of which we received a technology access fee of $18 million while retaining a 50 percent membership interest in Intrexon Energy Partners II. The IEPII Investors made initial capital
contributions, totaling $18 million in the aggregate, in exchange for pro rata membership interests in Intrexon Energy Partners II totaling 50 percent. In December 2015, the owners of Intrexon Energy Partners II made a capital contribution of $4 million, half of which was paid by us. We committed to make additional capital contributions of up to $10 million, and the IEPII Investors, as a group and pro rata in accordance with their respective membership interests in Intrexon Energy Partners II, have committed to make additional capital contributions of up to $10 million, at the request of the Intrexon Energy Partners II's board of managers, or the Intrexon Energy Partners II Board, and subject to certain limitations. Intrexon Energy Partners II is governed by the Intrexon Energy Partners II Board, which has five members. One member of the Intrexon Energy Partners II Board is designated by us and four members are designated by a majority of the IEPII Investors. We and the IEPII Investors have the right, but not the obligation, to make additional capital contributions above the initial limits when and if solicited by the Intrexon Energy Partners II Board.
In February 2016, we entered into a series of transactions involving EnviroFlight, LLC, or Old EnviroFlight, Darling Ingredients Inc., or Darling, and a newly formed venture between us and Darling, or New EnviroFlight. This series of integrated transactions resulted in us acquiring substantially all of the assets of Old EnviroFlight and contemporaneously contributing all of these assets, with the exception of certain developed technology, and $3 million of cash to New EnviroFlight in exchange for a non-controlling, 50 percent membership interest in New EnviroFlight. Our contributions to New EnviroFlight included an exclusive license to the developed technology that was retained by us. Darling received the remaining 50 percent membership interest in New EnviroFlight as consideration for terminating rights previously held in the developed technology with Old EnviroFlight. New EnviroFlight was formed to generate high nutrition, low environmental impact animal and fish feed, as well as fertilizer products, from black soldier fly larvae.
See "Notes to the Consolidated Financial Statements - Note 5" appearing elsewhere in this Annual Report for a discussion of significant collaborations between us and our JVs.
Although our strategy has evolved away from a focus primarily on ECCs, we remain party to a number of such collaborations, and we may, in the future, elect to enter into additional ECCs or expand one or more of our existing ECCs. An 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 certain of our technologies to commercialize products within the field.
We may realize four general categories of revenue under our ECCs: (i) technology access fees upon signing; (ii) reimbursements of costs incurred by us for our research and development and/or manufacturing efforts related to specific applications provided for in the collaboration; (iii) milestone payments upon the achievement of specified development, regulatory and commercial activities; and (iv) royalties on sales of products arising from the collaboration. We may receive equity in lieu of cash for technology access fees and milestones and also may participate in capital raises to allow earlier-stage collaborators to focus their resources on product development.
Generally, each of our ECCs is designed to continue in perpetuity unless terminated. 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 a collaboration with a different counterparty 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 applicable regulatory filings related to the reverted products, enabling us to develop those product candidates 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 an applicable regulatory body at the time of the ECC's termination are retained by the former collaborator. The collaborator has the right to 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 generally 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.
See "Notes to the Consolidated Financial Statements - Note 5" appearing elsewhere in this Annual Report for a discussion of the key financial terms of our significant ECCs.
Mergers, acquisitions, and technology in-licensing
We may augment our suite of proprietary technologies through mergers or acquisitions of technologies, which would then become available to new or existing ventures, including operating subsidiaries, JVs, and collaborations. Among other things, we may pursue technologies that we believe will be generally complementary to our existing technologies and also meet our desired return on investment and other economic criteria. In certain cases, such technologies may already be applied in the production of products or services and in these cases we may seek to expand the breadth or efficacy of such products or services through the use of our technologies. See "Notes to the Consolidated Financial Statements - Note 3" appearing elsewhere in this Annual Report for further discussion of mergers, acquisitions or significant technology in-licensing activities.
We believe that we are a leader in synthetic biology. We do not believe that we have any direct competitors who provide similar technologies that 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. One portion of our proprietary technology related to DNA synthesis and assembly includes the ability to de novo synthesize DNA. We believe the following companies engage in the manufacture of DNA componentry: ATUM, Inc.; Blue Heron Biotech, LLC (a subsidiary of OriGene); Integrated DNA Technologies, Inc. (IDT); GenScript USA, Inc.; Life Technologies Corporation, now part of Thermo Fisher Scientific Inc.; and Twist Bioscience Corporation.
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 that 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. The rapidly evolving market for developing genetically engineered, or GE, T-cells in particular is characterized by intense competition and rapid innovation. Genetically engineering T-cells faces significant competition in the chimeric antigen receptor, or CAR, technology space from multiple companies and their collaborators, such as Novartis/University of Pennsylvania, Bluebird Bio/Celgene/Juno Therapeutics, Gilead/Kite Pharma, Cellectis, Allogene Therapeutics, Adaptimmune/GSK, Autolus Therapeutics, and Bellicum Pharmaceuticals. We face competition from non-cell based treatments offered by other companies such as Amgen, AstraZeneca, Bristol-Myers Squibb, Incyte, Merck, and Roche.
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 subsidiaries, JVs, and collaborations.
We seek patent protection for our platform technologies, including but not limited to our (i) switch technology; (ii) activator ligands for our switch technology; (iii) portfolio around various genetic componentry such as vectors, cells and organisms containing these genetic componentry; and (iv) cell identification and selection platform. In addition, we seek patents covering specific collaborator's products.
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 subsidiaries, JVs, and collaborations. In addition, we may pursue intermediate and product-specific patents associated with our subsidiaries', JVs', and collaborations' 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 as we deem appropriate under the circumstances, with respect to certain of the technologies used in or relating to our products and processes. For instance, where we believe appropriate, we have also filed counterpart patents and patent applications in other jurisdictions, including Australia, Argentina, Brazil, Canada, China, Europe, Hong Kong, India, Indonesia, Israel, Japan, Korea, Mexico, New Zealand, Philippines, Russia, Singapore, South Africa and Taiwan. In the future we may file in these or additional jurisdictions as deemed appropriate for the protection of our technologies.
As of December 31, 2018, we owned at least 55 issued United States patents and 55 pending United States 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, provisional and continuations or divisionals 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 our owned patent portfolios directed to: our switch technology covering aspects of our switches and gene modulation systems, with a last to expire patent currently in 2032; our portfolio around various genetic componentry, such as vectors, cells and organisms containing these genetic componentry, and their use, with a last to expire patent in 2034; our activator ligand technology covering aspects of our activator ligands and their use, with a last to expire patent in 2034; 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, with a last to expire patent in 2031. Although we cannot be assured that these patents may not be subject to challenge in the future, as of this filing, there are currently no material contested proceedings and/or third party claims with respect to any of these patent portfolios.
Additionally, we complement our intellectual property portfolio with exclusive and non-exclusive patent licenses and options for licenses to third-party technologies.
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.
Regulations affecting Intrexon
With our diverse portfolio of proprietary and complementary technologies cutting across human health, animal health, public health and energy sectors, we are subject to significant and diverse regulations governing research, operations and product approval. Regulatory compliance is critical to our ability to operate, our management of potential liabilities and ultimately, our freedom to sell our products. Moreover, and as discussed below and in "Risk factors - Risks associated with our business strategy," the products produced by us and our collaborators enabled by our technology platforms are subject to extensive regulation. While we and our subsidiaries maintain regulatory compliance practices, we rely on our collaborators' compliance with laws and regulations applicable to the products they produce. We do not independently monitor whether our collaborators comply with applicable laws and regulations. Please see the risk factor entitled "Markets in which we, our JVs, and collaborators are developing products using our technologies are subject to extensive regulation, and we rely on our JVs and collaborators to comply with all applicable laws and regulations."
Environmental regulations affecting Intrexon, our JVs and our collaborators
We, as well as our JVs and collaborators, are subject to various federal, state and local environmental laws, rules and regulations, including those relating to the discharge of materials into the air, water and ground, the generation, storage, handling, use, transportation and disposal of hazardous materials and the health and safety of employees with respect to laboratory activities required for the development of products and technologies. These laws and regulations require us and our JVs and collaborators to obtain environmental permits and comply with numerous environmental restrictions. These laws and regulations also may require expensive pollution control equipment or operational changes to limit actual or potential impacts to the environment.
Our laboratory activities and those of our JVs and collaborators inherently involve the use of potentially hazardous materials, which are subject to health, safety and environmental regulations. We design our infrastructure, procedures and equipment to meet our obligations under these regulations. We perform recurring internal and third-party audits and provide employees ongoing training and support, as required. All of our employees must comply with safety instructions and procedures, which are codified in our employment policies. Federal and state laws and regulations impose requirements on the production, importation, use and disposal of chemicals and genetically-modified microorganisms, or GMMs, which impact us and our JVs and collaborators. Our, our JVs' and our collaborators' processes may contain GE organisms which, when used in industrial processes, are considered new chemicals under the Toxic Substances Control Act, or TSCA, program of the United States Environmental Protection Agency, or EPA. These laws and regulations would require us, our JVs and collaborators to obtain and comply with the EPA's Microbial Commercial Activity Notice process to operate. In the European Union, we and our JVs and collaborators may be subject to a chemical regulatory program known as REACH (Registration, Evaluation, Authorization and Restriction of Chemical Substances). Under REACH, companies are required to register their products with the European Commission, and the registration process could result in significant costs or delay the manufacture or sale of products in the European Union.
Regulations affecting us and our collaborators
Human therapeutics regulation
Government authorities in the United States, at the federal, state and local level, and in other countries extensively regulate, among other things, the research, development, testing, manufacture, including any manufacturing changes, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, import and export of pharmaceutical products such as those being developed by our collaborators. The processes for obtaining regulatory approvals in the United States and in foreign countries, along with subsequent compliance with applicable statutes, regulations, and requirements imposed by regulatory agencies, require the expenditure of substantial time and financial resources.
In the United States, pharmaceuticals must receive approval from the FDA before being marketed. The FDA approves drug products other than biological products through its authority under the Federal Food, Drug, and Cosmetic Act, or FDCA, and
implementing regulations. The FDA licenses biological drug products, or biologics, through its authority under the Public Health Service Act, or PHSA, and implementing regulations. The development processes for obtaining FDA approval for a non-biological drug product under the FDCA and for biologic licensure under the PHSA are generally similar, but have product-related differences reflected in regulations and in FDA guidance documents.
United States pharmaceutical development process
The process required by the FDA before a pharmaceutical product candidate may be marketed generally involves the following:
completion of preclinical laboratory tests and in vivo studies in accordance with the FDA's current Good Laboratory Practice regulations and standards, and other applicable requirements;
submission to the FDA of an Investigational New Drug application, or IND, for human clinical testing, which must become effective before human clinical trials commence;
performance of adequate and well-controlled human clinical trials according to the FDA's Good Clinical Practices, or GCP, regulations, and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed product candidate for each intended use;
preparation and submission to the FDA of an application for marketing approval that includes substantial evidence of safety, purity and potency for a biologic, or of safety and efficacy for a non-biologic drug, including from results of nonclinical testing and clinical trials;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the product candidate is produced to assess compliance with current Good Manufacturing Practice, or cGMP, and to assure that the facilities, methods and controls are adequate to preserve the product candidate's identity, safety, strength, quality, potency and purity;
potential FDA inspection of the nonclinical and clinical trial sites that generated the data in support of the application; and
FDA review and approval of the application.
Human clinical trials under an IND
Clinical trials involve administering the product candidate to healthy volunteers or patients under the supervision of qualified investigators. Clinical trials must be conducted and monitored in accordance with the FDA's regulations. Further, each clinical trial must be reviewed and approved by an Institutional Review Board, or IRB, at or servicing each institution at which the clinical trial will be conducted. An IRB is charged with protecting the welfare and rights of trial participants and considers, among other things, whether the risks to individuals participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. Clinical trials involving recombinant DNA at institutions that receive any funding from the National Institutes of Health, or NIH, also must be reviewed by an institutional biosafety committee, an institutional committee that reviews and oversees basic and clinical research that utilizes recombinant DNA at that institution.
Human clinical trials typically are conducted in three sequential phases that may overlap or be combined:
Phase 1. The product candidate is introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain early understanding of its effectiveness. For some product candidates for severe or life-threatening diseases, especially when the product candidate may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients with the targeted disease.
Phase 2. The product candidate is administered and evaluated in a limited patient population to identify possible adverse effects and safety risks, to evaluate preliminary efficacy evidence for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.
Phase 3. The product candidate is administered to an expanded patient population, often at geographically dispersed clinical trial sites, in adequate and well-controlled clinical trials to generate sufficient data to evaluate the safety and
efficacy of the non-biologic drug, or the safety, purity, and potency of the biologic. These clinical trials are intended to establish the overall risk/benefit ratio of the product candidate and provide an adequate basis for product labeling.
Post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, may be conducted, or may be required to be conducted, after initial approval to further assess the risk/benefit profile of the product and to gain additional experience from treatment of patients in the intended indication, including for long-term safety follow-up.
Additional regulation for gene therapy clinical trials
Additional standards apply to clinical trials involving gene therapy. The FDA has issued guidance documents regarding gene therapies, which relate to, among other things: preclinical assessments; chemistry, manufacturing and controls, or CMC, information that should be included in an IND application; the proper design of tests to measure product potency in support of an application; and measures to observe delayed adverse effects in subjects exposed to investigational gene therapies when the risk of such effects is high.
Compliance with cGMP requirements
Drug and biologics manufacturers must comply with applicable cGMP regulations. Manufacturers and others involved in the manufacture and distribution of such products also must register their establishments with the FDA and certain state agencies. Both domestic and foreign manufacturing establishments must register and provide additional information to the FDA upon their initial participation in the manufacturing of drugs. Establishments may be subject to periodic, unannounced inspections by the FDA and other government authorities to ensure compliance with cGMP requirements and other laws. Discovery of problems may result in a government entity placing restrictions on a product, manufacturer or holder of an approved product, and may extend to requiring withdrawal of the product from the market.
United States review and approval processes
The results of the preclinical tests and clinical trials, together with detailed information relating to the product's CMC and proposed labeling, among other things, are submitted to the FDA as part of an application requesting approval to market the product for one or more uses, or indications. For gene therapies, selecting patients with applicable genetic defects is often a necessary condition to effective treatment and may require diagnostic devices that the FDA has cleared or approved prior to or contemporaneously with approval of the gene therapy.
Under the Pediatric Research Equity Act, or PREA, marketing applications generally must contain data to assess the safety and effectiveness of the biologic product candidate for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product candidate is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any product candidate for an indication for which orphan designation has been granted.
On the basis of the marketing application and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information for the FDA to reconsider the application. If those deficiencies have been addressed to the FDA's satisfaction in a resubmission of the application, the FDA may issue an approval letter.
If a product candidate receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited. Further, the FDA may require that certain contraindications, warnings or precautions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing or dispensing in the form of a Risk Evaluation and Mitigation Strategy, or REMS, or otherwise limit the scope of any approval. In addition, the FDA may require post-marketing clinical trials designed to further assess a non-biologic drug's safety and effectiveness, or a biologic's safety, purity, and potency, and testing and surveillance programs to monitor the safety of approved products that have been commercialized.
Orphan Drug Designation in the United States
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs and biological products intended to treat a "rare disease or condition," which generally is a disease or condition that affects fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting a marketing application or supplement seeking approval
for the orphan indication. After the FDA grants orphan drug designation, the common identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA.
Orphan drug designation does not—by itself—convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product that has an orphan drug designation subsequently receives the first FDA approval for that drug or biologic for the indication for which it has been designated, the product is entitled to an orphan exclusivity period in which the FDA may not approve any other applications to market the same drug or biologic for the same indication for seven years.
Exceptions to the seven-year exclusivity period may apply in limited circumstances, such as where the sponsor of a different version of the product is able to demonstrate that its product is clinically superior to the approved orphan drug product. This exclusivity does not prevent a competitor from obtaining approval to market a different product that treats the same disease or condition, or the same product to treat a different disease or condition. The FDA can revoke a product's orphan drug exclusivity under certain circumstances, including when the holder of the approved orphan drug application is unable to assure the availability of sufficient quantities of the drug to meet patient needs. Orphan exclusivity operates independently from other regulatory exclusivities and other protections against generic or biosimilar competition.
A sponsor of a product application that has received an orphan drug designation is also granted tax incentives for clinical research undertaken to support the application. In addition, the FDA will typically coordinate with the sponsor on research study design for an orphan drug and may exercise its discretion to grant marketing approval on the basis of more limited product safety and efficacy data than would ordinarily be required, based on the limited size of the applicable patient population.
Fast Track Designation
The FDA has a number of expedited review programs for drugs that are intended for the treatment of a serious or life-threatening condition. As one example, under the agency's Fast Track program, the sponsor of a new drug candidate may request the FDA to designate the product for a specific indication as a Fast Track product concurrent with or after the filing of the IND for the product candidate. The FDA must determine if the product candidate qualifies for Fast Track designation within 60 days after receipt of the sponsor's request.
In addition to other benefits, such as the ability to have more frequent interactions with the FDA, the agency may initiate review of sections of a Fast Track product's marketing application before the application is complete. This rolling review is available if the applicant provides and the FDA approves a schedule for the submission of the remaining information and the applicant pays applicable user fees. However, the FDA's review period for a Fast Track application does not begin until the last section of the marketing application is submitted. In addition, the Fast Track designation may be withdrawn by the FDA if the agency believes that the designation is no longer supported by data emerging in the clinical trial process.
Rigorous and extensive FDA regulation of drugs and biologics continues after approval, including requirements relating to recordkeeping, periodic reporting, product sampling and distribution, adverse experiences with the product, cGMP, and advertising and promotion. Changes to the manufacturing process or facility often require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval. Failure to comply with the applicable requirements may result in administrative, judicial, civil or criminal actions and adverse publicity. These include refusal to approve pending applications or supplemental applications, withdrawal of approval, clinical hold, suspension or termination of clinical trial, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines or other monetary penalties, refusals of government contracts, mandated corrective advertising or communications with healthcare providers, debarment, restitution, disgorgement of profits or other civil or criminal penalties.
Regulatory Exclusivity and Biosimilar Competition in the United States
In 2010, the federal Biologics Price Competition and Innovation Act, or BPCIA, was enacted, creating a statutory pathway for licensure, or approval, of biological products that are biosimilar to, and possibly interchangeable with, reference biological products licensed under the Public Health Service Act.
Under the BPCIA, innovator manufacturers of original biological products are granted 12 years of exclusive use after first licensure before biosimilar versions of such products can be licensed for marketing in the United States. This means that the FDA may not approve an application for a biosimilar product that references data in an innovator's Biologics License
Application, or BLA, until 12 years after the date of approval of the reference biological product, with a potential six-month extension of exclusivity if certain pediatric studies are conducted and the results are reported to the FDA. A biosimilar application may be submitted four years after the date of licensure of the reference biological product, but the FDA cannot approve the application until the full exclusivity period has expired. This 12-year exclusivity period operates independently from other protections that may apply to biosimilar competitors, including patents that are held for those products. Additionally, the BPCIA establishes procedures by which the biosimilar applicant must provide information about its application and product to the reference product sponsor, and by which information about potentially relevant patents is shared and litigation over patents may proceed in advance of approval. The BPCIA also provides a period of exclusivity for the first biosimilar to be determined by the FDA to be interchangeable with the reference product.
Under the Best Pharmaceuticals for Children Act, which was subsequently made applicable to biological products by the BPCIA, the FDA may also issue a Written Request asking a sponsor to conduct pediatric studies related to a particular active moiety; if the sponsor agrees and meets certain requirements, the sponsor may be eligible to receive an additional six months of marketing exclusivity for its drug product containing such active moiety.
Other regulatory exclusivity may be granted to drugs, including, but not limited to, three-year and five-year exclusivity granted to non-biologic drugs under the Drug Price Competition and Patent Term Restoration Act of 1984, also referred to as the Hatch-Waxman Amendments.
Depending upon the timing, duration and specifics of FDA approval of product candidates, some of a sponsor's United States patents may be eligible for limited patent term extension under 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, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product's approval date. The United States Patent and Trademark Office, or USPTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. Only one patent applicable to an approved biologic product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent.
Foreign regulation of human therapeutics
In addition to regulations in the United States, our subsidiaries, such as Precigen and ActoBio, and our collaborators that are focused on the development of human therapeutic products will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of the products enabled by our technologies. Whether or not the developer obtains FDA approval for a product, they must obtain approval by the comparable regulatory authorities of foreign countries or economic areas, such as the European Union, before they may commence clinical trials or market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.
Regulation of animal based technologies
The development, movement and commercialization of animal based products (genetically modified animals) is governed globally by either technology- or product-based laws and regulations specific to each country. In the majority of our target markets, the relevant regulatory pathway for animal based products is distinct from those governing human pharmaceutical products although the risk assessment parameters and agencies with jurisdiction may be consistent. In each case, product evaluation and approval requires the development of data to demonstrate human/animal safety, environmental safety and effectiveness. In the United States, the FDA's Center for Veterinary Medicine regulates certain GE animals as 'animal drugs' as well as animal feed products. The United States Department of Agriculture, or USDA, regulates veterinary vaccines and other biologics, and the EPA regulates certain animals, such as genetically modified insects with pesticidal properties, as biopesticides. Regulatory oversight and jurisdiction within the United States is based on either the nature of the product and/or product end use. For example, the FDA has historically regulated genetically modified animals as animal drugs on the basis that the rDNA construct in a GE animal is an article intended to affect the structure or function of the body of the animal and, in some cases, intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease in the animal. However, the FDA recently clarified that certain genetically modified animals will not be regulated as animal drugs based on their ultimate end use. Specifically, products intended to reduce the population of mosquitoes (for example, by killing them at some point in their life cycle, or by interfering with their reproduction or development) are regulated as pesticides by EPA.
Specific statutes and regulations also define standards and data requirements that we and our collaborators must satisfy. While regulatory oversight may vary globally, animal based products generally must undergo regulatory review and approval prior to their movement and commercial introduction internationally. These regulations also require the development and submission of
data to demonstrate product efficacy as well as evaluate potential risk to human/animal health and the environment. For drugs administered to animals, extensive regulatory requirements exist often including evaluation by the same (or similar) authorities as human pharmaceuticals. For example, a new animal drug is deemed "unsafe" and, therefore, may not be introduced into commerce in the United States unless: the FDA has approved a new animal drug application, or NADA, for its intended use; the drug is only for investigational use and conforms to specified exemptions for such use under an Investigational New Animal Drug, or INAD, exemption; or the drug conforms to certain FDA regulations. The NADA approval process is in many ways similar to the approval process for human drugs and requires a demonstration of the drug's safety and efficacy for its proposed conditions of use. Actions on INADs may require preparation of an environmental assessment, or EA, and a finding of no significant impact, or FONSI. Through the preparation of an EA/FONSI or an Environmental Impact Statement, the FDA will examine the potential for environmental impacts, including the potential for inadvertent release or escape of the animal with an intentionally altered genome and/or its products into the environment, and whether certain measures may mitigate any potential significant impacts that would adversely affect the human environment.
The complex, multi-faceted regulation of genetically modified animals as "animal drugs" is exemplified by the regulatory approval of AquaBounty's AAS, the first genetically modified animal ever approved by the FDA. For such bioengineered animals, the United States and Canada have established regulatory processes led by the FDA and Health Canada/Canadian Food Inspection Agency, or CFIA, respectively, while other countries, such as Brazil and Argentina among others, are using existing authorities for the evaluation of genetically modified organisms for the advancement and regulation of novel genetically modified animal technologies. In December 2012, the FDA published an EA for AAS along with its FONSI in the Federal Register, confirming that an approval of the pending NADA would not have an adverse effect on the environment and opened up a 60 day period for public comment. In February 2013, the FDA extended the period for public comment by an additional 60 days, which expired in April 2013. Prior to the publication of the EA and FONSI, in September 2010, the FDA 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 National Environment Policy Act, or NEPA, which requires that all federal agencies consider the possible environmental impacts of any action that they authorize. Subsequently, in November 2015, the FDA approved the NADA for the production, sale and consumption of AAS. AquaBounty is subject to on-going post approval responsibilities as detailed in the FDA letter of approval and summarized in the EA dated in November 2015. In the event that AquaBounty seeks to modify or expand its production sites and methods, such would require further regulatory approvals.
In May 2016, Health Canada concluded its review of AAS and approved it for commercial sale in Canada, and the Animal Feed Division of the Animal Health Directorate of CFIA authorized AAS for use in livestock feeds.
In April 2016, the FDA issued Import Alert 99-40 in response to a law passed by Congress, which states that the FDA may not allow the introduction or delivery for introduction into interstate commerce any food that contains GE salmon, until final labeling guidelines for informing consumers of such content are published. In December 2017, the FDA approved a supplementary NADA for an additional grow out facility for AAS located in Albany, Indiana. However, the FDA considers salmon eggs to meet the definition of food and its import alert to mean that AquaBounty cannot import AAS, including its eggs or any food from the salmon, into the United States.
Global regulations continue to evolve for gene-edited animal technologies where precise genetic additions or deletions are introduced into an animal's genome. On January 10, 2017, the FDA released a draft Revised Guidance for Industry which, when finalized, will represent the FDA's current thinking on the regulation of intentionally altered genomic DNA in animals. Although the USDA recently issued a statement indicating that in large part it would not regulate gene-edited plants as GMO crops, the FDA's guidance reiterates the FDA's historic position that it maintains oversight of gene-edited animals as "animal drugs". However, there is a growing global trend to significantly reduce the regulatory burden for gene-edited animals in other countries, such as Argentina and Brazil. For example, Argentina's National Advisory Commission on Agricultural Biotechnology has implemented a regulatory process where technology providers are able to submit data to demonstrate that no new genetic material is introduced into the animal's genome. If the submission is successful, the product will not be subject to regulations governing genetically modified products in Argentina. Brazil has recently instituted a similar process. While such a process may significantly expedite time to market and may reduce developmental costs, we recognize the importance of also working with key stakeholders and the public to create product awareness and build public acceptance prior to commercialization.
Regulation of self-limiting insect technologies
Oxitec has developed a GE self-limiting line of the mosquito Aedes aegypti, OX513A, as well as a new second generation mosquito, OX5034. Moreover, Oxitec has developed other self-limiting insects to suppress crop pests. While the GE mosquito
was historically subject to regulatory review by the FDA as a new animal drug, jurisdiction was shifted to the EPA in October 2017. Under the Federal Insecticide, Fungicide, and Rodenticide Act, or FIFRA, the EPA is charged with protecting human health and the environment by ensuring that registered pesticides do not cause unreasonable adverse effects to man or the environment. FIFRA's definition of "pesticide" includes "any substance or mixture of substances intended for preventing, destroying, repelling, or mitigating any pest". Prior to this shift, the FDA published in August 2016 a final EA and FONSI regarding impacts on human health, animal health and the environment of the OX513A GE mosquito based on review of information and evidence related to an investigational trial in Key Haven, Florida. Following the transfer of jurisdiction to the EPA, Oxitec submitted regulatory dossiers to the EPA for the release of the OX513A GE mosquito in Florida and other states. Oxitec is now seeking approval for trial releases of its OX5034 mosquito. Oxitec's OX513A and OX5034 GE mosquitos have also been approved by Brazil's National Biosafety Committee, or CTNBio, for community-wide releases. Additionally, open field trials of Oxitec's mosquitoes have been conducted in the Cayman Islands, Panama, and Malaysia under relevant permits or approvals. Further approvals will be required for commercial production and use.
Self-limiting GE insects used to control crop pests—instead of disease carrying vectors—are regulated by the USDA. Under the Plant Protection Act, the USDA's Animal and Plant Health Inspection Service, or APHIS, has broad authority to regulate plant pests to protect crops and other plants. Therefore, USDA regulates organisms and products that are known or suspected to be plant pests or that pose a plant pest risk, including those that have been genetically modified. While Oxitec's GE self-limiting insects are designed to suppress hard-to-control or resistant plant pests, they are still currently subject to the USDA's jurisdiction. When an applicant has developed sufficient data to demonstrate that the organism no longer poses a plant pest risk, the applicant can petition APHIS to "deregulate" the article, meaning the GE organism should no longer be considered a regulated article under APHIS regulations. In 2017, APHIS released a final EA and subsequent FONSI supporting a limited environmental release of Oxitec's GE diamondback moth. This conclusion was based on the finding that it would be unlikely for these insects to impact the physical, biological and human health environment. These self-limiting insects will also likely be subject to foreign agriculture GE regulations and authorizing bodies, such as CTNBio and the Ministry of Agriculture in Brazil as well as CONABIA in Argentina and the Office of the Gene Technology Regulator in Australia.
Regulation of agricultural technologies/plants and food products
The manufacturing, marketing and certain areas of research related to some of the potential food products developed by us and our subsidiaries and collaborators are subject to regulation by federal and state governmental authorities in the United States. As it relates to GE foods and/or plants, they are subject to regulation by the FDA, USDA, and EPA under the Coordinated Framework for the Regulation of Biotechnology. These technologies have been regulated under this framework for over two decades. Similar regulatory approval systems are in place globally as biotech crops have been planted in over 26 countries, including over 19 developing countries. Currently, our Arctic apple and Florian technologies are subject to these plant biotechnology regulations. As previously noted above for gene-edited animal technologies, global processes are evolving that we believe may streamline the review and assessment of these technologies. In a number of countries, including the United States, which has implemented an "Am I Regulated" process, specific gene-edited plant products will not be subject to GMO regulation if simple nucleotide changes were made and/or no new genetic material has been incorporated in the final product.
The Arctic apple, which is one of our commercial plant biotechnology products, has undergone significant regulatory review in recent years, and a few varieties have been successfully deregulated and authorized for sale in the United States. In February 2015, the USDA announced its decision to deregulate Okanagan's Golden Delicious apple variety and Granny Smith apple variety, or together the Arctic apples. In reaching its decision, the USDA conducted a final plant pest risk assessment concluding that Arctic apples are unlikely to pose a plant pest risk to agriculture and other plants in the United States. The USDA also completed an EA to comply with the NEPA and concluded that deregulation is not likely to have a significant impact on the human environment. Concurrent with the USDA, Okanagan also engaged in a voluntary food safety assessment consultation with the FDA regarding its Arctic apples. The FDA completed its assessment in March 2015. As part of bringing the assessment to closure, Okanagan was required to submit summaries of its safety and nutritional assessments for its Arctic apples. Based on the information provided by Okanagan and other information available to the agency, the FDA concluded the Arctic apple is not materially different in safety, nutrition, composition, or other relevant characteristics from food and feed from apples currently on the market, and the apples do not raise any issues that would require premarket review or approval by the FDA. In August 2016, the USDA announced its decision to extend a preliminary determination of nonregulated status to Okanagan's Arctic Fuji apple variety.
Comparable authorities to the federal and state governmental authorities in the United States are involved in the regulation of plant technology products in other countries, such as the European Food Safety Authority in Europe, CONABIA in Argentina, CNTBio in Brazil, and Health Canada in Canada. For example, in relation to Okanagan, Health Canada announced its decision in March 2015 that it has no objection to the food use of the Arctic apple in Canada. In reaching its decision, Health Canada conducted a comprehensive assessment of the Golden Delicious and Granny Smith varieties according to its Guidelines for the
Safety Assessment of Novel Foods. These guidelines are consistent with internationally accepted principles for establishing the safety of foods with novel traits adopted by the Codex Alimentarius Commission. Following this assessment, it was determined that the changes made to the Arctic apple did not pose a greater risk to human health than apples currently available on the Canadian market. In addition, Health Canada also concluded that the Arctic apple would have no impact on allergies and that there are no differences in the nutritional value of the Arctic apple compared to other traditional apple varieties available for consumption.
Regulation of microbes and microbial products
The use of GMMs, such as our yeast and methanotroph strains, is subject to laws and regulations in many countries. In the United States, the EPA regulates the commercial use of many GMMs as well as potential products produced from GMMs. Various states within the United States could choose to regulate products made with GMMs as well. While the strain of genetically-modified yeast that we use, S. cerevisiae, is eligible for exemption from EPA review because it is generally recognized as safe, we must satisfy certain criteria to achieve this exemption, including, but not limited to, use of compliant containment structures and safety procedures. We expect to encounter GMM regulations in most if not all of the countries in that we may seek to make our products; however, the scope and nature of these regulations will likely vary from country to country. If we cannot meet the applicable requirements in countries in which we intend to produce our products using GMMs, then our business will be adversely affected.
In addition to the use of the dried fermentation, biomass from the GMMs for animal feed is subject to approval as a new feed ingredient. In the United States, ingredients intended as components of animal feed must be either (i) described by an Association of American Feed Control Officials, or AAFCO, ingredient definition; (ii) generally recognized as safe, or GRAS, for the intended use; or (iii) approved food additives and listed in the Code of Federal Regulations, or CFR. The Federal Food, Drug and Cosmetic Act requires that any substance that is added to or is expected to become a component of animal food, either directly or indirectly, must be used in accordance with a food additive regulation unless it is GRAS for that intended use. The AAFCO Official Publication includes the list of approved food additives as well as the list of GRAS substances. In addition, many of the ingredients in the AAFCO Official Publication are not approved food additives and may not meet the criteria needed to be recognized as GRAS (21 CFR 570.30). Nevertheless, the FDA has accepted the listing of certain ingredients (e.g., those used as sources of nutrients, aroma, or taste) in the AAFCO Official Publication for their marketing in interstate commerce, provided there were no apparent safety concerns about the use or composition of the ingredient.
Regardless of the regulatory pathway, the following areas should be addressed: human food safety, target animal safety, environmental impact, utility (intended physical, nutritional or other technical effect), manufacturing chemistry, labeling, and proposed regulation. Based on preliminary evaluation, the feed derivative M. capsulatus biomass could potentially be commercialized following completion of the FDA's GRAS notification process. Under this process, the safety of M. capsulatus biomass is determined by a panel of experts, qualified by training and experience, to evaluate the feed ingredient, with a subsequent review and determination made by the FDA. If approved, the FDA then issues a "no objections" letter. However, if the 'killed' GM M. capsulatus is contained in the final feed product, additional data and information may be required to characterize the microbial ingredient, such as molecular characterization and potential pathogenicity. For use in Canada, the manufacture, sale and import of livestock feeds are regulated under the Feeds Act and Regulations administered by the CFIA. Under these regulations, all feeds must be safe to livestock, humans and the environment as determined by a premarket review.
Energy and chemical regulation
The environmental regulations discussed above also govern the development, manufacture and marketing of energy and chemical products. Chemical products produced by us and our collaborators may be subject to government regulations in our target markets. In the United States, the EPA administers the requirements of the TSCA, which regulates the commercial registration, distribution and use of many chemicals. Before an entity can manufacture or distribute significant volumes of a chemical, it needs to determine whether that chemical is listed in the TSCA inventory. If the substance is listed, then manufacture or distribution can commence immediately. If not, then in most cases a "Chemical Abstracts Service" number registration and pre-manufacture notice must be filed with the EPA, which has 90 days to review the filing. A similar requirement exists in Europe under the REACH regulation. Additional regulations may apply to specific subsets of chemicals such as, for example, fuel products that are subject to regulation by various government agencies including, in the United States, the EPA and the California Air Resources Board.
Research and development
As of December 31, 2018, we had 464 research and development employees. We incurred expenses of $404.6 million, $143.2 million and $112.1 million in 2018, 2017, and 2016, respectively, on research and development activities. We anticipate that
our research and development expenditures could increase as we investigate other applications for our synthetic biotechnologies and further develop our internally developed programs, including those we reacquired from former collaborators in 2018. Our primary domestic research and development operations are located in laboratory facilities in Germantown, Maryland; South San Francisco, California; Davis, California; and San Diego, California; and our primary international research and development operations are located in laboratory facilities in Budapest, Hungary; Ghent, Belgium; Campinas, Brazil; and Oxford, England.
Collaboration revenues, product revenues, service revenues and other revenues and operating income for each of the last three fiscal years, along with assets as of December 31, 2018 and 2017, are set forth in the consolidated financial statements, which are included in Item 8 of this Annual Report. Financial information about geographic areas is set forth in "Notes to the Consolidated Financial Statements - Note 2" appearing elsewhere in this Annual Report.
As of December 31, 2018, we had 232 production employees. Our primary domestic production facilities, including approximately 360 acres of land, are located in Sioux Center, Iowa. The land and facilities are primarily used for our embryo transfer and in vitro fertilization processes, as well as housing livestock used in such processes. We also lease or own regional production facilities and land in California, Maryland, Missouri, New York, Oklahoma, South Dakota, Texas, and Washington for these purposes. Additionally, we are scaling up commercial production of our non-browning apples in Washington and our AAS salmon in Canada, in anticipation of generating future revenues from each of these product lines.
As of December 31, 2018, we had 882 full-time and 97 part-time employees. We consider our employee relations to be good.
We are a Virginia corporation formed in 1998 and our principal executive offices are located at 20374 Seneca Meadows Parkway, Germantown, MD 20876, and our telephone number is (301) 556-9900.
Our website is www.dna.com. The information on, or that can be accessed through, our website does not constitute part of, and is not deemed to be incorporated by reference into, this Annual Report. We post regulatory filings on this website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. These filings include annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; Section 16 reports on Forms 3, 4, and 5; and any amendments to those reports filed with or furnished to the SEC. We also post our press releases on our website. Access to these filings or any of our press releases on our website is available free of charge. Copies are also available, without charge, from Intrexon Corporation Investor Relations, 20374 Seneca Meadows Parkway, Germantown, Maryland 20876. Reports filed with the SEC may be viewed at www.sec.gov.
In addition, our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and charters for the Audit Committee, the Compensation Committee and the Nominating and Governance Committee are available free of charge to shareholders and the public through the "Corporate Governance" section of our website. Printed copies of the foregoing are available to any shareholder upon written request to our Communications Department at the address set forth on the cover of this Annual Report or may be requested through our website, www.dna.com.
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 Annual Report, including our consolidated financial statements and the related notes appearing at the end of this Annual Report, 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 Annual Report 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 Annual Report. See "Special Note Regarding Forward-Looking Statements" for information relating to these forward-looking statements.
RISKS RELATED TO OUR FINANCIAL POSITION, INDEBTEDNESS, 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 net losses attributable to Intrexon of $509.3 million, $117.0 million and $186.6 million in 2018, 2017 and 2016, respectively. As of December 31, 2018, we had an accumulated deficit of $1.3 billion. We may incur losses and negative cash flow from operating activities for the foreseeable future. To date, we have derived a significant portion of our revenues from ECCs and license agreements, but we expect these revenues will decrease considerably as a result of our evolving business model. We no longer expect to receive reimbursement of costs incurred by us for research and development services and will no longer recognize previously deferred revenues associated with the terminated collaborations. In addition, after our reacquisition of rights to fields previously licensed to collaborators, we no longer expect to receive from those collaborators reimbursement of costs incurred by us for research and development services. If our existing collaborators terminate their ECCs, license agreements or JVs with us or we are unable to commercialize products through our subsidiaries and JVs or enter into strategic transactions, our revenues could be adversely affected. In addition, certain of our collaborations and license agreements 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. Moreover, many of the products being commercialized by us are in the early stages of development or preliminary stages of sales. We expect a significant period of time could pass before the achievement of contractual milestones and the realization of royalties on products commercialized under our collaborations or before commercialization of our various products and revenues is sufficient to achieve profitability. As a result, our expenses may 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 will need substantial additional capital in the future in order to fund our business and have identified conditions that raise substantial doubt about our ability to continue as a going concern.
Our consolidated financial statements as of and for the year ended December 31, 2018 have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have incurred significant losses since our inception and we expect that we will continue to incur losses as we aim to successfully execute our business plan. We are and will continue to be dependent on additional public or private financings, new collaborations or licensing arrangements with strategic partners, or additional equity and debt financing sources to fund continuing operations. Based on our balance of cash, cash equivalents and short-term investments of $222.5 million at December 31, 2018 and recurring losses since inception, there is substantial doubt about our ability to continue as a going concern within one year after the date that these financial statements are issued. We expect our future capital requirements will be substantial, particularly as we continue to develop our business and pursue our internal research and development programs and for capital investment needed to scale up our commercial operations. Our need for additional capital 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 any payments received in connection with strategic transactions;
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;
our ability to maintain or improve the volume and pricing of our current product and service offerings and to develop new offerings, including those that may incorporate new technologies;
costs we might incur to reacquire previously licensed rights for our own development;
the timing and capital requirements to scale up our various product and service offerings and customer acceptance thereof;
our ability to maintain and establish additional collaborative arrangements and/or new strategic initiatives;
the timing of regulatory approval of products of our collaborations and operations;
the resources, time, and cost required for the preparation, filing, prosecution, maintenance, and enforcement of patent claims;
investments we may make in current and future collaborators, including JVs;
strategic mergers and acquisitions, including both the upfront acquisition cost as well as the cost to integrate, maintain, and expand the strategic target; and
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.
If future financings involve the issuance of equity securities, our existing shareholders would suffer further dilution. If we raise additional 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 strategic transactions, ECCs, JVs 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.
Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flows from our business to pay our substantial debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 3.50 percent convertible senior notes due 2023, or Convertible Notes, issued in July 2018, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flows from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flows, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
The Convertible Notes are our exclusive obligations and are not guaranteed by any of our operating subsidiaries. A substantial portion of our consolidated assets is held by our subsidiaries. Accordingly, our ability to service our debt, including the Convertible Notes, depends on the results of operations of our subsidiaries and upon the ability of such subsidiaries to provide us with cash, whether in the form of dividends, loans or otherwise, to pay amounts due on our obligations, including the Convertible Notes. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to make payments on the Convertible Notes or to make any funds available for that purpose. In addition, dividends, loans or other distributions to us from such subsidiaries may be subject to contractual and other restrictions and are subject to other business considerations.
Despite our current debt levels, we may still incur substantially more debt or take other actions that would intensify the risks discussed above.
Despite our current consolidated debt levels, we and our subsidiaries may incur substantial additional debt in the future, subject to the restrictions contained in our debt instruments, some of which may be secured debt. We are not restricted under the terms of the indenture governing the Convertible Notes from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that are not limited by the terms of the indenture governing the Convertible Notes that could have the effect of diminishing our ability to make payments on the Convertible Notes when due.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash or to repurchase the Convertible Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.
Holders of Convertible Notes have the right to require us to repurchase their Convertible Notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100 percent of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered therefor or Convertible Notes being converted. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the Convertible Notes as required by the indenture would constitute a default under the indenture. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.
The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board, or FASB, issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), which has subsequently been codified as Accounting Standards Codification, or ASC, Subtopic 470-20, Debt with Conversion and Other Options, or ASC 470-20. Under ASC 470-20, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of shareholders' equity on our consolidated balance sheet, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we record a greater amount of noncash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We report lower net income in our financial results because ASC 470-20 requires interest to include both the current period's amortization of the debt discount and the instrument's coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.
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 Annual Report:
our ability to achieve or maintain profitability;
the feasibility of producing and commercializing products enabled by our technologies;
our ability to enter into strategic transactions, collaborations, or JVs;
our relationships, and the associated exclusivity terms, with collaborators and licensees in our target end markets;
our ability to develop and maintain technologies that our collaborators and licensees continue to use and that new collaborators are seeking;
obligations to provide resources to our collaborators or to the collaborations themselves pursuant to the terms of the relevant ECC, license agreement or JV agreement;
our ability to manage our growth;
the outcomes of research programs, clinical trials, or other product development and approval processes conducted by us and our collaborators and licensees;
the ability of us and our collaborators and licensees to develop and successfully commercialize products enabled by our technologies;
our ability to successfully scale up production of our commercial products and customer acceptance thereof;
risks associated with the international aspects of our business;
our ability to integrate any businesses or technologies we may acquire with our business;
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, the competitors of our collaborators, 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 collaborators' ability to obtain additional capital that may be necessary to develop and commercialize products under our ECCs, license agreements and JVs;
business interruptions such as power outages and other natural disasters;
public concerns about the ethical, legal and social ramifications of GE products and processes;
the impact of new accounting pronouncements on our current and future operating results;
our ability to use our net operating loss carryforwards to offset future taxable income; and
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.
Our limited operating history and the evolution of our business model 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.
We may pursue strategic acquisitions and investments that 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, facilities, 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.
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.
We recorded a $60.5 million impairment charge in the year ended December 31, 2018. See "Notes to the Consolidated Financial Statements - Note 11" appearing elsewhere in this Annual Report for additional discussion.
We may encounter difficulties in connection with our acquisitions.
We cannot be certain that any acquisition will be successful or that we will realize the anticipated benefits of the acquisition. In particular, we may not be able to realize the strategic and operational benefits and objectives we had anticipated. In addition,
we may face increased competition in the markets for any acquired products. Any of the following factors may have a material adverse effect on our business, operating results and financial condition. These factors may include:
the potential disruption of our ongoing business and diversion of management resources;
unanticipated expenses related to the acquired operations;
the impairment of relationships with the acquired customers;
the impairment of relationships with key suppliers and their ability to meet our demand;
potential unknown liabilities associated with the acquired business and technology;
potential liabilities related to litigation involving the acquired companies;
potential periodic impairment of goodwill and intangible assets acquired; and
potential inability to retain, integrate and motivate key personnel.
We own equity interests in several of our collaborators and have exposure to the volatility and liquidity risks inherent in holding their equity.
We own equity interests in several of our collaborators. 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. Owning equity in our collaborators increases our exposure to the risks of our collaborators' businesses beyond the products of those collaborations. Our equity ownership in our collaborators exposes us to volatility and the potential for negative returns. We may have restrictions on resale and/or limited markets to sell our equity ownership. 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.
In connection with future collaborations or JVs, 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 collaborations or JVs, we would be exposed to 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 on our financial position.
We use estimates in determining the fair value of certain assets and liabilities. If our estimates prove to be incorrect, we may be required to write down the value of these assets or write up the value of these liabilities, which could adversely affect our financial position.
Our ability to measure and report our financial position and operating results is influenced by the need to estimate the impact or outcome of future events on the basis of information available at the time of the financial statements. An accounting estimate is considered critical if it requires that management make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from management's judgments and assumptions, then they may have an adverse impact on our results of operations and cash flows.
Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
Valuations are highly dependent upon the reasonableness of management's assumptions and the predictability of the relationships that drive the results of our valuation methodologies. Because of the inherent unpredictability in the future
performance of the investments requiring Level 3 valuations, we may be required to adjust the value of certain assets, which could adversely affect our financial position.
We rely on our subsidiaries, 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 subsidiaries and 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 collaboration agreements and JVs 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 collaboration agreements or JVs. 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 time frame consistent with our reporting requirements. We own a significant equity position in several of our collaborators, including a majority position in one of our collaborators. 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, 2018, we had net operating loss carryforwards of approximately $369.1 million for United States federal income tax purposes available to offset future taxable income, including $116.6 million generated after 2017, and United States federal and state research and development tax credits of $7.9 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. Carryforwards generated prior to 2018 begin to expire in 2022. As a result of our past issuances of stock, as well as due to prior mergers and acquisitions, certain of Intrexon's net operating losses have been subject to limitations pursuant to Section 382. As of December 31, 2018, Intrexon has utilized all net operating losses subject to Section 382 limitations, other than those losses inherited via acquisitions. As of December 31, 2018, approximately $41.9 million of domestic net operating losses were acquired via acquisition and are limited based on the value of the target at the time of the transaction. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation. As of December 31, 2018, our direct foreign subsidiaries had foreign loss carryforwards of approximately $159.8 million, most of which do not expire.
The Tax Cuts and Jobs Act of 2017, or Tax Act, introduced certain limitations on utilization of losses that are generated after 2017, generally limiting utilization of those losses to 80 percent of future annual taxable income. However, losses generated after 2017 will generally have an indefinite carryforward period.
We are exposed to exchange rate fluctuation.
We have international subsidiaries in a number of foreign countries, including Belgium, Brazil, Canada, Hungary, and the United Kingdom. As a consequence, we are exposed to risks associated with changes in foreign currency exchange rates. We present our consolidated financial statements in United States dollars. Our international subsidiaries have assets and liabilities denominated in currencies other than the United States dollar. Future expenses and revenues of our international subsidiaries are expected to be denominated in currencies other than in United States dollars. Therefore, movements in exchange rates to translate from foreign currencies may have an impact on our reported results of operations, financial position and cash flows.
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, limit consumer acceptance and limit our revenues.
Our technologies and the technologies of our JVs and collaborators 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, GE products and processes could influence public acceptance of our and our collaborators' technologies, products and processes.
The subject of GMOs has received negative publicity, which has aroused public debate. In addition, certain of the products of our operating subsidiaries have been the subject of negative publicity, including AAS, Arctic apples and GE mosquitoes. This adverse publicity has led to, and could continue to 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.
There is also an active and vocal group of opponents to GMOs who wish to ban or restrict the technology and who, at a minimum, hope to sway consumer perceptions and acceptance of this technology. Their efforts include regulatory legal challenges and labeling campaigns for genetically modified products, as well as application of pressure to consumer retail outlets seeking a commitment not to carry genetically modified products. Further, these groups have a history of bringing legal action against companies attempting to bring new biotechnology products to market. For example, on March 30, 2016, a coalition of non-governmental organizations filed a complaint against the FDA, the United States Fish and Wildlife Service, and related individuals for their roles in the approval of AAS. We may be subject to future additional litigation brought by one or more of these organizations in their attempt to block the development or sale of our products. In addition, animal rights groups and various other organizations and individuals have attempted to stop genetic engineering activities by pressing for legislation and additional regulation in these areas. We may not be able to overcome the negative consumer perceptions and potential legal hurdles that these organizations seek to instill or assert against our products, and our business could be harmed.
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 us and our collaborators to develop and commercialize products, or processes using our technologies could be limited by public attitudes and governmental regulation.
Inadvertent releases or unintended consequences of releases of synthetic biology technologies by us or others could lead to adverse effects on our business and results of operations.
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 many of these 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, by us or others, could have a material adverse effect on the public acceptance of our products and our business and financial condition. Such a release could result in enhanced regulatory activity and we could have exposure to liability for any resulting harm.
We may become subject to increasing regulation in the future.
We have a diverse portfolio of proprietary and complementary technologies in the areas of human health, animal health, public health and energy that are subject to significant and diverse regulations that govern research, operations and product approval. Regulatory compliance is critical to our freedom to operate, our management of potential liabilities and, ultimately, our freedom to sell our and our collaborators' products. While we and our subsidiaries maintain regulatory compliance practices, we rely on our collaborators' compliance with laws and regulations applicable to the products they produce. We do not independently monitor whether our collaborators comply with applicable laws and regulations. Failure to comply with applicable regulatory requirements may subject us to administrative and/or judicially imposed sanctions or monetary penalties as well as reputational and other harms. Moreover, obtaining and maintaining regulatory approval have been, and will likely continue to be, increasingly difficult, time consuming and costly. Legislative bodies or regulatory agencies could enact new laws or regulations, change existing laws or regulations, or change their interpretations of laws or regulations at any time, which could affect our ability to obtain or maintain approval of our products or product candidates. The rate and degree of change in existing laws and regulations and regulatory expectations have accelerated in established markets, and regulatory expectations continue to evolve in emerging markets. We are unable to predict whether and when such changes could occur or whether such changes will have a material adverse effect on our business.
We have limited experience bringing new products through development and successful commercialization. Even if our technologies enable new products, we or our collaborators may not be successful in commercializing the products that result from our technologies.
Even if our technologies enable new products, there is no guarantee that we or our collaborators will be successful in creating additional products enabled by our technologies. Furthermore, neither we nor our collaborators may be able to commercialize the resulting products or our collaborators may decide to use other methods competitive with our technologies that do not utilize synthetic biology. Several of our wholly and majority-owned subsidiaries have received regulatory approvals, including
AquaBounty and Okanagan. These approvals do not, however, guarantee our success in commercializing the products of these subsidiaries. If we are not successful in commercializing our products, our business could be harmed.
Changing labeling requirements may negatively impact consumer acceptance of the products of our operating subsidiaries.
Historically, we were not required to label AAS or our Arctic apples at the retail level as containing genetically modified ingredients. However, because several states either passed or considered new laws specifying varying requirements for labeling such products, the United States Congress passed the National BioEngineered Food Disclosure Law in July 2016 to establish a national mandatory standard for labeling for foods that are or may be bioengineered. As part of the new law, Congress directed the USDA to establish the disclosure standards. On December 20, 2018, the USDA released its National Bioengineered Food Disclosure Standard that defined bioengineered foods as "those that contain detectable genetic material that has been modified through certain lab techniques and cannot be created through conventional breeding or found in nature." The Agricultural Marketing Service of the USDA also developed the List of Bioengineered Foods identifying certain bioengineered crops or foods and for which regulated entities must maintain records. Both AAS and our Arctic apples are part of this list and we are currently in the process of assessing the impact of the new regulations on us and our subsidiaries. However, the mandatory labeling requirements could cause consumers to view the label as either a warning or as an indication that AAS is inferior to traditional Atlantic salmon or our Arctic apples are inferior to traditional apples. These perceptions could negatively impact consumer acceptance of the products of our operating subsidiaries and ultimately harm our business.
The FDA has only approved a few gene therapies and regulation of gene therapies is still nascent.
The FDA first approved a gene therapy for use in humans in 2017, and to date has only approved a limited number. Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. The field of gene therapies is still very early in development and remains predominantly experimental. 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 timely or 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 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. 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 or from further developing and commercializing our products and services offerings 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 acceptable terms.
Our planned activities, including the further development and scale-up of operating subsidiaries, 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 have limited financial and managerial resources, requiring us to prioritize our development efforts over other opportunities.
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 opportunities or markets and they do not lead to commercially viable products, our revenues, financial condition and results of operations could be adversely affected.
We may encounter difficulties managing our growth, which could adversely affect our business.
Currently, we are working simultaneously on multiple projects targeting several industries. 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.
We do not believe that we have any direct competitors who provide comparable technologies of similar depth and breadth that enable to the same extent the commercialization of products developed using synthetic biology across a broad spectrum of biologically-based industries. However, there are companies that have competing technologies for individual pieces of our proprietary suite of complementary technologies. One portion of our proprietary technology related to DNA synthesis and assembly includes the ability to synthesize new DNA. We believe the following companies engage in the manufacture of DNA components: ATUM, Inc.; Blue Heron Biotech, LLC (a subsidiary of OriGene); Integrated DNA Technologies, Inc. (IDT); GenScript USA, Inc.; Life Technologies Corporation, now part of Thermo Fisher Scientific Inc.; and Twist BioScience Corporation.
The synthetic biology 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.
The rapidly evolving market for developing GE T-cells in particular, is characterized by intense competition and rapid innovation. Genetically engineering T-cells faces significant competition in the CAR technology space from multiple companies and their collaborators, such as Novartis/University of Pennsylvania, Bluebird Bio/Celgene/Juno Therapeutics, Gilead/Kite Pharma, Cellectis, Allogene Therapeutics, Adaptimmune/GSK, Autolus Therapeutics, and Bellicum Pharmaceuticals. We face competition from non-cell based treatments offered by other companies such as Amgen, AstraZeneca, Bristol-Myers Squibb, Incyte, Merck, and Roche.
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.
Each of our collaborations requires the collaborator to indemnify us for liability related to products produced pursuant to the ECC or JV and to obtain insurance coverage related to product liability in amounts considered standard for the industry. We believe that these industry-standard coverage amounts range from $10 million to $40 million in the aggregate. Even so, we may be named in product liability suits relating to products that are produced by our collaborators using our technologies. Moreover, as we develop more products through our own operations and JVs, our potential exposure to such claims will increase. These claims could be brought by various parties, including other companies who purchase products from us or 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 or JVs. 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 we or 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' reputations 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.
If we experience a significant breach of data security or disruption in our information systems, our business could be adversely affected.
We rely on various information systems to manage our operations and to store information, including sensitive data such as confidential business information and personally identifiable information. These systems could be vulnerable to interruption or malfunction, including due to events beyond our control, and to unauthorized access, computer hackers, ransomware, viruses and other security problems. Failure of these systems or any significant breach of our data security could have an adverse effect on our business and may materially adversely affect our operating results and financial condition.
Data security breaches could result in loss or misuse of information, which could, in turn, result in potential regulatory actions or litigation, including material claims for damages, compelled compliance with breach notification laws, interruption to our
operations, damage to our reputation or could otherwise have a material adverse effect on our business, financial condition and operating results. Companies throughout our industry have been increasingly subject to a wide variety of security incidents, cyber-attacks and other attempts to gain unauthorized access to networks or sensitive information. While we have implemented and continue to implement cybersecurity safeguards and procedures, we may be unable to implement adequate protective measures. As cyber threats continue to evolve, we may be required to expend additional resources to enhance our cybersecurity measures or to investigate or remediate any vulnerabilities or breaches.
Although we maintain insurance to protect ourselves in the event of a breach or disruption of our information systems, we cannot ensure that the coverage is adequate to compensate for any damages that may be incurred.
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 EPA. 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.
We have international operations and assets and may have additional international operations and assets in the future. Our international operations and assets may be subject to various economic, social and governmental risks.
Our international operations and any future international operations may expose us to risks that could negatively impact our future results. Our operations may not develop in the same way or at the same rate as might be expected in a country with an economy similar to the United States. The additional risks that we may be exposed to in these cases include, but are not limited to:
tariffs and trade barriers;
currency fluctuations, which could decrease our revenues or increase our costs in United States dollars;
regulations related to customs and import/export matters;
tax issues, such as tax law changes and variations in tax laws;
limited access to qualified staff;
cultural and language differences;
inadequate banking systems;
different and/or more stringent environmental laws and regulations;
restrictions on the repatriation of profits or payment of dividends;
crime, strikes, riots, civil disturbances, terrorist attacks or wars;
nationalization or expropriation of property;
law enforcement authorities and courts that are weak or inexperienced in commercial matters; and
deterioration of political relations among countries.
The agricultural products of several of our operating subsidiaries are subject to disease outbreaks that can increase the cost of production and/or reduce production harvests, and the loss of existing organisms and germplasm would result in the loss of commercial technology.
Several of the products of our operating subsidiaries, including Trans Ova, Exemplar, AquaBounty and Okanagan, are subject to periodic outbreaks of a variety of diseases. Although these companies take measures to protect their stock, there can be no assurance that a disease will not damage or destroy existing organisms or germplasm. The economic impact of disease to our subsidiaries' production systems can be significant, as farmers must incur the cost of preventive measures, such as vaccines and antibiotics, and then if infected, the cost of lost or reduced harvests.
Our plans to pursue development and commercialization of adoptive cellular therapies based on CAR T-cell therapies, or CARs, are new approaches to cancer treatment that present significant challenges in a competitive landscape and the success of our efforts depends in large part on our owned and licensed intellectual property, and our efforts may be affected by litigation and developments in intellectual property law outside of our control.
Through our wholly owned subsidiary, Precigen, we intend to employ technologies licensed from the University of Texas MD Anderson Cancer Center, together with our existing suite of proprietary technologies, through our existing license with ZIOPHARM and internal programs, to pursue the development and commercialization of adoptive cellular therapies based on CARs under control of RheoSwitch technology targeting a variety of cancer malignancies. Because this is a newer approach to cancer immunotherapy and cancer treatment generally, developing and commercializing product candidates subjects us and our licensee to a number of challenges, including:
obtaining regulatory approval from the FDA and other regulatory authorities that have very limited experience with the commercial development of genetically modified T-cell therapies for cancer;
developing and deploying consistent and reliable processes for engineering a patient's T-cells ex vivo and infusing the engineered T-cells back into the patient;
possibly conditioning patients with chemotherapy in conjunction with delivering each of the potential products, which may increase the risk of adverse side effects of the potential products;
educating medical personnel regarding the potential side effect profile of each of the potential products, such as the potential adverse side effects related to cytokine release;
developing processes for the safe administration of these potential products, including long-term follow-up for all patients who receive the potential products;
sourcing additional clinical and, if approved, commercial supplies for the materials used to manufacture and process the potential products;
developing a manufacturing process and distribution network with a cost of goods that allows for an attractive return on investment;
establishing sales and marketing capabilities after obtaining any regulatory approval required to gain market access and acceptance;
developing therapies for types of cancers beyond those addressed by the current potential products;
not infringing the intellectual property rights, in particular, the patent rights, of third parties, including competitors developing alternative CAR T-cell therapies; and
avoiding any applicable regulatory barriers to market, such as data and marketing exclusivities held by third parties, including competitors with approved CAR T-cell therapies.
We cannot be sure that T-cell immunotherapy technologies developed by Precigen or our licensee will yield satisfactory products that are safe and effective, scalable, or profitable.
Because our gene therapy technology is novel, it is difficult to predict the time and cost of development and of subsequently obtaining regulatory approval.
There can be no assurance that we, including our subsidiaries and our collaborators, will not experience problems or delays in developing new product candidates and that such problems or delays will not cause unanticipated costs, or that any such development problems can be solved. We also may experience unanticipated problems or delays in expanding our manufacturing capacity, which may prevent the completion of clinical trials and the commercializing of products on a timely or profitable basis, if at all. For example, we, a collaborator or another group may uncover a previously unknown risk with any of our product candidates, and this may prolong the period of observation required for obtaining regulatory approval or may necessitate additional clinical testing.
In addition, the clinical trial requirements of the FDA, European Medicines Agency, or EMA, and other regulatory authorities and the criteria these regulators use when evaluating product candidates vary substantially according to the type, complexity, novelty and intended use and market of such product candidates. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or more extensively studied product candidates. Even if we and our collaborators are successful in developing product candidates, it is difficult to determine how long it will take or how much it will cost to obtain regulatory approvals in either the United States or the European Union or how long it will take to commercialize these product candidates.
Regulatory requirements governing gene and cell therapy products have changed frequently and may continue to change in the future. For example, the FDA has established the Office of Cellular, Tissue and Gene Therapies within the Center for Biologics Evaluation and Research, or CBER, to consolidate the review of gene therapy and related products and has established the Cellular, Tissue and Gene Therapies Advisory Committee to advise CBER in its marketing application review process. Gene therapy clinical trials conducted at institutions that receive funding for recombinant DNA research from NIH also potentially are subject to review by the NIH office of Biotechnology Activities' Recombinant DNA Advisory Committee, or RAC; however, NIH has announced that the RAC will only publicly review clinical trials if the trials cannot be evaluated by standard oversight bodies and pose unusual risks. Although the FDA decides whether individual gene therapy protocols may proceed, the RAC public review process, if undertaken, can delay the initiation of a clinical trial, even if the FDA has reviewed the trial design and details and approved its initiation. Conversely, the FDA can put a clinical trial or an IND on clinical hold even if the RAC has provided a favorable review or an exemption from in-depth, public review. In addition, adverse developments in clinical trials of gene therapy products conducted by others may cause the FDA or other oversight bodies to change the requirements for approval of any of our product candidates and those of our collaborators. Navigating these various requirements and frameworks may require significant time and money, and compliance with these requirements does not guarantee regulatory approval of any marketing applications.
There is a high failure rate for drugs and biologics proceeding through clinical trials, at all stages of development.
Results from preclinical studies or previous clinical trials are not necessarily predictive of future clinical trial results, and interim results of a clinical trial are not necessarily indicative of final results. Our product candidates and those of our collaborators may fail to show the desired results in clinical development despite demonstrating positive results in preclinical studies or having successfully advanced through initial clinical trials.
There is a high failure rate for drugs and biologics proceeding through clinical trials and may occur at any stage due to a multitude of factors both within and outside our control. Many companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in preclinical testing and earlier-stage clinical trials. Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, we and our collaborators may experience regulatory delays or rejections as a result of many factors, including changes in regulatory policy during the period of product candidate development. Any such delays could materially and adversely affect our business, financial condition, results of operations and prospects. If clinical trials result in negative or inconclusive results, we or our collaborators may decide, or regulators may require us, to discontinue trials of the products or conduct additional clinical trials or preclinical studies.
Our and our collaborators' product candidates may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial potential or result in significant negative consequences following any potential marketing approval.
There have been several significant adverse side effects in gene therapy treatments in the past, including reported cases of leukemia and death seen in other trials using other vectors. While new recombinant vectors and other approaches have been developed to reduce these side effects, gene therapy and synthetic biology therapy in general is still a relatively new approach
to disease treatment and additional adverse side effects could develop. There also is the potential risk of delayed adverse events following exposure to these products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material.
Other possible adverse side effects that could occur with treatment with synthetic biology products include an immunologic reaction early after administration that, while not necessarily adverse to the patient's health, could substantially limit the effectiveness of the treatment. In previous clinical trials involving adeno-associated virus, vectors for gene therapy, some subjects experienced the development of a T-cell response, whereby after the vector is within the target cell, the cellular immune response system triggers the removal of transduced cells by activated T-cells. If similar effect occurs with our or our collaborators' products, we or our collaborators may decide or be required to halt or delay further clinical development of our product candidates.
Additionally, if any of our or our collaborators' product candidates receives marketing approval, the FDA could require us to adopt a REMS to ensure that the benefits outweigh its risks, which may include, among other things, a medication guide outlining the risks of the product for distribution to patients and a communication plan to health care practitioners. Such requirements could prevent us from achieving or maintaining market acceptance of our product candidates and could significantly harm our business, prospects, financial condition and results of operations.
We and our collaborators may find it difficult to enroll patients in clinical trials, which could delay or prevent us and our collaborators from proceeding with clinical trials.
Identifying and qualifying patients to participate in clinical trials of our and our collaborators' product candidates is critical to success. The timing of clinical trials depends on the ability to recruit patients to participate as well as completion of required follow-up periods. If patients are unwilling to participate in our or our collaborators' clinical studies for any number of reasons, such as because of negative publicity from adverse events related to the biotechnology or gene therapy fields, the timeline for recruiting patients, conducting clinical trials and obtaining regulatory approval may be delayed. These delays could result in increased costs, delays in advancing product candidates, or termination of the clinical trials altogether.
Even if we and our collaborators complete the necessary clinical trials, we cannot predict when, or if, we and our collaborators will obtain regulatory approval to commercialize a product candidate and the approval may be for a more narrow indication than we or our collaborators seek.
We and our collaborators cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate. Even where product candidates meet their endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, or may not grant regulatory approval. Additional delays may result if an FDA Advisory Committee or other regulatory authority recommends non-approval or restrictions on approval. In addition, we and our collaborators may experience delays or rejections based upon additional government regulation from future legislation or administrative action, or changes in regulatory authority policy during the period of product development, clinical trials and the review process.
Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or a REMS. These regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates and materially and adversely affect our business, financial condition, results of operations and prospects.
Even if we or our collaborators obtain regulatory approval for a product candidate, the product will remain subject to regulatory oversight.
Even if we and our collaborators obtain regulatory approval for our product candidates, these candidates will be subject to ongoing regulatory requirements for manufacturing, labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information. Regulatory approvals also may be subject to a REMS, limitations on the approved indicated uses for which the product may be marketed or to the conditions of approval, or contain requirements for potentially costly post-marketing testing, including Phase 4 clinical trials, and surveillance to monitor the quality, safety and efficacy of the product. For example, the holder of an approved BLA is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. The FDA guidance advises that patients treated with some types of gene therapy undergo follow-up observations for potential adverse events for as long as 15 years.
The holder of an approved BLA also must submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.
In addition, product manufacturers and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements and adherence to commitments made in the United States or foreign marketing application. If we, our collaborators, or a regulatory authority discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured or disagrees with the promotion, marketing or labeling of that product, a regulatory authority may impose restrictions relative to that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or cessation of manufacturing.
If we fail to comply with applicable regulatory requirements following approval of any of our product candidates, a regulatory authority may take adverse actions, which include, among other things, a range of sanctions from issuing a warning letter to causing us to withdraw the product from the market.
In addition, the FDA's policies, and those of equivalent foreign regulatory agencies, may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability, which would materially and adversely affect our business, financial condition, results of operations and prospects.
Our reliance on third parties, such as contract manufacturing organizations and contract or clinical research organizations, may result in delays in completing, or a failure to complete, non-clinical testing or clinical trials if they fail to perform under our agreements with them. Such failures could adversely affect our financial results and our commercial prospects.
In the course of product development, we may engage contract or clinical manufacturing organizations to supply us with our product candidates or products to be used in non-clinical and clinical testing and contract research organizations to conduct and manage non-clinical and clinical studies. We are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with GCPs for conducting, recording, and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.
In addition, if our third-party contract manufacturers and suppliers do not supply us with our product candidates or products in a timely fashion and in compliance with applicable quality and regulatory requirements, including cGMPs, or otherwise fail or refuse to comply with their obligations to us under our supply and manufacturing arrangements, we may not have adequate remedies for any breach, and their failure to supply us could impair or preclude our ability to meet our supply needs for non-clinical and clinical studies, including those being conducted in collaboration with our partners. Such failures could delay our product development efforts, and our business, operating results and financial condition could be adversely affected.
RISKS RELATED TO MANUFACTURING HUMAN THERAPEUTICS
Synthetic biology therapies are novel, complex and difficult to manufacture. We or our collaborators could experience production problems that result in delays in product development or commercialization programs or otherwise adversely affect our business.
The manufacturing processes that we and our collaborators use to produce synthetic biology product candidates for human therapeutics are complex, novel and have not been validated for commercial use. Several factors could cause production interruptions, including equipment malfunctions, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error, or disruptions in the operations of our suppliers.
Our and our collaborators' synthetic biology product candidates require processing steps that are more complex than those required for most chemical pharmaceuticals. Moreover, unlike chemical pharmaceuticals, the physical and chemical properties of a biologic often cannot be fully characterized. As a result, assays of the finished product may not be sufficient to ensure that the product will perform in the intended manner. Accordingly, it is necessary to employ multiple steps to control our manufacturing process to assure that the product candidate is made strictly and consistently in compliance with the process. Problems with the manufacturing process, even minor deviations from the normal process, could result in product defects or manufacturing failures that result in lot failures, product recalls, product liability claims or insufficient inventory. We or our collaborators may encounter problems achieving adequate quantities and quality of clinical-grade materials that meet FDA, EMA or other applicable standards or specifications with consistent and acceptable production yields and costs.
Any problems in our manufacturing process or facilities could make us a less attractive collaborator for potential partners, which could limit our access to additional attractive development programs.
Delays in obtaining regulatory approval of manufacturing processes and facilities or disruptions in manufacturing processes may delay or disrupt our commercialization efforts.
Before we or our collaborators can begin to commercially manufacture our product candidates for human therapeutics, we must obtain regulatory approval from the FDA for the applicable manufacturing process and facility. This likely will require the manufacturing facility to pass a pre-approval inspection by the FDA. A manufacturing authorization must also be obtained from the appropriate European Union regulatory authorities.
In order to obtain FDA approval, we will need to ensure that all of the processes, methods and equipment are compliant with cGMP and perform extensive audits of vendors, contract laboratories and suppliers. If any of our vendors, contract laboratories or suppliers is found to be out of compliance with cGMP, we may experience delays or disruptions in manufacturing while we work with these third parties to remedy the violation(s) or while we work to identify suitable replacement vendors. The cGMP requirements govern, among other things, quality control of the manufacturing process, raw materials, containers/closures, buildings and facilities, equipment, storage and shipment, labeling, laboratory activities, data integrity, documentation policies and procedures, and returns. In complying with cGMP, we will be obligated to expend time, money and effort in production, record keeping and quality control to assure that the product meets applicable specifications and other requirements. If we fail to comply with these requirements, we would be subject to possible regulatory action that could adversely affect our business, results of operations, financial condition and cash flows, including the inability to sell any products that we may develop.
Ethical, legal and social issues related to genetic testing may reduce demand for our product candidates, if approved.
We anticipate that prior to receiving certain cellular, gene, or other synthetic biology therapies, patients may be required to undergo genetic testing. Genetic testing has raised concerns regarding the appropriate utilization and the confidentiality of information provided by genetic testing. Genetic tests for assessing a person's likelihood of developing a chronic disease have focused public attention on the need to protect the privacy of genetic information. For example, concerns have been expressed that insurance carriers and employers may use these tests to discriminate on the basis of genetic information, resulting in barriers to the acceptance of genetic tests by consumers. This could lead to governmental authorities prohibiting genetic testing or calling for limits on or regulating the use of genetic testing, particularly for diseases for which there is no known cure. Any of these scenarios could decrease demand for our product candidates, if approved.
The commercial success of any of our and our collaborators' product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors and others in the medical community.
Ethical, social and legal concerns about cellular, gene or other synthetic biology therapies could result in additional regulations restricting or prohibiting our products. Even with the requisite approvals from the FDA in the United States, the EMA in the European Union, and other regulatory authorities internationally, the commercial success of product candidates will depend, in part, on the acceptance of physicians, patients and health care payors of synthetic biology therapy products in general, and our and our collaborators' product candidates in particular, as medically necessary, cost-effective and safe. Any product that we or our collaborators commercialize may not gain acceptance by physicians, patients, health care payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may or our collaborators may not generate significant product revenue to make the products profitable.
The evolution of our business strategy may not be a successful strategy and may increase our capital requirements, increase our costs or otherwise harm our operating results and financial condition.
Our business strategy has evolved, and continues to evolve, toward relationships and structures that provide us with more control and ownership over the development process and commercialization path. This approach entails risks in implementation and operations and there is no guarantee that it will be successful. Furthermore, the changing focus of our business strategy may require additional capital beyond what we have historically used and what is available, and we may incur costs associated with the implementation and execution of our changing business strategy. In addition, as we perform our annual impairment tests, we will evaluate the impact of changes in our business strategy and, as a result, may incur impairment charges and write-offs and other related expenses, any of which, if material, could harm our operating results and financial condition.
If we fail to maintain and successfully manage our existing ECCs or JVs, we may not be able to develop and commercialize our technologies and achieve or sustain profitability.
We have entered into ECCs or JVs with strategic collaborators to develop products enabled by our technologies. There can be no guarantee that we can successfully manage these ECCs or JVs. We must use diligent efforts to carry out development activities under the ECCs. The exclusivity provisions of each ECC 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 could be adversely affected if one or more of these collaborators terminate their ECCs or JVs, fail to use our technologies or fail to develop commercially viable products enabled by our technologies.
To the extent they continue to be part of our business, maintenance of ECCs and JVs 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;
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 JVs 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 or JVs and negatively impact our relationships with one or more existing collaborators;
our collaborators could terminate our ECC or JV 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 or JVs 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.
Certain of our collaborators, including some businesses over which we have significant influence, will need additional capital.
In order for certain of our collaborators to execute on their business plans, they will have future capital requirements. We may be asked to, or need to, invest additional funds in these collaborators so that they can execute on their business plans. If we fail to invest such additional funds, the collaborator may not have sufficient capital to continue operations.
We rely on our collaborators to develop, commercialize and market certain products, and they may not be successful.
We depend on our collaborators to commercialize certain products enabled by our technologies. If our collaborators are not able to successfully develop the products enabled by our technologies, none of these enabled products will become commercially available and we will receive no back-end payments under our ECCs or JVs. 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 certain markets depends on our ability to develop and commercialize potential products through an ECC or JV. 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 or JVs and similar ECCs or JVs 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 breach or terminate their ECCs or JVs 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 strategic transactions or JVs may be lengthy and unpredictable, and we may expend substantial funds and management effort with no assurance of successfully entering into such transactions to commercialize our technologies.
Historically, the sales process for our ECCs and JVs has at times been lengthy and unpredictable. Our evolving focus on consummating strategic transactions and JVs may be equally or more challenging to consummate. Our sales and licensing efforts may require the effective demonstration of the benefits, value, differentiation, validation of our products, technologies and services and significant education and training of multiple personnel and departments within the potential collaborator's organization. We may expend substantial funds and management effort with no assurance that we will execute a transaction or otherwise sell our products, 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.
Many of our JVs, subsidiaries, and 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.
To develop products with our technologies, we or our JVs, subsidiaries, and 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 we 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 or JVs, 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 to commercialize products and processes using our technologies will be adversely affected, and, with respect to any products that are brought to market, our JVs, subsidiaries, or 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.
Markets in which we, our JVs, and collaborators are developing products using our technologies are subject to extensive regulation, and we rely on our JVs and 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 JVs and 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 either we, our JVs or our collaborators fail to comply with applicable laws and regulations, we are subject to substantial financial and operating risks because, in addition to our own compliance, we also depend on our JVs and collaborators to produce the end products enabled by our technologies for sale and because, in many cases, we have, or in the future may have, a substantial equity interest in our JVs and 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 our sales and profitability and that of our JVs and collaborators and materially impact our operating results;
our business could be adversely affected if our processes and those used by our JVs and 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 we and our JVs and collaborators are ultimately unable to obtain regulatory approval for products using our technologies, our business will be substantially harmed;
even if we and our JVs and 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 JVs and 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 we and our collaborators are developing products using our technologies are highly competitive.
The markets in which we and 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 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.
A significant portion of our business is conducted by JVs that we cannot operate solely for our benefit.
In JVs, we share ownership and management of a company with one or more parties who may not have the same goals, strategies, priorities or resources as we do and may compete with us outside the JV. JVs are intended to be operated for the benefit of all JV partners, rather than for our exclusive benefit. Operating a business as a JV often requires additional organizational formalities as well as time-consuming procedures for sharing information and making decisions. In JVs we are required to foster our relationships with our JV partners as well as promote the overall success of the JV, and if a JV partner changes or relationships deteriorate, our success in the JV may be materially adversely affected. The benefits from a successful JV are shared among the JV partners, so we do not receive all the benefits from our successful JVs. Moreover, as a partial owner of a JV, we are exposed to potential risks and liabilities that we do not face when we enter into an ECC.
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. We intend to continue to apply for patents relating to our technologies, methods and products as we 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. We have also filed counterpart patents and patent applications in other jurisdictions, including Australia, Argentina, Brazil, Canada, China, Europe, Hong Kong, India, Indonesia, Israel, Japan, Korea, Mexico, New Zealand, Philippines, Russia, Singapore, South Africa and Taiwan. In the future, we may file in these or additional jurisdictions as deemed appropriate for the protection of our technologies.
The enforceability of patents, as well as the actual patent term and expiration thereof, 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-Smith America Invents Act, enacted in September 2011, brought significant changes to the United States 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. 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.
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's 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 additional 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 that 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 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.
Except for claims we believe will not be material to our financial results, 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's 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, other United States legislation, and similar foreign legislation by extending the patent terms and obtaining regulatory 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 United States patents we own or license may be eligible for limited patent term restoration under 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 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.
Some of our products may not have patent protection and, as a result, potential competitors face fewer barriers in introducing competing products. We and our collaborators may rely on trade secrets and other unpatented proprietary information to protect our commercial position with respect to such products, which we may be unable to do. In some instances, we and our collaborators may also rely on regulatory exclusivity, including orphan drug exclusivity, to protect our products from competition. Some of our or our collaborators' products may be subject to the BPCIA, which may provide those products exclusivity that prevents approval of a biosimilar product that references the data in one of our BLAs in the United States for 12 years after approval. However, the BPCIA and other regulatory exclusivity frameworks may evolve over time based on statutory changes, FDA issuance of new regulations, and judicial decisions. In addition, the BPCIA exclusivity period does not prevent another company from independently developing a product that is highly similar to an approved product, generating all the data necessary for a full BLA and seeking approval. BPCIA exclusivity only assures that another company cannot rely on the innovator company's data and the FDA's prior approvals to support the biosimilar product's approval. As a result, it is possible that a potential competing drug product might obtain FDA approval before applicable exclusivity periods have expired.
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.
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.
We do not anticipate paying cash dividends, and accordingly, shareholders should rely on stock appreciation for 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, 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. We have on two occasions distributed equity securities to our shareholders as a special stock dividend: 17,830,305 shares of ZIOPHARM common stock were distributed in June 2015 and 1,776,557 shares of AquaBounty common stock were distributed in January 2017. However, it is possible that we may never declare a special dividend again, and shareholders should not rely upon potential future special dividends as a source of return on their investment.
Our stock price is volatile and purchasers of our common stock could incur substantial losses.
Our stock price has been, and is likely to continue to be, volatile. The market price of our common stock could fluctuate significantly for many reasons, including in response to the risks described in this "Risk Factors" section, or for reasons unrelated to our operations, such as reports by media or industry analysts, investor perceptions or negative announcements by our collaborators regarding their own performance, as well as industry conditions and general financial, economic and political instability. From January 1, 2017 through February 15, 2019, our common stock has traded as high as $26.99 per share and as low as $6.21 per share. The stock market in general, as well as the market for biopharmaceutical companies in particular, has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price of our common stock may be influenced by many factors, including, among others:
announcements of acquisitions, collaborations, financings or other transactions by us;
public concern as to the safety of our products;
termination or delay of a development program;
the recruitment or departure of key personnel; and
the other factors described in this "Risk Factors" section.
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 depends, 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 securities or industry analysts do not continue to cover us, the trading price for our shares of common stock may be negatively impacted. 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 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.
The issuance of our common stock pursuant to a share lending agreement, including sales of the shares that we lend, and other market activity related to the share lending agreement may lower the market price of our common stock.
In connection with our offering of the Convertible Notes in July 2018, we entered into a share lending agreement with J.P. Morgan Securities LLC (that we refer to when acting in this capacity as the "share borrower"), the underwriter for our offering, pursuant to which we agreed to lend up to 7,479,431 shares of our common stock to the share borrower.
We were informed by the share borrower that it or one of its affiliates intended to use the short position created by the share loan and the concurrent short sales of the borrowed shares to facilitate transactions by which investors in the Convertible Notes, or the Convertible Notes Investors, hedge their investments through short sales or privately negotiated derivatives transactions.
The existence of the share lending agreement in connection with the offering of the borrowed shares, the short sales of our common stock effected in connection with the sale of the Convertible Notes and the related derivatives transactions, or any unwind of such short sales or derivatives transactions, could cause the market price of our common stock to be lower over the term of the share
lending agreement than it would have been had we not entered into that agreement, due to the effect of the increase in the number of outstanding shares of our common stock or otherwise. For example, in connection with any cash settlement of any such derivative transaction, the share borrower or its affiliates may purchase shares of our common stock and the Convertible Notes Investors may sell shares of our common stock, which could temporarily increase, temporarily delay a decline in, or temporarily decrease, the market price of our common stock. The market price of our common stock could be further negatively affected by these or other short sales of our common stock, including other sales by the Convertible Notes Investors hedging their investment therein.
Adjustments by the Convertible Notes Investors of their hedging positions in our common stock and the expectation thereof may have a negative effect on the market price of our common stock.
The borrowed shares are used by the Convertible Notes Investors to establish hedged positions with respect to our common stock through short sale transactions or privately negotiated derivative transactions. The number of borrowed shares may be more or less than the number of shares that will be needed in such hedging transactions. Any buying or selling of shares of our common stock by those Convertible Notes Investors to adjust their hedging positions may affect the market price of our common stock.
In addition, the existence of the Convertible Notes may also encourage short selling by market participants because the conversion of the Convertible Notes could depress our common stock price. The price of our common stock could be affected by possible sales of our common stock by the Convertible Notes Investors who view the Convertible Notes as a more attractive means of equity participation in us and by hedging or arbitrage trading activity that we expect to occur involving our common stock. This hedging or arbitrage trading activity could, in turn, affect the market price of the Convertible Notes.
Changes in the accounting guidelines relating to the borrowed shares or our inability to classify the borrowed shares as equity could decrease our reported earnings per share and potentially our common stock price.
Because the borrowed shares (or identical shares) must be returned to us when the share lending agreement terminates pursuant to its terms (or earlier in certain circumstances), we believe that under generally accepted accounting principles in the United States, or U.S. GAAP, as presently in effect, assuming the borrowed shares issued pursuant to the share lending agreement are classified as equity under U.S. GAAP, the borrowed shares will not be considered outstanding for the purpose of computing and reporting our earnings per share. If accounting guidelines were to change in the future or we are unable to classify the borrowed shares issued pursuant to the share lending agreement as equity, we may be required to treat the borrowed shares as outstanding for purposes of computing earnings per share, our reported earnings per share would be reduced and our common stock price could decrease, possibly significantly.
If our executive officers and directors choose to act together, they may be able to significantly influence our management and operations, acting in their own best interests and not necessarily those of other shareholders.
As of December 31, 2018, our executive officers and directors owned approximately 45 percent of our voting common stock, including shares subject to outstanding options; restricted stock units, or RSUs; and warrants. 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, including ECCs, with companies in which Mr. Kirk and affiliates of Mr. Kirk have a direct or indirect interest. See "Notes to the Consolidated Financial Statements - Notes 4, 5, 7, 14 and 17" appearing elsewhere in this Annual Report for a discussion of such transactions. Mr. Kirk serves as the Senior Managing Director and Chief Executive Officer of Third Security and owns 100 percent of the equity interests of Third Security. 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 the audit committee of our board of directors. In addition, subsequent to our consummation of the ECCs with certain related parties, Mr. Kirk and his affiliates invested in these companies. Furthermore, as we execute on these ECCs or JVs going forward, a conflict may arise between our interests and those of Mr. Kirk and his affiliates.
As of December 31, 2018, Randal J. Kirk controlled approximately 42 percent of our common stock and is 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 Chairman and Chief Executive Officer, and affiliates of Mr. Kirk, including Third Security. As of December 31, 2018, Mr. Kirk and shareholders affiliated with him beneficially owned approximately 42 percent of our voting stock. Mr. Kirk is 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.
Our articles of incorporation authorize us to issue preferred stock with terms that are preferential to those of our common stock.
Our articles of incorporation authorize us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. For example, in connection with the formation of a Preferred Stock Equity Facility, which was subsequently terminated in June 2018, we filed an amendment to our articles of incorporation to set the designations of our Series A Preferred Stock, which, if and when issued, would have certain preferences over our common stock, including accrued dividends of 8 percent per annum and, subject to limited exceptions, seniority to our common stock with respect to the rights to the payment of dividends and on parity with our common stock with respect to the distribution of our assets in the event of a liquidation, dissolution, or winding up or change of control. In the future, we may enter into similar facilities or issue preferred stock that have greater rights, preferences and privileges than our common stock.
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.
In addition, as of December 31, 2018, there were 11,093,063 shares subject to outstanding options that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, lock-up agreements and Rules 144 and 701 under the Securities Act of 1933, as amended. As of December 31, 2018, there were 970,341 RSUs outstanding. Shares issuable upon the exercise of such options and upon vesting of the RSUs can be freely sold in the public market upon issuance and once vested. Additionally, as of December 31, 2018, we had 5,086,700 of shares available for grant under the 2013 Omnibus Incentive Plan.
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;
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 shareholders.
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.
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.
We have previously reported material weaknesses in our internal control over financial reporting. As discussed in Part II, Item 9A, "Controls and Procedures", during the second quarter of 2018 we identified and disclosed a material weakness in our controls over the adoption of ASC 606, Revenue from Contracts with Customers, or ASC 606. Based upon the remediation actions described in such section, management has concluded that such material weakness has been remediated as of December 31, 2018. Although we believe we have taken appropriate actions to remediate the control deficiencies we have identified and to strengthen our internal control over financial reporting, we cannot assure you that we will not discover other material weaknesses in the future.
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. The following table shows information about our primary lab operations as of December 31, 2018:
South San Francisco, California
San Diego, California
Our primary domestic production facilities are located in Sioux Center, Iowa, and include approximately 281,000 square feet of production and office facilities and approximately 360 acres of land. The land and production facilities are primarily used for embryo transfer and in vitro fertilization processes, as well as housing livestock used in such processes. We also lease or own regional production facilities and land in California, Maryland, Missouri, New York, Oklahoma, South Dakota, Texas, and Washington for these purposes. Additionally, we are scaling up commercial production of our non-browning apples in Washington and our AAS salmon in Canada in anticipation of generating future revenues from each of these product lines.
We lease an additional 36,000 square feet of administrative offices in South San Francisco, California; West Palm Beach, Florida; Germantown, Maryland; and Blacksburg, Virginia. The terms of our leases range from one to ten years. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations and Commitments" appearing elsewhere in this Annual Report.
In March 2012, Trans Ova was named as a defendant in a licensing and patent infringement suit brought by XY, LLC, or XY, alleging that certain of Trans Ova's activities breached a 2004 licensing agreement and infringed on patents that XY allegedly owned. Trans Ova filed a number of counterclaims in the case. In Colorado District Court, the matter proceeded to a jury trial in January 2016. The jury determined that XY and Trans Ova had each breached the licensing agreement and that Trans Ova had infringed XY's patents. In April 2016, the court issued its post-trial order, awarding $0.5 million in damages to Trans Ova and $6.1 million in damages to XY. The order also provided Trans Ova with a compulsory license to XY's technology, subject to an ongoing royalty obligation. Both parties appealed the district court's order, which appeal was decided in May 2018 by the Court of Appeals for the Federal Circuit. The Court denied Trans Ova's appeal of its claims for antitrust, breach of contract and patent invalidity (except as to one patent, for which the Court affirmed invalidity in a separate, same-day ruling in a third-party case). The Court considered the issue of willfulness to be moot since the district court did not award damages for the willfulness finding. Finally, the Court remanded the district court's calculation of the ongoing royalty and instructed the district court to re-calculate the ongoing royalty in light of post-verdict economic factors.
Since the inception of the 2004 agreement, Trans Ova has remitted payments to XY pursuant to the terms of that agreement, or pursuant to the terms of the April 2016 court order, and has recorded these payments in cost of services in the consolidated statements of operations for the respective periods. For the period from inception of the 2004 agreement through the court's April 2016 order, aggregate royalty and license payments were $3.2 million, of which $2.8 million had not yet been deposited by XY. In 2016, we recorded the expense of $4.2 million, representing the excess of the net damages awarded to XY, including prejudgment interest, over the liability previously recorded by Trans Ova for uncashed checks previously remitted to XY. In August 2016, Trans Ova deposited the net damages amount, including prejudgment interest, into the court's treasury, to be held until the appeals process is complete and final judgment amounts are determined. As of December 31, 2018, this amount is included in restricted cash on the accompanying consolidated balance sheet appearing elsewhere in this Annual Report.
In December 2016, Trans Ova elected to void the outstanding checks discussed above, and these amounts have been reclassified to other accrued liabilities on the accompanying consolidated balance sheets as of December 31, 2018 and 2017, appearing elsewhere in this Annual Report.
In December 2016, XY filed a complaint for patent infringement and trade secret misappropriation against Trans Ova in the District Court of Waco, Texas. Since the claims in this 2016 complaint directly relate to the 2012 licensing dispute and patent issues, Trans Ova filed and was granted a motion for change of venue to Colorado District Court. Trans Ova also filed a motion to dismiss, from which the Court dismissed ten of the twelve counts of the complaint. Presently, two counts for patent infringement remain pending. Trans Ova and we could elect to enter into a settlement agreement in order to avoid the further costs and uncertainties of litigation.
We may become subject to other claims, assessments and governmental investigations from time to time in the ordinary course of business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. We accrue liabilities for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. We do not believe that any such matters, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Holders of Record
Our common stock trades on the Nasdaq Global Select Market, or NASDAQ, under the symbol "XON".
As of February 15, 2019, we had 291 holders of record of our common stock. The actual number of shareholders is greater than this number of record holders and includes shareholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include shareholders whose shares may be held in trust by other entities.
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 and do not expect to pay any cash dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our equity compensation plans is incorporated herein by reference to Item 12 of Part III of this Annual Report.
Stock Performance Graph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Intrexon Corporation under the Securities Act of 1933, as amended, or the Exchange Act.
The following graph shows a comparison from December 31, 2013 through December 31, 2018 of the cumulative total return for our common stock; the Standard & Poor's 500 Stock Index, or the S&P 500 Index; the NYSE MKT ARCA Biotechnology Index; and the NASDAQ Biotechnology Index. The graph assumes that $100 was invested at the market close on December 31, 2013 in the common stock of Intrexon Corporation, the S&P 500 Index, the NYSE MKT ARCA Biotechnology Index, and the NASDAQ Biotechnology Index, and data for the S&P 500 Index, the NYSE MKT ARCA Biotechnology Index, and the NASDAQ Biotechnology Index assumes reinvestments of dividends. The NASDAQ Biotechnology Index is now included in this comparison as a result of Intrexon's inclusion in the index beginning December 24, 2018. We have elected to replace the NYSE MKT ARCA Biotechnology Index with the NASDAQ Biotechnology Index because we believe that it is a more appropriate comparison. In this transition year, the stock performance graph below includes the comparative performance of the new index and the previously reported index. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
(a) Sales of Unregistered Securities
From January 1, 2018 through December 31, 2018, we issued 696,033 unregistered shares of our common stock as payment under the services agreement entered into and effective as of November 1, 2015, as amended, by and between us and Third Security as previously discussed in our Current Report on Form 8-K filed on January 2, 2018.
We issued the above referenced shares of common stock in reliance on exemptions from registration under Section 4(a)(2) of the Securities Act.
(b) Use of Proceeds
(c) Issuer Purchases of Equity Securities
Selected Financial Data
The following tables set 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 Annual Report and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Annual Report.
The selected consolidated financial data set forth below as of December 31, 2018 and 2017, and for the years ended December 31, 2018, 2017 and 2016, are derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated financial data set forth below as of December 31, 2016, 2015, and 2014, and for the years ended December 31, 2015 and 2014, are derived from our audited consolidated financial statements contained in reports previously filed with the SEC, not included herein. Our audited consolidated financial statements have been prepared in United States dollars in accordance with U.S. GAAP.
Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Year Ended December 31,
(In thousands, except share and per share amounts)
Statements of Operations Data:
Collaboration and licensing revenues
Total revenues (1)
Total operating expenses
Net loss attributable to noncontrolling interests
Net loss attributable to Intrexon
Net loss attributable to common shareholders
Net loss attributable to common shareholders per share, basic and diluted
Weighted average shares outstanding, basic and diluted
Revenues and deferred revenue in 2018 are accounted for under ASC 606, and revenues and deferred revenue prior to 2018 are accounted for under ASC 605, Revenue Recognition, or ASC 605. We adopted ASC 606 on January 1, 2018 using the modified retrospective method, which applies the changes in accounting prospectively and does not restate prior periods.
In conjunction with the ZIOPHARM License Agreement in 2018, all of our ZIOPHARM preferred shares were returned to ZIOPHARM.
In 2018, we completed a registered underwritten public offering of $200,000 aggregate principal amount of Convertible Notes.
Other liabilities include $8,801, $15,629, and $20,485 of deferred consideration as of December 31, 2016, 2015, and 2014, respectively.
In 2017, we acquired GenVec, Inc., or GenVec, and began including the results of its operations effective on the acquisition date. In 2017, we also acquired the remaining 49 percent of outstanding equity of Biological & Popular Culture, Inc.
In 2015, we acquired ActoGeniX NV, Okanagan, and Oxitec and began including the results of their operations effective on the respective acquisition dates.
In 2014, we acquired Medistem, Inc. and Trans Ova and began including the results of their operations effective on the respective acquisition dates.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of, and should be read in conjunction with, Part I, Item 1, "Business" and Item 8, "Financial Statements and Supplementary Data." For information on risks and uncertainties related to our business that may make past performance not indicative of future results, or cause actual results to differ materially from any forward-looking statements, see "Special Note Regarding Forward-Looking Statements," and Part I, Item 1A, "Risk Factors."
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. Outside of collaboration and license fee payments and sales of products and services, which vary over time, we have not generated significant revenues, including revenues or royalties from product sales by us or our collaborators. Certain of our consolidated subsidiaries require regulatory approval and/or commercial scale-up before they may commence significant product sales and operating profits.
Historically, we have derived our collaboration and licensing revenues through agreements with counterparties for the development and commercialization of products enabled by our technologies. Generally, the terms of these collaborations provide that we receive some or all of the following: (i) technology access fees upon signing; (ii) reimbursements of costs incurred by us for our research and development and/or manufacturing efforts related to specific applications provided for in the collaboration; (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. Our collaborations contain multiple arrangements, and we typically defer revenues from the technology access fees and milestone payments 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.
From time to time, we and certain collaborators may cancel the agreements or we may repurchase rights to the exclusive fields from collaborators, relieving us of any further performance obligations under the agreement. Upon such circumstances or when we determine no further performance obligations are required of us under an agreement, we may recognize any remaining deferred revenue as either collaboration revenue or as a reduction of in-process research and development expense, depending on the circumstances.
We generate product and service revenues primarily through sales of products or services that are created from technologies developed or owned by us. Our primary current offerings include sales of advanced reproductive technologies, including our bovine embryo transfer and in vitro fertilization processes and from genetic preservation and sexed semen processes and applications of such processes to other livestock, as well as sales of livestock and embryos produced using these processes and used in production. We recognize revenue when control of the promised product is transferred to the customer or when the promised service is completed.
In future periods, our revenues will depend in part on our ability to partner our more mature programs and capabilities, the number of collaborations to which we are party, the advancement and creation of our programs and programs within our collaborations and the extent to which we or our collaborators bring products enabled by our technologies to market. We expect our collaboration revenues will decrease considerably as a result of our reacquisition of rights to fields previously licensed to collaborators, after which we no longer expect to receive reimbursement of costs incurred by us for research and development services and will no longer recognize previously deferred revenues associated with the terminated collaboration. Our revenues will also depend upon our ability to maintain or improve the volume and pricing of our current product and service offerings and to develop and scale up production of new offerings from the various technologies of our subsidiaries. Our future revenues may also include additional revenue streams we may acquire through mergers and acquisitions. In light of our limited operating history and experience, there can be no assurance as to the timing, magnitude and predictability of revenues to which we might be entitled.
Cost of products and services
Cost of products and services includes primarily labor and related costs, drugs and supplies used primarily in the embryo transfer and in vitro fertilization processes, livestock and feed used in production, and facility charges, including rent and depreciation. Fluctuations in the price of livestock and feed have not had a significant impact on our operating margins and no derivative financial instruments are used to mitigate the price risk.
Research and development expenses
We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:
salaries and benefits, including stock-based compensation expense, 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;
costs related to laboratory supplies used in our research and development efforts;
costs related to certain in-licensed technology rights or reacquired in-process research and development;
depreciation of leasehold improvements and laboratory equipment;
amortization of patents and related technologies acquired in mergers and acquisitions; and
rent and utility costs for our research and development facilities.
We have no individually significant research and development projects, and our research and development expenses primarily relate to either the costs incurred to expand or otherwise improve our multiple platform technologies, the costs incurred to develop a specific application of our technologies in support of current or prospective partners, or costs incurred to expand or otherwise improve our products and services. Research and development expenses, including costs for preclinical and clinical development, incurred for programs we support pursuant to an ECC agreement are typically reimbursed by the partner at cost, and all other research and development programs may be terminated or otherwise deferred at our discretion. The amount of our research and development expenses may be impacted by, among other things, the number of ECCs and the number and size of programs we may support on behalf of an ECC.
The table below summarizes our research and development expenses incurred to expand or otherwise improve our multiple platform technologies, the costs incurred to develop a specific application of our technologies in support of current or prospective partners, or costs incurred to expand or otherwise improve our products and services for the years ended December 31, 2018, 2017, and 2016. Other research and development expenses for these periods include indirect salaries and overhead expenses that are not allocated to either expanding or improving our multiple platform technologies, specific applications of our technologies in support of current or prospective partners, or expanding or improving our product and services offerings. Additionally, other research and development expenses for the year ended December 31, 2018 include $236.7 million of expense related to in-process research and development reacquired from several collaborators in 2018.
Year Ended December 31,
Expansion or improvement of our platform technologies
Specific applications of our technologies in support of current and prospective partners
Expansion or improvement of our product and service offerings
Total research and development expenses
Other than our expenses related to reacquired in-process research and development, we expect that our research and development expenses will increase as we develop our own proprietary programs and expand our offerings. 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 laboratory supplies. Research and development expenses may also increase as a result of ongoing research and development operations that we might assume through mergers and acquisitions.
Selling, general and administrative expenses
Selling, general and administrative, or SG&A, expenses consist primarily of salaries and related costs, including stock-based compensation expense, for employees in executive, operational, finance, sales and marketing, information technology, legal and corporate communications functions. Other significant SG&A expenses include rent and utilities, insurance, accounting and legal services, and expenses associated with obtaining and maintaining our intellectual property.
SG&A expenses may increase in the future to support our expanding operations as we explore new partnering opportunities and continue to develop our proprietary programs. These increases would likely include costs related to the hiring of additional personnel and increased fees for business development functions, costs associated with defending us in litigation matters, the costs of outside consultants, and other professional services. SG&A expenses may also increase as a result of ongoing operations that we might assume through mergers and acquisitions.
We hold equity securities and preferred stock received and/or purchased from certain collaborators. Other than investments accounted for using the equity method discussed below, we elected the fair value option to account for our equity securities and preferred stock held in these collaborators. These equity securities and preferred stock 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 statements of operations. As such, we bear the risk that fluctuations in the securities' share prices may significantly impact our results of operations.
Interest expense is expected to increase in future periods as we incur interest expense related to the Convertible Notes issued in July 2018.
Interest income consists of interest earned on our cash and cash equivalents and short-term and long-term investments. Dividend income consists of the monthly preferred stock dividends received from our investments in preferred stock. Dividend income is expected to decrease in future periods because we returned our ZIOPHARM preferred shares to ZIOPHARM in October 2018.
Equity in net income (loss) of affiliates
Equity in net income or loss of affiliates is our pro-rata share of our equity method investments' operating results, adjusted for accretion of basis difference. We account for investments in our JVs and start-up entities backed by Harvest Intrexon Enterprise Fund I, LP, or Harvest, using the equity method of accounting since we have the ability to exercise significant influence, but not control, over the operating activities of these entities.
Comparison of the year ended December 31, 2018 to the year ended December 31, 2017
The following table summarizes our results of operations for the years ended December 31, 2018 and 2017, together with the changes in those items in dollars and as a percentage:
Year Ended December 31,
Collaboration and licensing revenues (2)
Cost of products
Cost of services
Research and development
Selling, general and administrative
Total operating expenses
Total other income (expense), net
Equity in loss of affiliates
Loss before income taxes
Income tax benefit
Net loss attributable to noncontrolling interests
Net loss attributable to Intrexon
Revenues in 2018 are accounted for under ASC 606 and revenues in 2017 are accounted for under ASC 605. We adopted ASC 606 on January 1, 2018 using the modified retrospective method, which applies the changes in accounting prospectively and does not restate prior periods.
Including $60,238 and $130,670 from related parties for the years ended December 31, 2018 and 2017, respectively.
The following table shows the collaboration and licensing revenue recognized for the years ended December 31, 2018 and 2017, together with the changes in those items.
Year Ended December 31,
ZIOPHARM Oncology, Inc.
Ares Trading S.A.
Intrexon T1D Partners, LLC
Intrexon Energy Partners, LLC
Intrexon Energy Partners II, LLC
Fibrocell Science, Inc.
Persea Bio, LLC
S & I Ophthalmic, LLC
Harvest start-up entities (1)
For the years ended December 31, 2018 and 2017, revenue recognized from collaborations with Harvest start-up entities include Genten Therapeutics, Inc.; CRS Bio, Inc.; Exotech Bio, Inc.; AD Skincare, Inc.; and Thrive Agrobiotics, Inc. For the year ended December 31, 2017, revenues recognized from collaborations with Harvest start-up entities also include Relieve Genetics, Inc.
Collaboration and licensing revenues decreased $68.7 million, or 47 percent, from the year ended December 31, 2017 due to (i) the mutual termination in 2017 of our second ECC with ZIOPHARM for the treatment of graft-versus-host disease, (ii) a decrease in research and development services for certain of our ECCs as we redeployed certain resources towards supporting prospective new platforms and partnering opportunities and began to focus more on the further development of relationships and structures that provide us with more control and ownership over the development process and commercialization path, including programs where we reacquired the previously licensed technology rights in 2018, and (iii) a decrease in research and development services we perform for collaborators upon the transition of program execution to our collaborators.
Product revenues and gross margin
Product revenue decreased $5.1 million, or 15 percent, from the year ended December 31, 2017. The decrease in product revenues was primarily due to lower milk prices which in turn resulted in lower customer demand for live calves, cows previously used in production, and cloned products. Gross margin on products declined in the current period as a result of the lower product sales and increased operating costs associated with new product offerings and cloned products.
Service revenues and gross margin
Service revenue increased $1.8 million, or 4 percent, over the year ended December 31, 2017. The increase in service revenues and gross margin thereon relates to pricing changes and an increase in the number of embryos produced per bovine in vitro fertilization cycle performed due to improved production results.
Research and development expenses increased $261.4 million, or 183 percent, over the year ended December 31, 2017. Current period research and development expenses include $236.7 million of expenses related to in-process research and development reacquired from former collaborators.
Selling, general and administrative expenses
SG&A expenses decreased $8.3 million, or 6 percent, from the year ended December 31, 2017. Legal and professional fees decreased $7.5 million primarily due to (i) decreased legal fees associated with ongoing litigation and (ii) decreased fees incurred for regulatory and other consultants.
Impairment loss for the year ended December 31, 2018 of $60.5 million arose from a charge taken due to a change in our business strategy for commercializing the Oxitec technology targeting the Aedes Aegypti mosquito. Impairment loss for the year ended December 31, 2017 of $16.8 million resulted from our annual test for goodwill and indefinite-lived intangible asset impairment in the fourth quarter. Based on the price per share received by AquaBounty in its then-recent underwritten public offering, we determined that it was more likely than not that the fair value of our AquaBounty reporting unit was less than the carrying value and recorded a $13.0 million impairment charge representing the estimated excess of carrying value over fair value of this reporting unit. Additionally, in the fourth quarter of 2017, we decided to forgo further development of certain of our in-process research and development assets and as a result recorded a $3.0 million impairment charge.
Total other income (expense), net
Total other income (expense), net, decreased $41.5 million, or 185 percent, from the year ended December 31, 2017. This decrease was primarily attributable to losses on our investment in ZIOPHARM preferred stock prior to returning this investment to ZIOPHARM in October 2018, as well as an increase in interest expense related to the Convertible Notes issued in July 2018.
The following table shows the collaboration and licensing revenue recognized for the years ended December 31, 2017 and 2016, together with the changes in those items.
Year Ended December 31,
ZIOPHARM Oncology, Inc.
Ares Trading S.A.
Intrexon T1D Partners, LLC
Intrexon Energy Partners, LLC
Intrexon Energy Partners II, LLC
Fibrocell Science, Inc.
Persea Bio, LLC
S & I Ophthalmic, LLC
Harvest start-up entities (1)
For the years ended December 31, 2017 and 2016, revenue recognized from collaborations with Harvest start-up entities include Genten Therapeutics, Inc.; CRS Bio, Inc.; Relieve Genetics, Inc.; Exotech Bio, Inc.; AD Skincare, Inc.; and Thrive Agrobiotics, Inc.
Collaboration and licensing revenues increased $35.7 million, or 33 percent, over the year ended December 31, 2016 due primarily to (i) the recognition of previously deferred revenue totaling $28.9 million related to our second ECC with ZIOPHARM for the treatment of graft-versus-host disease, which was mutually terminated in December 2017 and (ii) a full year of recognition of deferred revenue associated with the payment received in June 2016 from ZIOPHARM to amend our collaborations.
Product revenues and gross margin
Product revenue decreased $3.4 million, or 9 percent, from the year ended December 31, 2016. The decrease in product revenues was primarily due to lower milk prices which in turn resulted in lower customer demand for cows and live calves. Gross margin on products improved slightly in the current period primarily due to a decline in the average cost of cows.
Service revenues and gross margin
Service revenue increased $7.6 million, or 18 percent, over the year ended December 31, 2016. The increase in service revenues relates to an increase in the number of bovine in vitro fertilization cycles performed due to higher customer demand. Gross margin on services decreased slightly in the current period primarily due to an increase in royalties and commissions due to vendors.
Research and development expenses
Research and development expenses increased $31.1 million, or 28 percent, over the year ended December 31, 2016. The increase is due primarily to increases in (i) lab supplies and consulting expenses; (ii) salaries, benefits and other personnel costs for research and development employees; (iii) depreciation and amortization; and (iv) rent and utilities expenses. Lab supplies and consulting expenses increased $11.3 million due to (i) the progression of certain programs into the preclinical and clinical phases with certain of our collaborators and (ii) the expansion or improvement of certain of our platform technologies. Salaries,
benefits and other personnel costs increased $8.0 million due to an increase in research and development headcount necessary to invest in current or expanding platforms and to develop new prospective collaborations and other partnering opportunities. Depreciation and amortization increased $5.8 million primarily as a result of (i) the amortization of developed technology acquired from Oxitec, which began in November 2016 upon the completion of certain operational and regulatory events, and (ii) the amortization of developed technology acquired from GenVec in June 2017. Rent and utilities expenses increased $3.3 million due to the expansion of certain facilities to support our increased headcount.
Selling, general and administrative expenses
SG&A expenses increased $3.8 million, or 3 percent, over the year ended December 31, 2016. Salaries, benefits and other personnel costs increased $4.2 million primarily due to increased headcount to support our expanding operations. Legal and professional fees increased $4.2 million primarily due to (i) increased legal fees to defend ongoing litigation and to support our evolving corporate strategy and (ii) consulting fees related to potential business opportunities and public relations. These increases were partially offset by $4.3 million in litigation expenses recorded in 2016 arising from the entrance of a court order in our trial with XY.
Impairment loss for the year ended December 31, 2017 of $16.8 million resulted from our annual test for goodwill and indefinite-lived intangible asset impairment in the fourth quarter. Based on the price per share received by AquaBounty in its recent underwritten public offering, we determined that it was more likely than not that the fair value of our AquaBounty reporting unit was less than the carrying value and recorded a $13.0 million impairment charge representing the estimated excess of carrying value over fair value of this reporting unit. Additionally, in the fourth quarter of 2017, we decided to forgo further development of certain of our in-process research and development assets and as a result recorded a $3.0 million impairment charge.
Total other income (expense), net
Total other income (expense), net, increased $70.3 million, or 147 percent, over the year ended December 31, 2016. This increase was primarily attributable to (i) the change in fair market value of our equity securities portfolio, investments in preferred stock, and other convertible instruments and (ii) a full year of dividend income from our investment in preferred stock of ZIOPHARM.
Equity in net loss of affiliates
Equity in net loss of affiliates for the years ended December 31, 2017 and 2016 includes our pro-rata share of the net losses of our investments we account for using the equity method of accounting. The $6.8 million, or 32 percent, decrease was primarily due to the temporary redeployment of certain resources away from JV programs towards supporting prospective new platforms and additional collaborations.
Liquidity and capital resources
Sources of liquidity
We have incurred losses from operations since our inception and as of December 31, 2018, we had an accumulated deficit of $1.3 billion. From our inception through December 31, 2018, we have funded our operations principally with proceeds received from private and public equity and debt offerings, cash received from our collaborators and through product and service sales made directly to customers. As of December 31, 2018, we had cash and cash equivalents of $102.8 million and short-term investments of $119.7 million. Cash in excess of immediate requirements is typically invested primarily in money market funds and United States government debt securities in order to maintain liquidity and preserve capital.
We currently generate cash receipts primarily from sales of products and services, reimbursement of research and development services performed by us and from strategic transactions involving our subsidiaries.
The following table sets forth the significant sources and uses of cash for the periods set forth below:
Year Ended December 31,
Net cash provided by (used in):
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash flows from operating activities:
In 2018, our net loss was $514.7 million, which includes the following significant noncash expenses totaling $440.0 million: (i) $236.7 million of expense related to reacquired in-process research and development previously licensed to certain of our collaborators, (ii) $60.5 million of impairment loss, (iii) $36.3 million of stock-based compensation expense, (iv) $33.1 million of depreciation and amortization expense, (v) $30.2 million of net unrealized and realized losses on our equity securities and preferred stock, (vi) $20.9 million of loss on disposal of assets, (vii) $11.6 million of equity in net loss of affiliates, and (viii) $10.7 million of shares issued as payment for services. These expenses were partially offset by (i) $21.3 million of net changes in deferred income taxes and (ii) $14.8 million of noncash dividend income. Additionally, we had a $20.0 million net increase in our operating assets and liabilities primarily as a result of the recognition of previously deferred revenue.
In 2017, our net loss was $126.8 million, which includes the following significant noncash expenses totaling $114.9 million: (i) $41.6 million of stock-based compensation expense, (ii) $31.1 million of depreciation and amortization expense, (iii) $16.8 million of impairment losses, (iv) $14.3 million of equity in net loss of affiliates, and (v) $11.1 million of shares issued as payment for services. These expenses were partially offset by $16.8 million of noncash dividend income. Additionally, we had a $74.6 million net increase in our operating assets and liabilities.
In 2016, our net loss was $190.3 million, which includes the following significant noncash expenses totaling $157.6 million: (i) $58.9 million of net unrealized and realized losses on our equity securities and preferred stock, (ii) $42.2 million of stock-based compensation expense, (iii) $24.6 million of depreciation and amortization expense, (iv) $21.1 million of equity in net loss of affiliates, and (v) $10.8 million of shares issued as payment for services. These expenses were partially offset by $7.4 million of noncash dividend income. Additionally, we had a $17.7 million net increase in our operating assets and liabilities primarily as a result of the recognition of previously deferred revenue, partially offset by a $10.0 million technology access fee received in cash pursuant to a new collaboration.
Cash flows from investing activities:
During 2018, we used $112.7 million for purchases of short-term investments, net of maturities; $41.6 million for purchases of property, plant and equipment; and $16.6 million for investments in our JVs, and we received $15.5 million in an asset acquisition.
During 2017, we received proceeds of $174.5 million from the maturity of short-term investments, and we used $46.7 million for purchases of property, plant and equipment; $14.2 million for the purchase of a land-based aquaculture facility by AquaBounty; and $11.2 million for investments in our JVs.
During 2016, we used $31.6 million for purchases of property, plant and equipment; $11.5 million for investments in our JVs; $7.2 million to acquire the assets of Old EnviroFlight; $3.0 million for the issuances of notes receivable; and $2.3 million for purchases of equity securities and warrants of certain of our collaborators, and we received $26.7 million of proceeds from the maturity of short-term investments, net of purchases.
During 2018, we received $219.9 million net proceeds from the issuance of long-term debt and $88.0 million net proceeds from public financings.
During 2017, we received $13.7 million proceeds from a private placement of our common stock with an affiliate of Third Security and paid $8.7 million of deferred consideration to former shareholders of acquired businesses.
During 2016, we received $19.2 million from stock option exercises and paid $6.7 million of deferred consideration to former shareholders of an acquired business.
Future capital requirements
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 any payments received in connection with strategic transactions;
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;
our ability to maintain or improve the volume and pricing of our current product and service offerings and to develop new offerings, including those that may incorporate new technologies;
costs we might incur to reacquire previously licensed rights for our own development;
the timing and capital requirements to scale up our various product and service offerings and customer acceptance thereof;
our ability to maintain and establish additional collaborative arrangements and/or new strategic initiatives;
the timing of regulatory approval of products of our collaborations and operations;
the resources, time and cost required for the preparation, filing, prosecution, maintenance and enforcement of patent claims;
investments we may make in current and future collaborators, including JVs;
strategic mergers and acquisitions, including both the upfront acquisition cost as well as the cost to integrate, maintain, and expand the strategic target; and
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.
Until such time, if ever, as we can regularly 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 strategic transactions, collaborations, 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.
Our consolidated financial statements as of and for the year ended December 31, 2018 have been prepared on the basis that we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course
of business. Based on our balance of cash, cash equivalents and short-term investments of $222.5 million at December 31, 2018 and recurring losses since inception, there is substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements were issued. Our ability to continue as a going concern will depend on whether we are able to generate positive cash flows through equity or debt financings, strategic collaborations or equity investments in our subsidiaries or platforms, and the continuation of cash revenues from collaborators and customers of our products and services. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, which could have a material adverse effect on our financial condition. In addition, if we are unable to continue as a going concern, we may be unable to meet our obligations under our existing debt facilities, which could result in an acceleration of our obligation to repay all amounts outstanding under those facilities, and we may be forced to liquidate our assets. In such a scenario, the values we receive for our assets in liquidation or dissolution could be significantly lower than the values reflected in our consolidated financial statements.
If we do not achieve our planned operating results, our ability to continue as a going concern would be jeopardized and we may need to take the following actions to support our liquidity needs in 2019:
shift our internal investments from subsidiaries and platforms whose potential for value creation is longer-term to near-term opportunities;
sell certain of our operating subsidiaries to third parties;
reduce operating expenditures for third-party contractors, including consultants, professional advisors, and other vendors; and
reduce or delay capital expenditures, including non-essential facility expansions, lab equipment, and information technology projects.
Implementing this plan could have a negative impact on our ability to continue our business as currently contemplated, including, without limitation, delays or failures in our ability to:
maintain the diversity of our various portfolio offerings;
develop and commercialize products within planned timelines or at planned scales; and
invest in new research and development efforts.
Contractual obligations and commitments
The following table summarizes our significant contractual obligations and commitments as of December 31, 2018 and the effects such obligations are expected to have on our liquidity and cash flows in future periods: