Filed with the SEC from Apr 24 to Apr 30:
Applied Biosystems Group (ABI)
Hedge-fund manager Steven A. Cohen suggested a sale of the life-science research company. Cohen said his SAC Capital Advisors sent a letter last month to the non-management directors of Applera, the parent of Applied Biosystems, expressing its continued support for the recent spinoff of Applera's Celera Group (CRA) as an independent entity. He also encouraged Applera's board to take a number of actions. Among them, SAC Capital asked Applera to explore all strategic alternatives, including the sale of the Applied Biosystems Group. SAC Capital holds 8,604,018 shares (5.1%).
Applied Biosystems and Celera Business Segments
Applera Corporation conducts business through two business segments, which are described below. Throughout this report, terms such as â€śApplera,â€ť â€śwe,â€ť â€śus,â€ť or â€śourâ€ť may be used to refer to Applera Corporation.
Applied Biosystems Group. Our Applied Biosystems Group, which we refer to as â€śApplied Biosystemsâ€ť throughout this report, serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Its customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries and develop new pharmaceuticals. Applied Biosystemsâ€™ products also serve the needs of some markets outside of life science research, which we refer to as applied markets, such as the fields of: human identity testing (forensic and paternity testing); biosecurity, which refers to products needed in response to the threat of biological terrorism and other malicious, accidental, and natural biological dangers; and quality and safety testing, such as testing required for food and pharmaceutical manufacturing. A description of this business segment and developments during our 2007 fiscal year is set forth below in this Item 1 under the heading â€śBusinessâ€“Applied Biosystems Group Business.â€ť
Celera Group. Our Celera Group, which we refer to as â€śCeleraâ€ť throughout this report, is primarily a molecular diagnostics business that is using proprietary genomics and proteomics discovery platforms to identify and validate novel diagnostic markers, and is developing diagnostic products based on these markers as well as other known markers. Celera maintains a strategic alliance with Abbott Laboratories for the development and commercialization of molecular, or nucleic acid-based, diagnostic products, and it is also developing new diagnostic products outside of this alliance. Through its genomics and proteomics research efforts, Celera is also discovering and validating therapeutic targets, and it is seeking strategic partnerships to develop therapeutic products based on these discovered targets. A description of this business segment and developments during our 2007 fiscal year is set forth below in this Item 1 under the heading â€śBusinessâ€“Celera Group Business.â€ť
Through December 31, 2005, we operated a diagnostics business known as Celera Diagnostics. This business was a 50/50 joint venture between Applied Biosystems and Celera. In January 2006, we announced that our Board of Directors had approved a restructuring of Celera Diagnostics. As a result of the restructuring, effective as of January 1, 2006, Applied Biosystemsâ€™ interest in Celera Diagnostics was transferred to Celera in exchange for various considerations to Applied Biosystems. During our 2007 fiscal year, we changed the name of this group from the Celera Genomics Group to the Celera Group to better reflect the current focus and business strategy of the group.
Information about the risk factors associated with our business segments is set forth below in Item 1A of this report under the headings â€śRisk Factorsâ€“Risks Relating to Applied Biosystemsâ€ť and â€śRisk Factorsâ€“Risks Relating to Celera.â€ť
We maintain a corporate staff to provide accounting, tax, treasury, legal, information technology, human resources, and other shared internal services for Applied Biosystems and Celera.
Corporate History and Structure; Two Classes of Stock
Applera was incorporated in 1998 under the laws of the State of Delaware. Applera is the successor to â€śThe Perkin-Elmer Corporation,â€ť a corporation originally formed in 1939, as a result of a recapitalization completed in May 1999. As part of the 1999 recapitalization, Applera established the following two classes of common stock, sometimes referred to as tracking stock, that were intended to reflect separately the relative performance of the businesses of Applied Biosystems and Celera, which are business units of Applera and are not separate legal entities:
Applera Corporation-Applied Biosystems Group Common Stock, which we refer to in this report as â€śApplera-Applied Biosystems stockâ€ť; and
Applera Corporation-Celera Group Common Stock, which we refer to in this report as â€śApplera-Celera stock.â€ť This class of stock was previously named â€śApplera Corporation-Celera Genomics Group Common Stock,â€ť but we changed the name during our 2007 fiscal year to be consistent with the change in the name of the Celera Genomics Group to the Celera Group, as described above.
On August 8, 2007, we announced that our Board of Directors has retained Morgan Stanley to explore alternatives to the companyâ€™s current tracking stock structure, including the possibility of creating two independent publicly-traded companies in place of our two business groups, Applied Biosystems and Celera.
More information about Applera-Applied Biosystems stock and Applera-Celera stock is set forth below in Item 5 of this report under the heading â€śMarket for Registrantâ€™s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.â€ť Also, information about the risk factors associated with our capital structure and our two classes of common stock is set forth below in Item 1A of this report under the heading â€śRisk Factorsâ€“Risks Relating to a Capital Structure with Two Separate Classes of Common Stock.â€ť
Websites. We maintain Internet websites for Applera, Applied Biosystems, and Celera. All interested persons can access the following information on these websites free of charge:
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed with or furnished to the Securities and Exchange Commission;
Section 16 â€śinsider transactionâ€ť reports, which include Forms 3, 4, and 5, filed by our officers and directors with the SEC; and
information relating to our corporate governance, including: our Corporate Governance Guidelines; our Code of Business Conduct and Ethics, which is applicable to our officers, directors, and employees; the charters for the Audit/Finance
Committee, the Management Resources Committee, and the Nominating/Corporate Governance Committee of our Board of Directors; information on how to communicate with our Board of Directors, including our non-management directors; and information on how to report valid complaints and concerns to the Company regarding accounting, internal accounting controls, or auditing matters.
We make our SEC reports and the insider transaction reports available on our websites as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Except for any documents on our websites that are expressly incorporated by reference into this report, the information contained on our websites is not incorporated by reference into this report and should not be considered to be a part of this report. All of these website addresses are included in this document as inactive textual references only.
Information Incorporated by Reference. The SEC allows us to â€śincorporate by referenceâ€ť some information from parts of other documents filed with the SEC, including:
our Annual Report to Stockholders for our 2007 fiscal year, which we refer to in this report as our â€ś2007 Annual Reportâ€ť; and
our Proxy Statement relating to our Annual Meeting of Stockholders to be held on October 18, 2007, which we refer to in this report as our â€ś2007 Proxy Statement.â€ť
When we â€śincorporate by reference,â€ť that means that we are referring you to important information in other documents that have been filed with the SEC rather than repeating that information in this report. We recommend that you refer to the information that we indicate is contained in the other documents and which is incorporated by reference into this report. The portions of our 2007 Annual Report that are incorporated by reference into this report are included as Exhibit 13 to this report.
All living organisms contain biological molecules. The most numerous are in the categories of: nucleic acids, which include DNA and RNA; proteins; carbohydrates; and lipids. Biological molecules are typically much larger and more complex than common molecules, and there is a wide diversity in the types of biological molecules present in living organisms. These characteristics make the analysis of biological molecules significantly more complex than the analysis of smaller compounds. Key advances in therapeutics have often come from an understanding of either proteins or DNA.
DNA molecules provide instructions that ultimately control the synthesis of proteins within a cell, a process referred to as gene expression. DNA molecules consist of chemical subunits, called nucleotides, bound in two long strands formed by a chemical â€śbackboneâ€ť made up of sugar and phosphate molecules. There are four nucleotides â€“ adenine, cytosine, guanine, and thymine â€“ often abbreviated with their first letters A, C, G, and T and often referred to as bases. In a DNA molecule, the nucleotides in the two strands are bound together in pairs to form a structure that resembles a twisted ladder, which is often referred to as a double helix. The bound pairs of nucleotides, which form the rungs of the ladder, are often referred to as base pairs.
Genes are individual segments of these DNA molecules that carry the specific information necessary to perform particular biological functions including, for example, to construct particular proteins. Genes may contain from several dozen to tens of thousands of nucleotides. The entire collection of DNA in an organism, called the genome, may contain a wide range of nucleotides, including as few as 4 million nucleotides in the case of simple bacteria and 3.1 billion base pairs of nucleotides in the case of human beings.
RNA molecules are similar to DNA in structure and are essential for biological function through a number of biochemical activities within the human body. There are different types of RNA molecules, each of which has a different function. For example, messenger RNA, the most widely understood form of RNA, acts as an intermediary between DNA and protein, transcribing the genetic code from DNA into proteins.
Principally driven by the â€śbiotechnology revolutionâ€ť and the increasing focus on DNA, researchers are developing a better understanding of DNAâ€™s role in human disease. An increased appreciation of how DNA ultimately determines the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the genes that make up the human genome. We believe the best scientific evidence to date indicates that the number of genes in the human genome that code for proteins is between 25,000 and 30,000. The study of genes and other genetic material of organisms is now commonly referred to as genomics.
The field of genomics research generally includes three broad categories of analysis, consisting of sequencing, genotyping, and gene expression studies:
Sequencing is performed to determine the exact order of the individual nucleotides in a DNA strand. Sequencing was used to identify the nucleotides in the entire human genome and other species. It has also been used to identify naturally occurring genetic variations in the human genome, which are referred to as single nucleotide polymorphisms, or SNPs. Scientists believe that SNPs can be correlated with, for example, susceptibility to disease, disease prognosis, therapeutic efficacy, and therapeutic toxicity, and therefore may have diagnostic or therapeutic utility.
Genotyping is performed to determine a particular sequence variant of a gene and its particular association with an individualâ€™s DNA. Genotyping is not performed to determine the complete structure of the gene, but rather is performed to determine if the particular DNA sequence variant, typically a SNP, can be associated with, for example, susceptibility to a particular disease or response to a particular drug.
Gene expression is performed to determine whether a particular gene is expressed, or present, and in some cases at what levels, in a relevant biological material. This analysis can be used, for example, to measure and compare gene activity in various biological samples, such as samples from populations of healthy and diseased individuals, or from populations at different stages of disease development. These types of studies may be useful in the development of diagnostic tests and therapeutic treatments.
As researchers learn more about DNA and RNA, they are also developing a better understanding of the role of proteins in human disease through efforts in the field of proteomics, the study of proteins expressed, or coded, by genes. Proteins are the products of genes and, along with gene expression and modification, are believed to be key drivers and mediators of cellular function and biological system activity. The understanding and treatment of disease today involves the study of genes and the proteins they code for, and frequently involves the measurement of a drugâ€™s ability to bind to specific proteins in the body.
Although DNA contains the code for proteins, scientists have discovered that the body may modify proteins after they have been made in cells. These modifications, referred to as post-translational modifications, can alter a proteinâ€™s function, leading to changes in the biological reactions that take place in cells, which researchers refer to as biological pathways. These post-translational modifications complicate the study of proteins, because scientists studying proteins and seeking to understand their role in health and disease need a more thorough characterization of proteins than simply knowing their genetic, or DNA, code.
We believe that gene and protein research will increase as companies in the pharmaceutical and biotechnology industries seek to improve their drug discovery and development efforts. We also believe that ongoing drug discovery and development efforts will increase research of cells as researchers seek to further understand how drugs work in the body.
The growth in DNA, protein, and other life science research has created the need for systems that facilitate the collection, organization, and analysis of the large amounts of data generated by this research. This demand has led to the development of the science of bioinformatics. The science of bioinformatics seeks to blend biology and computing to transform massive amounts of data into useful information.
Applied Biosystems serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Its customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries and develop new pharmaceuticals. Applied Biosystemsâ€™ products and services are designed to address the demand for increased automation and efficiency in pharmaceutical and biotechnology laboratories by combining the detection capabilities of analytical instruments with advances in automation and laboratory work-flow design. The markets for Applied Biosystemsâ€™ products and services span the spectrum of the life sciences industry and research community, including: basic human disease research and genetic analysis performed by universities, government agencies, and other non-profit organizations; pharmaceutical drug discovery, development, and manufacturing; and agriculture research. Applied Biosystemsâ€™ products also serve the needs of some markets outside of life science research, which we refer to as applied markets, such as the fields of: human identity testing (forensic and paternity testing); biosecurity, which refers to products needed in response to the threat of biological terrorism and other malicious, accidental, and natural biological dangers; and quality and safety testing, such as testing required for food and pharmaceutical manufacturing.
In October 2006, we announced that Catherine M. Burzik had resigned from her positions as Senior Vice President of Applera and President of Applied Biosystems. At the same time, we announced that Tony L. White, our Chairman, President, and Chief Executive Officer, had assumed the role of interim President of Applied Biosystems. In July 2007, we announced the promotion of Mark P. Stevenson to the position of Executive Vice President of Applied Biosystems as part of a realignment of the groupâ€™s operating structure. Immediately prior to his promotion, Mr. Stevenson was President of Applied Biosystemsâ€™ molecular and cell biology business and was also responsible for the groupâ€™s strategic planning and business development. In his new position, Mr. Stevenson has continued with these responsibilities but has also assumed responsibility for the groupâ€™s applied markets business and its services division as well as oversight of the Applied Biosystems business in Europe and Japan.
For information on revenues from instruments and consumables for our 2007, 2006, and 2005 fiscal years, refer to pages 30 and 32 of Managementâ€™s Discussion and Analysis in our 2007 Annual Report, which pages are incorporated herein by reference.
Products for the Molecular Biology Market
Customers in the molecular biology market use systems for the analysis of nucleic acids including DNA and RNA. DNA molecules provide instructions that ultimately control the synthesis of proteins within a cell, a process referred to as gene expression. RNA molecules are similar to DNA in structure and are essential for biological function through a number of biochemical activities within the human body. There are different types of RNA molecules, each of which has a different function. For example, messenger RNA, or mRNA, the most widely understood form of RNA, acts as an intermediary between DNA and protein, transcribing the genetic code from DNA into proteins. Another example is microRNA, or miRNA, a class of small RNA molecules discovered by scientists during the last few years and which may act as key regulators of processes such as cell proliferation and differentiation, apoptosis, or cell death, and fat metabolism.
Applied Biosystems has developed technologies, instrument systems, and consumables products that address the needs of a wide array applications within this market, including for example: basic research; pharmaceutical and diagnostic discovery and development; biosecurity testing, including infectious disease analysis; human identity testing, including forensic and paternity testing; and food and environment quality and safety testing. These technologies, systems, and consumable products support key methods of analysis, including DNA sequencing, genotyping, and gene expression studies, which are described in further detail above in Item 1 of this report under the heading â€śScientific Background.â€ť
PCR and Real-Time PCR Systems and Related Consumables. Polymerase chain reaction, commonly referred to as PCR, is a process in which a short strand of DNA is copied multiple times, or amplified, so that it can be more readily detected and analyzed. Applied Biosystemsâ€™ PCR product line includes amplification instruments, known as thermal cyclers, several combination thermal cyclers and PCR detection systems, known as real-time PCR systems, and reagents, disposables, and software necessary for the PCR amplification and detection process.
Technologically, these instruments are distinguished among each other primarily based on: their capacity for simultaneously processing multiple samples, determined based on the number of consumable â€śwellsâ€ť that can be accommodated; the speed at which the thermal cycling process is completed; and features supporting the development of experimentation protocols to increase the accuracy and efficiency of the PCR process. The Veriti thermal cycler is the most recent addition to the thermal cycler instrument product line and became commercially available in April 2007. This new instrument uses Applied Biosystemsâ€™ first-of-its-kind Veriflexâ„˘ Blocks temperature-control technology, which allows users to simultaneously control the temperature in six separate blocks, or zones, within the thermal cycler to determine the optimum temperature protocols for the particular sample being copied. This temperature control technology differentiates the Veriflex Blocks from current gradient technologies offered by other companies, which less-precisely regulate gradients of temperature across a single block within the instrument.
All of these real-time PCR instruments are enhanced versions of Applied Biosystemsâ€™ thermal cyclers, which are described above. However, unlike a general PCR instrument, which is used only to amplify a sample, these instruments are used to detect and for some applications quantify a sample during the PCR amplification process for purposes of conducting, for example, gene expression or genotyping analysis. Technologically, these instruments are distinguished among each other primarily based on: their capacity for simultaneously processing multiple samples, determined based on the number of consumable â€śwellsâ€ť that can be accommodated; the speed at which the detection and quantification process is completed and the level of automation; and the applications for which the instruments can be used.
The model 7900HT Fast system and the model 7500 Fast system are the most advanced real-time PCR systems offered by Applied Biosystems, and can complete the detection and quantification process substantially faster than other instruments offered by Applied Biosystems. The model 7900HT systems can incorporate optional robotics to enable large-scale gene expression and genotyping studies. The StepOneâ„˘ system is the most recent introduction to the real-time PCR instrument product line. This new instrument system, which became commercially available in February 2007, was developed in response to demand for a highly functional but easy to use and less expensive real-time PCR system.
Generally, the PCR and real-time PCR product lines are designed to offer instruments suitable for use by a wide range of users, from individual researchers to research laboratories conducting high-volume research. The suitability of any particular system for any researcher or research laboratory will depend on the nature of the work being performed and the capital budget of the researcher or research laboratory. Applied Biosystems provides servicing and customer support for the PCR and real-time PCR systems described above, as well as some previously-marketed systems that remain in use by some customers.
Applied Biosystemsâ€™ PCR product line also includes reagents and disposables for use in the PCR process. PCR reagents include specialized enzymes used to enable the PCR amplification process. Enzymes represent a class of proteins which activate biological processes. PCR enzymes are optimized to efficiently make copies of a segment of DNA while exposed to the high temperatures required by the PCR process. Applied Biosystems offers a range of products containing these PCR enzymes. These include products for use in general PCR, as well as special formulations designed for real-time PCR applications. Disposables include plastic devices which are used to hold DNA samples and PCR reagents throughout the PCR amplification process. A number of different disposable devices are available for use with the full range of PCR and real-time PCR instruments offered by Applied Biosystems.
Applied Biosystemsâ€™ real-time PCR systems enable TaqMan Â® chemistry, a unique PCR technology that can be used both for measurement of gene expression and for genotyping. TaqMan gene expression chemistry detects the product of PCR amplification and quantifies the amount of the target gene sequence present in the sample during the amplification process. This technique is referred to as quantitative real-time PCR. The real-time PCR systems analyze a sample by measuring fluorescence resulting from the reaction of the TaqMan chemistry and the sample. This product line has been widely accepted in the scientific research market. Applied Biosystemsâ€™ TaqMan Gene Expression Assays and SNP Genotyping Assays are TaqMan chemistry-based assays designed for use on Applied Biosystemsâ€™ real-time PCR systems. These products are described below in this description of the Applied Biosystems business under the heading â€śProducts for the Molecular Biology Marketâ€“Genomic Assays.â€ť TaqMan chemistry is the most sensitive and specific method for real-time PCR provided by Applied Biosystems. However, Applied Biosystemsâ€™ real-time PCR systems also support some other commonly used real-time PCR methods and Applied Biosystems provides reagents to enable those other methods.
Applied Biosystems offers a proprietary TaqMan Array, which was jointly developed with 3M Company, and a modified version of its model 7900HT system to support the TaqMan Arrays for real-time PCR applications. The TaqMan Arrays, which we previously referred to as TaqMan Low Density Arrays, are consumable laminated plastic and metal sheets containing 384 fluid channels and wells, sometimes referred to by scientists as microfluidic cards. They are designed for use instead of plastic trays with sample wells generically referred to as microtiter plates, which are used in many types of laboratory analyses, including gene expression or genotyping studies on Applied Biosystemsâ€™ instruments. The fluid channel design of the TaqMan Arrays enables researchers to automatically route a sample to the reaction wells rather than doing this by hand or using expensive and complex robotics as is required when using microtiter plates. Applied Biosystems offers the TaqMan Arrays pre-loaded with its inventoried human, mouse, and rat TaqMan Gene Expression Assays. Using an on-line ordering system, customers can select the assays to be pre-loaded onto, as well as the configuration of those assays on, the TaqMan Arrays. Applied Biosystems also offers a limited selection of inventoried TaqMan Arrays that are pre-loaded with a fixed panel of gene expression assays. For example, in January 2007, Applied Biosystems commercially launched Gene Signature Panels used to detect and quantify the expression of difficult-to-detect genes that we believe are important to the drug research needs of the pharmaceutical industry. Also, in July 2007, Applied Biosystems commercially launched Human MicroRNA Panels used to identify and quantify some of the most prevalent microRNAs. The Applied Biosystems TaqMan assays are described below in this description of the Applied Biosystems business under the heading â€śProducts for the Molecular Biology Marketâ€“Genomic Assays.â€ť
Genetic Analysis Instruments; Capillary Electrophoresis and Next Generation Systems. Applied Biosystemsâ€™ genetic analysis instruments, referred to as DNA or genetic analyzers or sequencers, can be used to perform both DNA sequencing and fragment analysis. DNA sequencing is used to determine the exact order of nucleotides in a strand of DNA. DNA fragment analysis is used to determine the size, quantity, or pattern of DNA in a strand of DNA. Genetic analysis instruments have been used extensively to obtain the DNA sequence of the human genome and the genomes of other species and to identify SNPs and other genetic mutations. SNPs, or single nucleotide polymorphisms, are naturally occurring genetic variations in the human genome that scientists believe can be correlated with, for example, susceptibility to disease, disease prognosis, therapeutic efficacy, and therapeutic toxicity, and therefore may have diagnostic or therapeutic utility.
Mr. Ayers is the retired Chairman and Chief Executive Officer of The Stanley Works, a tool and hardware manufacturer. He was an advisor to the Chairman and Chief Executive Officer of Stanley from January 1997 to October 1997 after having served as Chairman and Chief Executive Officer of Stanley from May 1989 to December 1996. Mr. Ayers is a Trustee of MassMutual Select Funds and MML Series Investment Fund.
Mr. BĂ©lingard is Chairman and Chief Executive Officer of Ipsen Group, a diversified French healthcare holding company. He previously served as Chief Executive Officer of bioMĂ©rieux-Pierre Fabre Group, a diversified French healthcare holding company, from 1999 to 2001, and as Director General of the Diagnostics Division and a member of the Executive Committee of F. Hoffmann-La Roche Ltd., a healthcare company, from 1990 to 1998. Mr. BĂ©lingard is also a director of Laboratory Corporation of America Holdings, NicOx S.A. (France), and bioMĂ©rieux S.A. (France).
Dr. Hayes is the Philip Caldwell Professor of Business Administration, Emeritus, at the Harvard Business School. He has held various positions at Harvard since 1966.
Dr. Levine is a professor at the Institute for Advanced Study. He previously served as President and Chief Executive Officer of Rockefeller University from 1998 to 2002 and was the Harry C. Weiss Professor of the Life Sciences and Chairman of the Molecular Biology Department at Princeton University from 1984 to 1998. Dr. Levine is also a director of Theravance, Inc. and Infinity Pharmaceuticals, Inc.
Mr. Longfield is the retired Chairman and Chief Executive Officer of C.R. Bard, Inc., a manufacturer of healthcare products. He joined C.R. Bard in 1989 as executive vice president, became President in 1991, and served as Chairman and Chief Executive Officer from 1995 until his retirement in August 2003. Mr. Longfield is also a director of Manor Care, Inc.
Dr. Mardis is an Associate Professor of Genetics at Washington University School of Medicine and Co-Director of the Washington University Genome Sequencing Center where she leads the technology development group. She has served in various positions at Washington University School of Medicine since 1993 and was appointed Associate Professor in October, 2006 and Co-Director of the Genome Sequencing Center in December, 2002. Dr. Mardis is also a member of the American Society of Human Genetics.
Mr. Martin is the retired President and Chief Executive Officer of Barnes Group Inc., a manufacturer of precision springs and custom metal components. He joined Barnes Group in 1990 as a group vice president and served as President and Chief Executive Officer from 1995 until his retirement in 1998. Mr. Martin is also a director of C.R. Bard, Inc., Ingersoll-Rand Company, and Unisys Corporation.
Dr. Slayman is the Sterling Professor of Genetics and Deputy Dean for Academic and Scientific Affairs at Yale University School of Medicine. She joined the Yale faculty in 1967. Dr. Slayman is a consultant to the National Institutes of Health, most recently having served as a member of the National Advisory General Medical Sciences Council.
Mr. Tobin has served as President and Chief Executive Officer of Boston Scientific Corporation, a medical device manufacturer, since March 1999. Mr. Tobin previously served as President and Chief Executive Officer of Biogen, Inc., a biotechnology company, from 1997 to 1998 and President and Chief Operating Officer from 1994 to 1997. Prior to joining Biogen, he held various positions at Baxter International Inc., including President and Chief Operating Officer from 1992 to 1994. Mr. Tobin is also a director of Boston Scientific and Curis, Inc.
Mr. White has served as our Chairman, President and Chief Executive Officer since September 1995. Prior to that date, he was Executive Vice President and a member of the Office of the Chief Executive of Baxter International Inc., a manufacturer of healthcare products and instruments. He also served as Group Vice President of Baxter from 1986 to 1992. Mr. White is also a director of C.R. Bard, Inc., Ingersoll-Rand Company, and the Standards, Productivity and Innovation Board of Singapore (SPRING Singapore).
MANAGEMENT DISCUSSION FOR LATEST QUARTER
We conduct business through two business segments: the Applied Biosystems group and the Celera group.
The Applied Biosystems group serves the life science industry and research community by developing and marketing instrument-based systems, consumables, software, and services. Its customers use these tools to analyze nucleic acids (DNA and RNA), small molecules, and proteins to make scientific discoveries and develop new pharmaceuticals. The Applied Biosystems groupâ€™s products also serve the needs of some markets outside of life science research, which we refer to as â€śapplied markets,â€ť such as the fields of: human identity testing (forensic and paternity testing); â€śbiosecurity,â€ť which refers to products needed in response to the threat of biological terrorism and other malicious, accidental, and natural biological dangers; and quality and safety testing, such as testing required for food and pharmaceutical manufacturing.
The Celera group is a diagnostics business delivering personalized disease management through a combination of products and services incorporating proprietary discoveries. Berkeley HeartLab, Inc. (â€śBHLâ€ť), a subsidiary of the Celera group, offers clinical laboratory testing services to characterize cardiovascular disease risk and optimize patient management. The Celera group also commercializes a wide range of molecular diagnostic products through its strategic alliance with Abbott Laboratories and has licensed its diagnostic technologies to clinical laboratories to provide personalized disease management in cancer and liver diseases.
In fiscal 1999, as part of a recapitalization of our Company, we created two classes of common stock referred to as â€śtrackingâ€ť stocks. Tracking stock is a class of stock of a corporation intended to â€śtrackâ€ť or reflect the relative performance of a specific business within the corporation.
Applera Corporation-Applied Biosystems Group Common Stock (â€śApplera-Applied Biosystems stockâ€ť) is listed on the New York Stock Exchange under the ticker symbol â€śABIâ€ť and is intended to reflect the relative performance of the Applied Biosystems group. Applera Corporation-Celera Group Common Stock (â€śApplera-Celera stockâ€ť) is listed on the New York Stock Exchange under the ticker symbol â€śCRAâ€ť and is intended to reflect the relative performance of the Celera group. There is no single security that represents the performance of Applera as a whole.
Holders of Applera-Applied Biosystems stock and holders of Applera-Celera stock are stockholders of Applera. The Applied Biosystems group and the Celera group are not separate legal entities, and holders of these stocks are stockholders of a single company, Applera. As a result, holders of these stocks are subject to all of the risks associated with an investment in Applera and all of its businesses, assets, and liabilities. The Applied Biosystems group and the Celera group do not have separate boards of directors. Applera has one board of directors, which will make any decision in accordance with its good faith business judgment that the decision is in the best interests of Applera and all of its stockholders as a whole.
On August 8, 2007, we announced that our board of directors has retained Morgan Stanley & Co. Incorporated to explore alternatives to our current tracking stock structure, including the possibility of creating independent publicly-traded companies in place of our two business groups, the Applied Biosystems group and the Celera group. In January 2008, we reiterated a preference of our board of directors to dissolve the current tracking stock structure and create separate, publicly traded companies for the Applied Biosystems group and the Celera group. Although no final decision has been reached, we expect to file a registration statement with the Securities and Exchange Commission (â€śSECâ€ť) by the end of the third quarter of fiscal 2008 in an effort to finalize a separation by June 30, 2008, the end of our 2008 fiscal year. We intend to update shareholders as the analysis is completed and the decision is finalized. No assurances can be given that the board will ultimately authorize such a transaction or that, if authorized, such a transaction will be consummated.
More information about the risks relating to our capital structure, particularly our two classes of capital stock, is contained in our Annual Report on Form 10-K for fiscal 2007 filed with the Securities and Exchange Commission.
Our fiscal year ends on June 30. The financial information for both segments is presented in Note 15 to our interim condensed consolidated financial statements, Segment and Consolidating Information. Managementâ€™s discussion and analysis addresses the consolidated financial results followed by the discussions of our two segments.
Listed below are significant business developments since the filing of our last Quarterly Report on Form 10-Q on November 7, 2007.
Applied Biosystems Group
In January 2008, Morgan Stanley exercised its option to settle an accelerated share repurchase transaction and delivered to us 1.9 million shares of Applera-Applied Biosystems stock. These new shares supplement the 16 million shares that were received in October 2007. See Note 9 to our interim condensed consolidated financial statements for more information on the accelerated share repurchase.
Also in January 2008, the Applied Biosystems group launched its SOLiD system service provider program and named its first four participants. The program enables researchers who donâ€™t own or canâ€™t access SOLiD system technology an effective channel for generating high-quality genomic data at a reasonable cost and/or evaluating our next-generation sequencing technology prior to system purchase.
In December 2007, our board of directors named Mark P. Stevenson a Senior Vice President of Applera and President and Chief Operating Officer of the Applied Biosystems group.
Also in December, the Applied Biosystems group launched GeneMapper Â® ID-X , a powerful new software application designed to help forensic laboratories deliver faster DNA results by automating routine DNA data analysis, facilitating more efficient manual review of complex samples and improving the overall workflow of forensic analysis. GeneMapper ID-X software is an expert system developed with feedback obtained from many of the more than a thousand forensic laboratories that the Applied Biosystems group supports worldwide.
In November 2007, the Applied Biosystems group announced an exclusive agreement and collaboration with BioTrove, Inc. to deploy and market TaqMan Â® genotyping assays on BioTroveâ€™s mid-density OpenArray platform, enabling customers to cost-effectively identify tens to hundreds of single nucleotide polymorphisms (SNPs) in thousands of samples. The product offering is expected to address commercial screening applications in human health and agriculture.
In January 2008, the Celera group published three papers in the Journal of the American College of Cardiology reporting that a variant of the gene encoding kinesin-like protein 6 (â€śKIF6â€ť) is associated with up to a 55% increased risk of primary and recurrent coronary heart disease events. These research studies included a total of more than 30,000 individuals, among whom about 60% are carriers of this risk variant. The studies also showed that the excess risk associated with the KIF6 variant was virtually eliminated by pravastatin (Pravachol Â® ) therapy and that high-dose atorvastatin (Lipitor Â® ) therapy reduced risk in carriers of the KIF6 risk variant more effectively than moderate-dose pravastatin therapy in acute coronary syndrome patients.
In January 2008, the United States Court of Appeals for the Federal Circuit vacated the permanent injunction granted by the lower court for Innogenetics N.V., Ghent, Belgium against Abbott Laboratories in selling hepatitis C virus (â€śHCVâ€ť) genotyping products. Since the juryâ€™s damage award included an upfront entry fee, the Court remanded to the lower court to determine the terms of a compulsory license for Abbottâ€™s future sales. In addition, the Court remanded for a new trial on the validity of the Innogenetics patent in view of a prior-issued patent. Innogenetics did not name the Celera group as a party in this lawsuit, but the Celera group has an interest in these products and in the outcome of the litigation because the products are manufactured by the Celera group and sold through its alliance with Abbott.
In January 2008, Abbott received CE mark certification for a new Chlamydia Real Ti m e PCR test. This is a newly formulated, and highly sensitive, molecular test, which is performed on the m2000 system, and is capable of detecting a recently identified new variant strain of Chlamydia trachomatis.
In January 2008, Laboratory Corporation of America Â® Holdings (â€śLabCorpâ€ť) commenced the commercialization of the first of two breast cancer assays based on the Celera groupâ€™s estrogen/progesterone receptor discoveries. These assays were developed under a license agreement that allows LabCorp to select from among the Celera groupâ€™s genomic findings to develop and commercialize two molecular oncology laboratory service tests.
In January 2008, the Celera group restructured management to support the integration of the BHL and Atria Genetics Inc. (â€śAtriaâ€ť) acquisitions. Michael Zoccoli, Ph.D., was promoted to the position of General Manager of the Celera groupâ€™s in vitro diagnostic product business. Dr. Zoccoli joined the Celera group in 2002, and in this new position he will oversee all product development, manufacturing, quality, regulatory and product support activities in the Celera groupâ€™s in vitro diagnostic product business.
In November 2007, the Celera group and Ipsen entered into a pharmacogenomics research collaboration to develop biomarker and pharmacogenomic tests for patients with growth failure.
Critical Accounting Estimates
There were no material changes to our critical accounting estimates during the first six months of fiscal 2008, except for our revenue recognition policy, as described below, due to the acquisition of BHL in October 2007. For further information on our critical accounting estimates, refer to the discussion contained in the managementâ€™s discussion and analysis section of our 2007 Annual Report to Stockholders (which discussion is incorporated in this quarterly report by reference).
The following describes only the areas that are most subject to our judgment. Refer to Note 1, Accounting Policies and Practices, to our interim condensed consolidated financial statements for a more detailed discussion of our revenue recognition policy.
In the normal course of business, we enter into arrangements whereby revenues are derived from multiple deliverables. In these revenue arrangements, we record revenue as the separate elements are delivered to the customer if the delivered item is determined to represent a separate earnings process, there is objective and reliable evidence of the fair value of the undelivered item, and delivery or performance of the undelivered item is probable and substantially in our control. For instruments where installation is determined to be a separate earnings process, the portion of the sales price allocable to the fair value of the installation is deferred and recognized when installation is complete. We determine the fair value of the installation process based on technician labor billing rates, the expected number of hours to install the instrument based on historical experience, and amounts charged by third parties. We continually monitor the level of effort required for the installation of our instruments to ensure that appropriate fair values have been determined.
We recognize royalty revenues when earned over the term of the agreement in exchange for the grant of licenses to use our products or some technologies for which we hold patents. We recognize revenue for estimates of royalties earned during the applicable period, based on historical activity, and make revisions for actual royalties received in the following quarter. Historically, these revisions have not been material to our consolidated financial statements. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue upon the receipt of cash or royalty statements from our licensees.
A portion of the Celera groupâ€™s reported net revenues include patient test service revenues associated with BHLâ€™s operations. We recognize patient test service revenues upon completion of the testing process and when the test results are sent to the ordering physicians. Billings for services reimbursed by third-party payors, including Medicare, are recorded net of allowances for differences between amounts billed and the estimated receipts from such payors. For the second quarter of fiscal 2008, revenue from Medicare patients represented approximately 39% of the total BHL patient test service revenues. Payment arrangements with third parties, such as Medicare and some insurance companies, include predetermined rates for patient tests. Adjustments to the estimated receipts, based on final settlement with the third-party payors, including Medicare, are recorded in revenue upon settlement.
With regard to patient test services, the Celera group has an established process to estimate and review the collectibility of its receivables based on the period of time the receivables have been outstanding. The Celera groupâ€™s process for determining the appropriate level of the allowance for doubtful accounts involves judgment, and considers such factors as the age of the underlying receivables, historical and projected collection experience, and other external factors that could affect the collectibility of its receivables. The process includes the close monitoring of billings and the collection experience, which helps reduce the risks of material revisions to allowance estimates.
Events Impacting Comparability
We are providing the following information on some actions taken by us or events that occurred in the periods indicated. We describe the effect of these items on our reported earnings for the purpose of providing you with a better understanding of our on-going operations.
In October 2007, we acquired BHL for $193.2 million in cash, including transaction costs. BHL, a privately held company with operations in Burlingame and Alameda, California, is a cardiovascular healthcare company with a Clinical Laboratory Improvement Amendments (â€śCLIAâ€ť)-certified laboratory that provides a broad portfolio of testing and disease management services focused on the secondary prevention market. We believe that the acquisition will provide the Celera group with a commercial infrastructure to bring its new genetic tests to the U.S. cardiovascular market. Additionally, BHL is expected to provide opportunities for the Celera group to commercialize new tests and technologies and to gain economies of scale and improve its margins as a consequence of the vertical integration with BHLâ€™s clinical laboratory service business.
In late October 2007, we acquired substantially all of the assets of Atria, a privately held company based in South San Francisco, CA, for $33.3 million in cash, including transaction costs. Atria has a line of human leukocyte antigen (â€śHLAâ€ť) testing products that are used for identifying potential donors in the matching process for bone marrow transplantation. The acquisition is a strategic fit for the Celera group providing direct access to the niche market of tissue typing in the transplantation and bone marrow registry market.
The net assets and results of operations of BHL and Atria have been included in our condensed consolidated financial statements since their respective acquisition dates, and have been allocated to the Celera group. For further information on these acquisitions, see Note 3 to our interim condensed consolidated financial statements.
Acquired Research and Development
In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $114.3 million charge to write-off the value of acquired in-process research and development (â€śIPR&Dâ€ť) in connection with the acquisition of Agencourt Personal Genomics, Inc. (â€śAPGâ€ť). As of the acquisition date, in July 2006, the technological feasibility of the acquired IPR&D project had not been established, and it was determined that the project had no future alternative use. The project being developed, which consists of both an instrument and reagents, is intended for very high throughput genetic analysis applications, including DNA sequencing and expression profiling.
At the date of acquisition, the project was in the development stage and approximately 30% complete. The work on this project was completed in September 2007. The following table briefly describes the APG project.
In June 2007, we made our first placements of this next generation instrument system to early access customers. The initial instrument and reagents are expected to begin generating revenue in fiscal 2008. The total project costs were approximately $29 million, an increase of $13 million from the estimate as of the acquisition date. These additional R&D expenditures were for labor and materials required to accelerate the commercial launch of the platform and optimize features to better compete with other already commercialized next generation technologies. This increase in costs was offset by reductions in other planned R&D projects. Based on the performance of the system, the level of interest shown by our potential customers, and the progress in our manufacturing scale up, we accelerated the commercial release of the system to October 2007.
At the time of the acquisition, we believed there was a reasonable chance of realizing the economic return expected from the acquired in-process technology. We remain optimistic about the technology; however, as there is risk associated with the realization of benefits related to commercialization of an in-process project due to, among other things, rapidly changing customer needs, the complexity of the technology, growing competitive pressures, and potentially conflicting intellectual property rights of third parties, there can be no assurance that any project will meet commercial success.
Employee-Related Charges, Asset Impairments and Other
The following items have been recorded in the interim condensed consolidated statements of operations in employee-related charges, asset impairments and other, except as noted.
Applied Biosystems group
During the second quarter of fiscal 2008, the Applied Biosystems group recorded a pre-tax charge of $2.9 million for severance costs for 41 employees. The charge resulted from the realignment of the Applied Biosystems groupâ€™s organization to support market dynamics and it plans on redirecting the savings into other strategic initiatives. All of the affected employees were notified as of December 31, 2007, and are expected to be terminated by June 30, 2008. During the second quarter of fiscal 2008, we made cash payments of $0.8 million related to this charge. Cash expenditures were funded by cash provided by operating activities. The remaining cash expenditures of $2.1 million are expected to be paid by the June 30, 2008.
Charges prior to fiscal 2007
During the first six months of fiscal 2008, the Applied Biosystems group made cash payments of approximately $0.7 million related to excess facility lease space charges recorded in fiscal 2005. The remaining cash payments of $1.0 million as of December 31, 2007 are expected to be disbursed by fiscal 2011. In accordance with Statement of Financial Accounting Standards (â€śSFASâ€ť) 146, â€śAccounting for Costs Associated with Exit or Disposal Activitiesâ€ť, the excess facility lease space charge included a reduction for future estimated sublease rentals for the property. A sublease rental was not obtained for the property and over the course of the lease, additional charges of $0.6 million were recorded in operating expenses. Additionally, in the second quarter of fiscal 2007, a charge of $0.5 million was recorded in operating expenses to reserve for additional estimated costs under the lease.
During the second quarter of fiscal 2008, the Celera group recorded a pre-tax charge of $0.4 million related to a reduction in the Celera groupâ€™s proteomic-based activities. This charge was in addition to a charge recorded in the fourth quarter of fiscal 2007, as described below. The charge was primarily comprised of a $0.8 million charge for severance costs for approximately 20 employees, partially offset by a gain of $0.4 million from the disposal of equipment related to proteomic-based activities. All of the affected employees were notified by October 31, 2007, and are expected to be terminated by the end of the third quarter of fiscal 2008. During the second quarter of fiscal 2008, we made net cash payments of $0.5 million related to this charge. Cash expenditures were funded by available cash. The remaining cash expenditures of $0.3 million are expected to be paid by the third quarter of fiscal 2008. This action was intended to continue to improve the Celera groupâ€™s financial results, in part due to lower operating expenses.
During the fourth quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $0.5 million for severance costs for approximately 20 employees. The charge resulted from a reduction in the Celera groupâ€™s proteomics-based activities. All of the affected employees were notified as of June 30, 2007, and were terminated by October 31, 2007. During the first six months of fiscal 2008, we made cash payments of $0.5 million, which represent the remaining payments related to this charge. Cash expenditures were funded by available cash. This action was intended to continue to improve the Celera groupâ€™s financial results, in part due to lower operating expenses.
During the second quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $2.5 million, which was primarily comprised of a $3.0 million pre-tax charge for the write-down of the carrying amount of an owned facility that was impaired initially in fiscal 2006, partially offset by a pre-tax benefit of $0.6 million for a reduction in anticipated employee-related costs associated with severance and benefit charges recorded in the third and fourth quarters of fiscal 2006.
During the first quarter of fiscal 2007, the Celera group recorded a pre-tax charge of $3.5 million for its estimated share of a damage award in continuing litigation between Abbott Laboratories, our alliance partner, and Innogenetics N.V. In September 2006, a jury found that the sale of hepatitis C virus (â€śHCVâ€ť) genotyping analyte specific reagents (â€śASRsâ€ť) products by Abbott willfully infringed a U.S. patent owned by Innogenetics and awarded Innogenetics $7.0 million in damages. In January 2007, the U.S. District Court for the Western District of Wisconsin ruled in favor of Innogeneticsâ€™ request for a permanent injunction, and as such, ordered Abbott to withdraw its products from the market. The Court also reversed the jury verdict of willful infringement and ruled that Abbott did not willfully infringe Innogeneticsâ€™ patent and denied Innogeneticsâ€™ request for enhanced damages and attorneysâ€™ fees. Innogenetics did not name the Celera group as a party in this lawsuit, but the Celera group has an interest in these products and in the outcome of the litigation because the enjoined products are manufactured by the Celera group and sold through its alliance with Abbott. Also, as these products are part of its alliance with Abbott, the Celera group has agreed to share the cost of this litigation, including the damage award described above. Abbott appealed the judgment. On January 17, 2008, the United States Court of Appeals for the Federal Circuit vacated the permanent injunction granted by the lower court for Innogenetics against Abbott in selling HCV genotyping products. Since the juryâ€™s damage award included an upfront entry fee, the Court remanded to the lower court to determine the terms of a compulsory license for Abbottâ€™s future sales. In addition, the Court remanded for a new trial on the validity of the Innogenetics patent in view of a prior-issued patent. The Court also affirmed the judgment of infringement and the judgment of no willful infringement.
Charges prior to fiscal 2007
During fiscal 2006, the Celera group recorded pre-tax charges of $26.4 million related to its decision to exit its small molecule drug discovery and development programs and the integration of Celera Diagnostics into the Celera group. These charges consisted of $12.8 million of employee-related charges, $9.8 million of asset impairments, $1.2 million of excess lease space, and $2.6 million of other disposal costs. The remaining required cash expenditures of $0.8 million as of December 31, 2007, the majority of which related to the asset impairment of an owned facility, are expected to be disbursed by December 31, 2008.
During the first six months of fiscal 2008, the Celera group made net cash payments of approximately $0.4 million related to an excess facility lease space charge that was recorded in fiscal 2005. The remaining net cash expenditures of approximately $2.3 million as of December 31, 2007 related to this charge are expected to be disbursed by fiscal 2011.
Other Events Impacting Comparability
Revenue from sale of small molecule program
In the second quarter of fiscal 2007, the Celera group recorded $2.5 million in net revenues from the sale of a small molecule drug discovery and development program to Schering AG. The Celera group had recorded an initial $2.5 million in the fourth quarter of fiscal 2006 when the agreement for the sale of the program was executed.
Asset dispositions and legal settlements
The following items have been recorded in the interim condensed consolidated statements of operations in asset dispositions and legal settlements.
In the first quarter of fiscal 2008, the Applied Biosystems group recorded a $7.6 million pre-tax gain primarily related to a settlement and licensing agreement entered into with Stratagene Corporation and Agilent Technologies, Inc. (which acquired Stratagene), which resolved outstanding legal disputes with Stratagene.
In the second quarter of fiscal 2007, the Applied Biosystems group recorded a $4.8 million pre-tax benefit related to the settlement of a patent infringement claim and a $3.0 million pre-tax benefit related to our collection from a third party of a portion of its liability relative to the settlement of a prior legal dispute. Additionally in the second quarter of fiscal 2007, the Celera group recorded a $2.4 million pre-tax benefit related to the settlement of a litigation matter associated with the former Online/Information Business, an information products and service business.
In the first quarter of fiscal 2007, the Applied Biosystems group recorded a $9.1 million pre-tax charge related to a settlement agreement entered into with another company which resolved outstanding legal disputes with that company.
The Applied Biosystems group recorded a pre-tax gain of $2.6 million in gain on investments in the second quarter of fiscal 2008 from the sale of a non-strategic minority equity investment.
In the second quarter of fiscal 2008, the Applied Biosystems group recorded tax charges of $0.5 million primarily related to foreign tax settlements. In the first quarter of fiscal 2008, the Applied Biosystems group recorded tax charges of $1.8 million primarily related to the recalculation of deferred tax assets as a result of a decrease in the statutory tax rate in Germany.
In December 2006, the President of the U.S. signed the Tax Relief and Health Care Act of 2006, which extended the R&D tax credit from January 1, 2006 through December 31, 2007. The Celera group included the estimated benefit of the current year R&D tax credit in the second quarter of fiscal 2007 estimated annual effective tax rate. In addition, the Celera group recorded a tax benefit of $1.0 million in the second quarter of fiscal 2007 related to the R&D tax credit generated between January 1 and June 30, 2006. In the first quarter of fiscal 2007, the Applied Biosystems group recorded a tax benefit of $8.8 million related to a reduction in the valuation allowance for German net operating loss carryforwards.