| STRATAGENE CORP Item 1A Risk Factors It is important to carefully consider the following risks, together with other matters described in this Form 10-K or in other documents referred to in this Form 10-K in evaluating our business and prospects |
| If any of the following risks occur, our business, financial condition or operating results could be harmed |
| In such case, the trading price of our common stock could decline |
| The risks described below are not the only risks we face |
| Additional risks not presently known to us or that we currently deem immaterial may also impair business operations |
| Our future success depends on the timely introduction of new products and the acceptance of these new products in the marketplace |
| Rapid technological change and frequent new product introductions are typical for the markets we serve |
| Our future success will depend in large part on continuing to develop and introduce new products in a timely manner that address evolving market requirements |
| We believe successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use new products and are reluctant to switch thereafter |
| To the extent that we fail to introduce new and innovative products, we may lose market share to our competitors, which may be difficult to regain |
| Any inability, for technological or other reasons, to successfully develop and introduce new products could materially damage our business |
| In the past we have experienced, and are likely to experience in the future, delays in developing and introducing products |
| We cannot assure you that we will keep pace with the rapid rate of change in life sciences or clinical diagnostic research, or that our new products will adequately meet the requirements of the marketplace or achieve market acceptance |
| Some of the factors affecting market acceptance of new products include: • availability, quality and price relative to competitive products; • the timing of introducing the product relative to competitive products; • customers’ opinions of the product’s utility; • citation of the product in published research; and • general trends in life sciences and clinical diagnostics research |
| The markets for our products are extremely competitive and subject to rapid technological change and if we fail to compete effectively, our business may suffer |
| The markets for our products are highly competitive |
| We compete with many other suppliers of life sciences research products and clinical diagnostic products |
| Many of our competitors have greater financial, operational and sales and marketing resources and more experience in research and development than we do |
| These and other companies may have developed or could in the future develop new technologies that compete with our products or even render our products obsolete |
| Competition in our markets is primarily driven by: • product performance, features and reliability; • price; • timing of product introductions; • ability to develop, maintain and protect proprietary products and technologies; • sales and distribution capabilities; 8 _________________________________________________________________ [62]Table of Contents • technical support and service; and • breadth of product line |
| If a competitor develops or acquires superior technology or cost-effective alternatives to our products, our business, financial condition and results of operations could be materially adversely affected |
| Our competitors have in the past and may in the future compete by lowering prices |
| We may respond by lowering our prices, which could reduce revenues and profits |
| Conversely, failure to anticipate and respond to price competition may damage our market share |
| In addition, we must continually adapt to new marketing and distribution trends in order to compete effectively |
| We believe that customers in our markets display a significant amount of loyalty to their initial supplier of a particular product |
| Therefore, it may be difficult to make sales to customers who have previously purchased products from our competitors |
| To the extent we are unable to be the first to develop and supply new products, our competitive position may suffer |
| We may be prevented from selling some of our products if our existing license agreements are terminated |
| Approximately 51prca of our product sales in 2005 were attributable to products sold pursuant to license agreements |
| If we lose the rights to use a patented technology, we may be forced to stop selling some of our products or redesign our products and may lose significant sources of revenues |
| Losing a significant license could have a material adverse effect on our business |
| Our significant licenses include: • a license from Applera Corporation (which license was assigned to Applera from Hoffman La Roche and Roche Molecular Systems, Inc |
| in 2005) granting us, among other rights, the right to manufacture, promote and sell certain products for use in the research field in a process referred to as the “PCR process;” and • a license from Applied Biosystems, which grants us rights to manufacture, promote and sell thermal cyclers (certain laboratory instruments capable of generating and maintaining specific temperatures for a defined period of time) under certain patents for use in the research field |
| Applera may terminate its license agreement (1) for cause, (2) if certain parties acquire more than 50prca of the voting stock of our subsidiary that is a party to the agreement, and (3) in the event of our bankruptcy or insolvency |
| Since mid-2003 and through late 2005, we withheld royalty payments to Applera under this license agreement pending further evaluation of a potential overpayment of royalties paid to Applera in prior periods |
| During that period, we continued to record estimated quarterly royalties payable under this license agreement and report these amounts to Applera |
| We believe that we determine the royalties we calculate and accrue in accordance with the terms of this patent license agreement |
| However, our royalty calculations are subject to review by Applera |
| Our financial position or results of operations could be materially affected if the parties determine that the royalties differ significantly from the amounts we have recorded |
| Additionally, there can be no assurances that we will recover any overpayment in royalties paid in prior periods |
| The US patents that covered the PCR process underlying this royalty obligation expired in March 2005 |
| The corresponding foreign patents will expire in 2006 and 2007 |
| Upon expiration of these patents outside of the United States, we will no longer be required to pay royalties under these patents on future product sales |
| The agreement with Applied Biosystems may be terminated (1) for cause, (2) upon the change in control of our subsidiary that is a party to the license agreement, and (3) in the event of our bankruptcy or insolvency |
| We do not anticipate that either of these significant license agreements will terminate in the near future |
| Our licenses typically subject us to various commercialization, sublicensing and other material obligations |
| If we fail to comply with these requirements, we could lose important rights under a license, such as the 9 _________________________________________________________________ [63]Table of Contents right to exclusivity in a specified market |
| In some cases, we could also lose all rights under a license |
| In addition, the licensor could lose patent protection for a number of reasons, including the invalidity or unenforceability of the licensed patent |
| We typically do not receive significant indemnification under such arrangements from a licensor against third party claims of intellectual property infringement |
| Because our quarterly revenue and operating results may vary significantly in future periods, our stock price may decline |
| Our operating results have fluctuated in the past and may continue to fluctuate in the future |
| In particular, we have historically seen slower sales in the fourth quarter as a result of reduced purchases by academic and research institutions as well as the closing of such facilities during the holiday period |
| Our revenues are unpredictable and may also fluctuate due to changes in demand for our products, delays in developing and introducing new products and new product introductions by our competitors |
| A high proportion of our costs are fixed, due in part to significant research and development costs |
| Thus, small declines in revenue could disproportionately affect operating results in a quarter and the price of our common stock may decline |
| Because of these factors, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could also cause our stock price to decline |
| Our founder, chairman of our board of directors, chief executive officer and president exerts considerable control over our business |
| As of December 31, 2005, Joseph A Sorge, MD, our founder, chairman of the board of directors, chief executive officer and president, beneficially owned approximately 60prca of our outstanding common stock |
| Sorge controls all matters requiring approval of our stockholders, including electing directors and approving mergers or other business combinations |
| Such a concentration of ownership may have the effect of delaying or preventing transactions resulting in our change of control, including transactions where stockholders might otherwise receive a premium for their shares over then current market prices |
| We depend substantially on key employees, and losing the services of any of our key employees or failing to hire qualified employees could seriously damage our business |
| To a large degree, we depend on our founder, chairman of our board of directors, chief executive officer and president, Joseph A Sorge, MD Dr |
| Sorge has significant expertise in the life sciences research market and has been instrumental in establishing and executing our business plan |
| Sorge’s services could have a material adverse effect on our business |
| Sorge has an existing employment agreement with us, which expires in June 2007, subject to automatic one year renewals unless either party provides timely notice of non-renewal |
| We maintain directors and officers insurance for the benefit of our officers and directors |
| Because our products and services are highly technical in nature, only highly qualified and trained scientists have the necessary skills to develop and market our products and provide our services |
| As such, our future success also will depend in large part on the continued service of our key scientific and management personnel, including research and development, customer service, marketing and sales staffs |
| We face intense competition for these professionals from our competitors, our customers and other companies throughout our industry |
| We do not generally enter into employment agreements requiring these employees to continue their employment for any period of time |
| Any failure on our part to hire, train and retain a sufficient number of qualified professionals could seriously damage our business |
| Our indebtedness could limit our ability to operate our business, obtain additional financing and pursue other business opportunities |
| As of December 31, 2005, we had approximately dlra4dtta0 million of outstanding indebtedness related to industrial revenue bonds |
| At December 31, 2005, 10 _________________________________________________________________ [64]Table of Contents there was dlra5dtta5 million outstanding under this revolving credit facility, which was paid off on January 3, 2006 |
| Our indebtedness could have negative consequences for us, including the following: • we will need a portion of our cash flow to pay the principal and interest on our indebtedness, including indebtedness we may incur in the future; • payments of our indebtedness will reduce the funds that would otherwise be available for our operations and future business opportunities; • we may have greater relative debt burdens than our competitors, which may place us at a competitive disadvantage; • our debt level may make us more vulnerable than our competitors to a downturn in our business or the economy in general; and • there would be a material adverse effect on our business and financial condition if we are unable to service our indebtedness or obtain additional financing |
| We may not have financing for future capital requirements, which may prevent us from addressing gaps in our product offerings or improving our technology |
| Although historically our cash flow from operations has been sufficient to satisfy working capital, capital expenditure and research and development requirements, in the future we may need to incur additional debt or issue equity in order to fund these requirements as well as to make acquisitions and other investments |
| Our senior credit facility restricts our ability to incur new debt |
| If we cannot obtain additional debt or equity financing on acceptable terms or if we are limited with respect to incurring additional debt or issuing equity, we may be unable to address gaps in our product offerings or improve our technology, particularly through strategic acquisitions or investments |
| We may need to raise substantial amounts of money to fund a variety of future activities integral to the development of our business, including but not limited to the following: • for research and development to successfully develop additional products; • to file and prosecute patent applications and defend and assert patents to protect our technology; • to retain qualified employees, particularly in light of intense competition for qualified scientists; • to manufacture additional products ourselves or through third parties; and • to acquire new technologies, products or companies |
| If we raise funds through the issuance of debt or equity, any debt securities or preferred stock issued will have rights, preferences and privileges senior to those of holders of our common stock in the event of a liquidation |
| The terms of the debt securities may impose restrictions on our operations |
| If we raise funds through the issuance of equity, this issuance would dilute the ownership interest of our existing stockholders |
| We expect to fund future acquisitions in part by issuing additional equity |
| Our inability to secure and maintain intellectual property protection for our products and technologies could adversely affect our ability to compete |
| Our success depends to a significant degree upon our ability to develop, maintain and protect proprietary products and technologies |
| We file patent applications in the United States and selectively in foreign countries as part of our strategy to protect our proprietary products and technologies |
| However, patents provide only limited protection of our intellectual property |
| The assertion of patent protection involves complex legal and factual determinations and is therefore uncertain and expensive |
| We cannot provide assurances that patents will be granted with respect to any of our pending patent applications, that the scope of any of our patents will be sufficiently broad to offer meaningful protection, or that we will develop additional proprietary technologies that are patentable |
| Our issued patents, or third party patents that we license, could be successfully challenged, 11 _________________________________________________________________ [65]Table of Contents invalidated or circumvented |
| This could result in our patent rights failing to create an effective competitive barrier |
| Losing a significant patent or failing to get a patent to issue from a pending patent application that we consider significant could have a material adverse effect on our business |
| The laws governing the scope of patent coverage in the United States and abroad continue to evolve, particularly in the life sciences area |
| The laws of some foreign countries may not protect our intellectual property rights to the same extent as United States laws |
| We hold patents only in selected countries |
| Therefore, third parties can make, use and sell products covered by our patents in countries in which we do not have patent protection |
| We give our customers the right to use some of our products for research purposes only under certain licenses |
| These licenses could be contested |
| Therefore, no assurances can be given that we would either be aware of an unauthorized use or be able to enforce these license limitations in a cost-effective manner |
| We attempt to protect our trade secrets by entering into confidentiality agreements with employees, consultants and third parties |
| However, these agreements might be breached and, if they are, there may not be an adequate remedy available to us |
| Also, our trade secrets might become known to a third party through means other than by breach of its confidentiality agreements, or they could be independently developed by our competitors |
| If our trade secrets become known, our business and competitive position could be adversely affected |
| We are currently, and could in the future be, subject to lawsuits, arbitrations, and other legal actions, particularly involving claims for infringement of patents and other intellectual property rights |
| We believe that we have meritorious defenses against the claims currently asserted against us and intend to defend them vigorously |
| However, the outcome of legal actions is inherently uncertain, and we cannot be sure that we will prevail in any of these actions |
| An adverse determination in some of our current legal actions, particularly the cases described below, could have a material adverse effect on our business |
| Our products are based on complex, rapidly developing technologies |
| These products could be developed without knowledge of previously filed patent applications that mature into patents that cover some aspect of these technologies |
| In addition, our belief that our products do not infringe the technology covered by valid and enforceable patents could be successfully challenged by third parties |
| We have from time to time been notified that we may be infringing patents and other intellectual property rights of others |
| Also, in the course of our business, we may from time to time have access to confidential or proprietary information of third parties, and these parties could bring a claim against us asserting that we had misappropriated their technologies and had improperly incorporated such technologies into our products |
| Due to these factors, there remains a constant risk of intellectual property litigation affecting our business |
| We have been made a party to litigation involving intellectual property matters |
| Such actions currently include the litigations described in the following paragraphs, some of which, if determined adversely, could have a material adverse effect on us |
| To avoid or settle legal claims, it may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies, and we cannot be assured that we will be able to obtain these licenses or other rights on commercially reasonable terms |
| We have been involved in significant patent disputes with third parties, a number of which remain unresolved |
| For example, we are involved in litigation with Invitrogen Corporation regarding patents relating to certain enzymes and competent cell products |
| In one such litigation, in which Invitrogen alleges damages of up to approximately dlra22dtta0 million, the Federal Circuit Court of Appeals reversed the district court’s prior summary judgment decision of patent invalidity due to public use, affirmed the district court’s partial summary judgment of infringement, affirmed the district court’s denial of summary judgment of invalidity due to indefiniteness, and remanded the case for further proceedings |
| We are also involved in litigation with Applera Corporation regarding a patent that Applera alleges is infringed by our real-time PCR instrumentation and certain related reagents |
| In addition, we are involved in litigation with Third Wave Technologies regarding patents relating to certain assays for the detection of nucleic acids |
| In a jury trial in August 2005, the jury returned a verdict that 12 _________________________________________________________________ [66]Table of Contents the patents-in-suit were valid and infringed by us, for monetary damages in the amount of dlra5dtta3 million, and that our infringement was willful |
| Based on the jury’s verdict, the district court permanently enjoined us from further infringement |
| The district court recently awarded Third Wave treble damages of dlra15dtta9 million, attorneys’ fees and costs in an amount of dlra4dtta2 million, and pre-judgment interest of dlra0dtta5 million |
| We have posted a dlra21dtta0 million civil supersedeas bond to stay payment of the judgment of the district court, and filed an appeal to the Federal Circuit Court of Appeals |
| We are also involved in litigation with Invitrogen Corporation and Takara Bio regarding one of our patents relating to polymerase blend products |
| As part of the patent infringement claims in these matters, we seek monetary damages, injunctive relief and attorneys’ fees |
| As stated above, the outcome of any such litigation or appeal is inherently uncertain |