-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GRre9+xR5BPAdf2ML9cf0yjBo9P9qRtkU9NyZPQBP5LqJ/sP2Nxjf1/W2EUlMs0+ YUaHES4sR5qg+weivTIJ5A== 0000912057-97-011003.txt : 19970401 0000912057-97-011003.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFFYMETRIX INC CENTRAL INDEX KEY: 0000913077 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 770319159 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-28218 FILM NUMBER: 97568687 BUSINESS ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 BUSINESS PHONE: 4085226000 MAIL ADDRESS: STREET 1: 3380 CENTRAL EXPRESSWAY CITY: SANTA CLARA STATE: CA ZIP: 95051 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-28218 ---------------------- AFFYMETRIX, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 77-0319159 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 3380 CENTRAL EXPRESSWAY, SANTA CLARA, CALIFORNIA 95051 (Address of principal executive offices) (Zip Code) (408) 522-6000 (Registrant's telephone number including area code) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value ---------------------- 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. /X/ Yes / / No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. /X/ The aggregate market value of voting stock held by non-affiliates of the registrant (based on the closing price for the Common Stock on the Nasdaq National Market on March 24, 1997) was approximately $342,785,000. As of March 24, 1997, 22,582,383 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain sections of the Proxy Statement to be filed in connection with the 1997 Annual Meeting of Shareholders are incorporated by reference into Part III. AFFYMETRIX, INC. FORM 10-K DECEMBER 31, 1996 TABLE OF CONTENTS Item Page No. PART I 1. Business........................................................... 3 2. Properties......................................................... 27 3. Legal Proceedings.................................................. 27 4. Submissions of Matters to a Vote of Security Holders............... 27 PART II 5. Market for Registrant's Common Equity and Related Shareholder Matters.......................................................... 27 6. Selected Financial Data............................................ 28 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 29 8. Financial Statements and Supplementary Data........................ 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 49 PART III 10. Directors and Executive Officers of the Registrant................. 49 11. Executive Compensation............................................. 49 12. Security Ownership of Certain Beneficial Owners and Management..... 49 13. Certain Relationships and Related Transactions..................... 49 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 50 Signatures......................................................... 52 PART I ITEM 1. BUSINESS The business and operations of Affymetrix, Inc. ("Affymetrix" or the "Company") were commenced in 1991 by Affymax N.V. and subsidiaries ("Affymax") and were initially conducted within Affymax. In March 1992, Affymetrix, a California corporation, was incorporated as a wholly-owned subsidiary of Affymax, which was later acquired by Glaxo plc, now Glaxo Wellcome, plc ("Glaxo"). As a result of subsequent financings by the Company, Glaxo currently holds 33% of the outstanding Common Stock. Affymetrix has developed and intends to establish its GeneChip-TM- system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The Company commenced commercial sales of the GeneChip system and HIV probe arrays for research use in April 1996. As of December 31, 1996, the Company had sold 17 of its GeneChip systems. INDUSTRY BACKGROUND GENES AND DISEASE Genes provide a fundamental basis for understanding human health and disease. Genomics, the study of genes and their functions, will lead to new approaches to diagnose, monitor and treat disease. The entire genetic content of an organism is known as its genome. DNA is the molecule that makes up genes and encodes the genetic instructions. These instructions are embodied in the sequence of the four nucleotide bases (A, C, G and T) that are the chemical building blocks of DNA. The DNA molecule is a combination of two strands held together by chemical bonds between nucleotide bases on one strand and the bases on the other strand. Only certain pairs of nucleotide bases can form these bonds: C always pairs with G, and A always pairs with T. Such paired DNA strands are said to be complementary. When two DNA strands are complementary, they bind together to form a double helix in a process called hybridization. In humans, the DNA molecule contains 3 billion nucleotide pairs organized into 46 chromosomes. The human genome is believed to contain over 100,000 genes. Cells carry out their normal biological functions through the genetic instructions encoded in their DNA. This genetic process, known as gene expression, involves several steps. In the first step, nucleotides in a gene are copied into a related nucleic acid molecule called messenger RNA. Messenger RNA instructs the cell to produce proteins. Proteins are molecules that regulate or perform most of the physiological functions of the body. Because the order of nucleotides in each gene is different, each gene directs the production of a different protein. Each organism's characteristics are thus ultimately determined by proteins encoded in its DNA. The diversity of living organisms results from variability in their genomes. Variability stems from differences in the sequences of genes and from differences in levels of gene expression. Changes in the sequences of normal genes may be introduced by environmental or other factors, such as errors in replication of genes. These changes are known as polymorphisms, and the affected genes can be passed from generation to generation. In some cases, polymorphisms have no effect on the biology of the organism. However, in other cases, polymorphisms can result in altered function of the protein encoded by the gene. Such polymorphisms are called mutations. Mutations in single genes have been associated with diseases such as cystic fibrosis, and mutations in multiple genes have been associated with diseases such as cancer and cardiovascular disease. Similarly, it has recently been discovered that polymorphisms in the genome of HIV, the virus that causes AIDS, enable that virus to develop resistance to antiviral drugs, resulting in disease progression and ultimately death. In order to understand how mutations in particular genes cause disease, scientists must compare genes from healthy and diseased people. These efforts are laborious and time consuming, requiring the repeated sequencing of the same genes from a large number of people. The genes expressed in a given cell, as well as the timing and levels of their expression, determine differences among cell types in an organism. Although most cells contain an organism's full set of genes, each cell expresses only a small fraction of this set. The expression of the wrong or defective genes, or the expression of too much or too little of genes normally expressed, causes disease. Such abnormalities in gene expression have been associated with human diseases, including many types of cancer. The role of gene expression in disease requires an -3- understanding of how genes interact to cause disease and how external stimuli, such as drugs, cause variations in levels of gene expression. THE ROLE OF GENOMICS IN UNDERSTANDING DISEASE Increased knowledge of how DNA molecules encode the functions of living organisms has generated a worldwide effort to identify and sequence genes of many organisms, including the estimated 100,000 genes within the human genome. This effort is being led by the Human Genome Project and related academic, government and industry research projects. Once the genes and their nucleotide sequences are identified, it is anticipated that many years of additional research will be required to understand the specific function of each gene and its role in disease. This research, commonly referred to as genomics, may lead to new opportunities in drug discovery and diagnostics. The general processes by which researchers are attempting to discover genes fall into two principal categories: genetic mapping and high-throughput sequencing. Once a gene has been identified, either through mapping or sequencing, researchers must understand the function of the gene and how variability in the gene leads to disease. Many diseases are caused by either changes in the sequence of the gene or by changes in the expression of the gene. Understanding the role of a gene in disease requires either quantitative gene expression monitoring or large scale polymorphism screening. GENETIC MAPPING. Researchers use genetic mapping to identify the gene or genes causing an observable and well-characterized disease or genetic disorder. The gene mapping process is extensive and typically begins by assembling tissue samples and histories from families where the disease of interest is prevalent. Researchers then attempt to locate the position of the gene responsible for the disease using a technique called linkage analysis. This technique relies on the identification of genes using DNA sequences called markers, whose specific locations are known among the three billion base pairs of the human genome. By comparing the patterns of markers in generations of healthy and diseased people, researchers can link genes to markers and thereby determine that a particular marker is located near the gene responsible for the disease. By using more markers, genes can be more precisely mapped. Since many major diseases, such as diabetes and atherosclerosis, are believed to be caused by the interplay of numerous genes, it is often necessary to try to map several genes simultaneously. This mapping process requires extensive efforts and significant computational capabilities. It is expected that increasing the speed and accuracy of genetic mapping and improving the ability to analyze information from thousands of different markers may accelerate the identification of disease associated genes. HIGH-THROUGHPUT SEQUENCING. High-throughput sequencing involves first identifying genes and subsequently determining their function and possible role in disease. When a gene is expressed in a particular cell, its DNA is copied into messenger RNA. In this process, sequences that do not code for an expressed gene are removed. Thus, messenger RNA contains only expressed gene sequences. Using high-throughput sequencing methods, DNA copies of the messenger RNA can be sequenced and thereby reveal the sequence of a gene. Corporate, academic and government efforts have been successful in identifying a substantial number of the 100,000 genes in the human genome using such techniques. GENE EXPRESSION MONITORING. By monitoring the expression of a large number of genes, researchers seek to correlate changes in expression patterns with particular diseases. The effectiveness of monitoring gene expression is a function of the number of genes that can be monitored simultaneously, the sensitivity of the method (ability to measure small changes or low levels of gene expression) and the ability of the method used to provide qualitative information. Relative levels of gene expression are currently monitored primarily through an intensive process of sequencing many copies of genes. Scientists believe that the development of technologies that can quantitatively monitor thousands of genes simultaneously will increase the effectiveness of gene expression monitoring as a tool for understanding the roles of genes in disease. POLYMORPHISM SCREENING. Using polymorphism screening, researchers seek to correlate variability in the sequence of genes with a specific disease. By sequencing a gene of interest from a large number of healthy and diseased persons, researchers are able to statistically correlate specific gene mutations with the disease. Currently, the polymorphism screening process is done using gel-based sequencing. A typical polymorphism screening project might require sequencing 10 genes of 5,000 nucleotide bases each in up to 1,000 patients, or a total of 50 million bases, to understand the role of these 10 genes in one disease. Using high-throughput sequencing techniques, even at a cost of cents per base, such projects are expensive and time consuming. It is expected that new technologies will -4- be needed to effectively screen the more than 100,000 human genes for polymorphisms that correlate with many known diseases. OPPORTUNITIES IN DIAGNOSTICS AND THERAPEUTICS Current diagnostic tests can monitor the physiological effects of disease, detect infectious organisms by growing them in culture, or use specific markers, such as proteins, known to be associated with disease. Diagnostic tests rely on a patient sample of tissue, blood, or urine, and detect the physiological effect, the infectious organism or the marker in the sample. For example, immunoassays detect and measure specific proteins already known to be associated with a disease using antibodies generated against those proteins. However, protein markers are not available or are not useful for diagnosing many diseases. Diagnostic tests that monitor physiological effects are also limited because different diseases can cause the same effect. For example, an elevated white blood cell count can be caused by appendicitis, an acute infection or leukemia. Most infectious diseases are viral, bacterial or fungal. Diagnosis of bacterial and fungal infections is generally achieved by growing a culture, which may take several days. Even after the infectious organism is identified, further analysis may be required to determine which antibiotics, if any, may be effective in treating the disease. In the case of many viruses, diagnosis depends on immunoassay tests that detect antibodies to the virus. However, these tests provide no information as to whether the virus is resistant to drug therapy or if the infection is active or latent. Recent advances in gene-based diagnostic tests using DNA probes, DNA amplification techniques and sequencing technologies have begun to address these shortcomings by directly examining the genes associated with a given disease rather than relying on physiological parameters or antibodies. For example, amplification of specific genes from an infectious organism eliminates the need to grow that organism in culture. However, current techniques for gathering genetic information for diagnosis and monitoring of disease have limitations. For example, gel-based sequencing techniques used in some approaches are time-consuming, require skilled operators, and can analyze only limited lengths of contiguous DNA sequences in a given run. Gene-based diagnosis often requires rapid turnaround and examination of noncontiguous DNA sequences. As a result, new techniques and tools are being developed to improve the diagnosis, monitoring and treatment of disease. Using genetic mapping and high-throughput sequencing, scientists have been successful in discovering many genes. Technological improvements that increase the speed and decrease the cost of gene expression monitoring and polymorphism screening will improve the ability of researchers to understand the function of these genes and their role in disease. Such knowledge may assist in the development of therapeutics with greater efficacy and fewer side effects, as well as diagnostic products with greater sensitivity and accuracy. BUSINESS STRATEGY Affymetrix' objective is to establish the GeneChip system as the platform of choice for acquiring, analyzing and managing complex genetic information in order to improve the diagnosis, monitoring and treatment of disease. The Company's GeneChip system consists of disposable DNA probe arrays containing gene sequences on a chip, instruments to process the probe arrays, and software to analyze and manage genetic information from the probe arrays. The Company intends to commercialize the GeneChip system in two principal areas: genomics and diagnostics. GENOMICS - ESTABLISH GENECHIP TECHNOLOGY AS A PLATFORM FOR GENOMICS RESEARCH. The Company intends to develop the GeneChip system for use in several applications where Affymetrix believes it has substantial advantages over conventional tools used for DNA sequence analysis in the identification of genes and their role in disease. Initially, four such applications have been identified: gene discovery, gene mapping, gene expression monitoring and polymorphism screening, all of which require analyzing and processing large amounts of genetic information. - COMMERCIALIZE CUSTOM PROBE ARRAYS THROUGH CORPORATE PARTNERSHIPS. The Company intends to sell custom probe arrays to pharmaceutical and biotechnology companies through collaborative agreements. The Company will seek to receive revenue through design and development fees, milestone payments and sales of DNA probe arrays and instruments to collaborative partners. If a collaborative partner is successful in discovering products -5- through the use of the GeneChip technology, the Company would also seek to receive royalties from the sale of such products. - PARTICIPATE IN THE COLLECTION AND APPLICATION OF GENETIC INFORMATION. Affymetrix intends to use the DNA sequence analysis capabilities of the GeneChip technology to measure gene expression in order to create databases containing information on the function of genes and their role in disease. Affymetrix anticipates that such databases will be developed and commercialized through partnerships with pharmaceutical and biotechnology companies. DIAGNOSTICS - IMPROVE ACCURACY AND SPEED OF DIAGNOSIS. Affymetrix intends to develop DNA probe arrays to obtain genetic information from patient samples so that specific diseases can be rapidly diagnosed. Furthermore, such probe arrays will be designed to simultaneously collect additional relevant information, including drug resistance data. - ESTABLISH DIRECT SALES EFFORTS AND PARTNERSHIPS. Affymetrix intends to initially market its GeneChip products, for research use only, directly to academic research centers and reference laboratories that conduct the majority of gene-based diagnostic tests. In addition, the Company will seek to partner with, or license technology to, established diagnostic companies which could develop, seek regulatory approval, and commercialize probe arrays for broader clinical use. - DISCOVER NOVEL DIAGNOSTIC MARKERS. The Company intends to use information from the Human Genome Project and related efforts to identify genes associated with particular diseases and use the proteins encoded by these genes in new diagnostic tests. The Company will seek to partner with established diagnostic companies by providing these novel protein markers for development and commercialization as conventional immunoassays. There can be no assurance that the Company will be successful in implementing its strategy or marketing its GeneChip system for these genomics and diagnostic applications. The Company's GeneChip system and other potential products will require significant additional development and investment, including testing to further validate performance and demonstrate cost effectiveness. While the Company's initial product sales for research use have not required regulatory approvals, the Company expects that such approvals will be required for diagnostic applications in the future. The Company may need to undertake costly and time-consuming efforts to obtain required approvals. There can be no assurance that any further products will be successfully developed, be proven to be accurate and efficacious in any markets, meet applicable regulatory standards in a timely manner or at all, be protected from competition by others, avoid infringing the proprietary rights of others, be manufactured in sufficient quantities or at reasonable costs or be marketed successfully. TECHNOLOGY Affymetrix' probe array technology and systems integrate semiconductor fabrication techniques, molecular biology, solid phase chemistry, software and robotics. The Company's GeneChip system consists of four integrated parts: disposable DNA probe arrays containing genetic information on a chip housed in a cartridge, a fluidics station for introducing the test sample to the probe arrays, a scanner to read the data from the probe arrays, and software to control the instruments and to analyze and manage the genetic information. The GeneChip system is designed for use by pharmaceutical and biotechnology companies, academic research centers and reference laboratories. The base price of the Company's GeneChip system (scanner, software, workstation and fluidic station) currently starts at approximately $135,000. The Company's HIV probe arrays, currently being sold commercially for research use, are priced at $45 per array, with two arrays (one for each strand of DNA) presently used per test. DNA PROBE ARRAYS. The Company produces its DNA probe arrays using a process based on semiconductor photolithographic fabrication techniques, which enables it to assemble vast amounts of genetic information on a small glass chip called a probe array. The genetic information is contained in sequences of DNA probes that are built on the probe array. This process uses technology initially developed at Affymax and now assigned to the Company. The Company believes that this technology enables the efficient use of a large number of DNA probes to analyze DNA or RNA sequences in a test sample. -6- The Company uses photolithography to synthesize large numbers of DNA sequences simultaneously in specific locations on a glass chip. Photolithography is a technique which uses light to induce chemical reactions that create exposure patterns on the glass chip. The process begins by coating the chip with light-sensitive chemical compounds (defined as "protecting" groups) that prevent chemical coupling. Lithographic masks, which consist of predetermined patterns that either block or transmit light, are used to selectively illuminate the glass surface of the chip. Only those areas exposed to light are deprotected and thus activated for chemical coupling through removal of the light-sensitive protecting groups. The entire surface is then flooded with a solution containing the first in a series of DNA building blocks (A, C, G or T). Coupling only occurs in those regions which have been deprotected through illumination. The new DNA building block also bears a light-sensitive protecting group so that the cycle can be repeated. This process of exposure to light and subsequent chemical coupling can be repeated on the same chip in order to generate an array of DNA sequences. The intricate illumination patterns allow the Company to build arrays of many diverse DNA sequences in a small area. The Company can manufacture a large number of identical DNA probe arrays on a large glass wafer, which is then diced into individual probe arrays. Each probe array contains thousands of "features." Each feature contains millions of copies of the same single-stranded DNA sequence, or probe. The patterns of photolithographic masks and the order of DNA building blocks used in the synthesis process dictate the sequence of the probes in each feature on the chip surface. The number of synthesis cycles determines the length of the DNA probes in each feature. The Company's GeneChip technology enables it to effectively synthesize a large number of DNA sequences, which would not be possible with existing technologies. Unlike conventional synthesis, which generally uses a linear process to create compounds, the Company's synthesis technology is combinatorial, in that the number of compounds synthesized grows exponentially with the number of cycles in the synthesis. For example, in a 40 cycle process, Affymetrix has developed a probe array with over one million features, each containing a unique DNA sequence. This process would take over ten million cycles using standard DNA synthesis techniques. The function of each single-stranded probe on the GeneChip probe array is to bind to its complementary single strand of DNA or RNA from the patient sample. Each feature on the GeneChip probe array contains identical copies of a single strand of DNA. The nucleic acid to be tested is isolated from a sample, such as blood or biopsy tissue, and fluorescently labeled by one of several standard biochemical methods. The test sample is then washed over the probe array surface and the labeled test sample binds, or hybridizes, to the complementary probes if they are present in the probe array. When scanned by the laser in the GeneChip scanner, the hybridized test sample generates a fluorescent signal. The presence and sequence of the nucleic acid sample can be determined by detecting these signals since the sequence and position of each complementary DNA probe on the probe array are known. The Company currently manufactures probe arrays containing from 16,000 to more than 100,000 features. INSTRUMENTATION. The fluidics station controls the introduction of the test sample to the probe array and the hybridization process. A technician places the test sample in a small container in the fluidics station, which introduces the test sample into the cartridge containing the DNA probe array. The technician uses a computer to control the delivery of reagents and the timing and temperature required for hybridization of the test sample to the probe array. The process concludes with a reagent wash that leaves only the hybridized test sample bound to the probe array. The fluidics station can process four probe arrays simultaneously, typically taking less than one hour to process these arrays. After completion of hybridization on the fluidics station, the technician places the cartridge in the scanner which reads the probe array. The GeneChip scanner consists of a laser, high resolution optics, robotics to position and scan the cartridge, a fluorescence detector and an interface to a personal computer. The label on the test sample emits fluorescent signals when exposed to the light from the laser. The intensity of the fluorescent signal is recorded by the scanner and stored in the computer. The Company's first generation commercial scanner can read 1.28 centimeter ("cm") by 1.28 cm probe arrays with up to 64,000 features. The second generation scanner can read 1.28 cm by 1.28 cm probe arrays with up to 400,000 features, which was developed in collaboration with Hewlett-Packard Company ("HP") and is expected to be shipped to customers in the second quarter of 1997. SOFTWARE. The GeneChip product software is supplied as part of the integrated system and runs on a Windows platform. The fluorescence intensity data captured from the scanner are used in conjunction with computer files containing the sequence and location of all the probes on the probe array to determine the nucleotide sequence of the test sample. For the HIV GeneChip product, the analysis takes less than 90 seconds for one probe array and the resulting sequence is displayed on the computer. Customized software enables the technician to rapidly identify -7- polymorphisms in the test sample and to compare genetic sequences across test samples. Other GeneChip software windows enable custom probe array users to simultaneously evaluate the relative expression levels of thousands of genes. The GeneChip software package is compatible with most database formats. GENOMICS APPLICATION AREAS Affymetrix is applying the GeneChip technology to create a platform for genomics and pharmaceutical research. Genomics applications include gene discovery, genetic mapping, gene expression monitoring and polymorphism screening. GENE DISCOVERY. The discovery of genes will be an important means to understand disease and design new therapies. A large number of the genes identified to date have been classified into families based on common sequences within these genes. One approach to gene discovery uses these common sequences to search for and identify previously unknown members of these gene families. To facilitate this approach, the Company can design DNA probe arrays containing a large number of probes for both common and variable regions of known genes. Using this technology, samples containing DNA can be screened against the probe arrays, and, for genes that are already known, both the variable and common regions are detected from the sample. For previously unknown genes, only the common regions are detected, thus identifying a new gene. The Company believes that this approach to gene discovery may aid in new gene identification. In November 1994, Affymetrix established a collaboration with Genetics Institute ("GI") to apply the GeneChip technology to the discovery of new genes and uses of genes in selected gene areas. GENETIC MAPPING. Genetic mapping is an important method for linking diseases to particular genes. Over the last five years, over 60 genes have been linked to known diseases by this method. However, the current technologies for mapping genes are slow and labor intensive. This problem is exacerbated when looking at complex diseases such as diabetes, asthma, and cardiovascular disease which are believed to be associated with multiple genes. Using genetic mapping, researchers attempt to find disease genes by using markers. The correlation between markers in diseased and healthy people enables researchers to link such genes to a particular disease state. Research to identify markers is currently being conducted by various academic and scientific groups to improve genetic mapping techniques. The Company has established a collaboration with the Whitehead Institute for Biomedical Research at the Massachusetts Institute of Technology to design probe arrays with new markers identified by Whitehead scientists. The Company intends to develop mapping probe arrays based upon publicly available markers as well as custom probe arrays based upon proprietary markers. The Company intends to market these arrays to pharmaceutical and biotechnology companies for conducting genetic mapping. There can be no assurance that these arrays will be successfully developed or marketed to these or other customers. GENE EXPRESSION MONITORING. Currently, large amounts of genetic sequence information are being generated, through the Human Genome Project and related efforts, yet relatively little is understood about the function of most genes. Affymetrix believes that monitoring gene expression is fundamental for understanding the function of genes and their role in disease. To facilitate the monitoring of gene expression, the Company designs probe arrays with DNA probes that are complementary to a sequence within a gene of interest. By providing sequence information, these probe arrays may enable researchers to identify the particular gene and quantitatively measure its level of expression compared to other genes of interest in the test sample. By synthesizing specific probes for multiple genes on a single probe array, the Company also enables researchers to quickly, quantitatively and simultaneously monitor the expression of a large number of genes of interest. By monitoring the expression of such genes at different times, researchers can use the probe arrays to understand gene expression and how it is related to disease progression. The Company believes that such information will be an important tool in the understanding of gene function and the development of new therapeutics. Under its 1994 collaboration with GI, the Company received research funding to develop probe arrays for gene expression monitoring. Pursuant to a second agreement, executed in 1995, the Company will also design, manufacture, and supply custom probe arrays for GI to monitor the expression patterns of up to 15,000 genes to be specified by GI. GI retains all rights to discovered genes and their uses. Affymetrix will supply custom probe arrays for specified fees and may receive milestone payments and royalties on certain therapeutic products based on the discovered genes. In April 1996, the Company also entered into an agreement with Incyte Pharmaceuticals, Inc. ("Incyte") to explore the potential use of DNA probe arrays in the area of gene expression. In November 1996, the -8- Company and Incyte entered into an agreement to use the Company's gene expression chips to develop a database of expression information to be licensed to pharmaceutical and biotechnology companies. POLYMORPHISM SCREENING. As the identity of genes in the human genome is determined, the need to understand the significance of the variability of nucleotide sequences in these genes increases. Researchers must determine the normal sequence of the gene, which mutations exist and how these mutations correlate with a disease. This requires the sequencing of samples from a large number of affected and unaffected individuals. Using sequencing strategies developed for the HIV probe array, Affymetrix believes that GeneChip probe arrays could significantly reduce the cost and time of polymorphism screening, which is currently done through more labor intensive gel-based sequencing techniques. In May 1996, the Company entered into an agreement with Glaxo to design, test and supply probe arrays to demonstrate use of the arrays in detecting polymorphisms in specific genes. DIAGNOSTIC PRODUCTS AND RESEARCH APPLICATIONS Affymetrix intends to use the GeneChip platform in conjunction with public and private gene databases to discover and develop diagnostic products. The Company is pursuing diagnostic products and research applications in infectious diseases, cancer and other areas, including drug metabolism. INFECTIOUS DISEASES. The Company believes its GeneChip technology may enable it to develop tests which, by assaying large amounts of genetic information, can provide information that could improve treatments for infectious diseases. Industry sources, estimate that in North America and Europe, approximately 1.5 million persons are infected with HIV and that approximately 100,000 persons are diagnosed with AIDS annually. Many HIV symptomatic patients receive antiviral treatment with reverse transcriptase inhibitors, such as AZT, or protease inhibitors, both of which block proteins required for the virus to replicate. The HIV genome encodes the reverse transcriptase and protease gene proteins within approximately 1,400 bases (or approximately 15%) of the viral genome. Mutations in the viral genome result from errors in replication. Some of these mutations confer resistance to the antiviral drugs being administered to the patient. It is believed that the identity of nucleotides in the reverse transcriptase and protease genes will be essential in order to monitor a patient's drug resistance profile. Affymetrix has developed the GeneChip system with an HIV probe array as its first product for commercialization. The Company believes this GeneChip system will enable researchers to identify the mutations associated with drug resistance in HIV infected patients and allow researchers to identify new mutations. The HIV probe array contains DNA probes in approximately 20,000 features that represent sequences of the reverse transcriptase and protease genes of the virus. These features can identify mutations at sites in the genes that have been associated with drug resistance. The Company is marketing the HIV product for research use to identify the correlation between mutations in the virus and drug resistance. The Company believes that monitoring drug resistance related mutations during therapy may become a valuable aspect of patient management. As of December 31, 1996, Affymetrix had placed eight GeneChip systems for the HIV application in academic research centers and pharmaceutical companies for evaluation and validation. The Company will rely on third parties to manufacture and service its instruments. The Company has no prior experience in introducing a commercial product. There can be no assurance that technicians will not experience difficulties with the system that would prevent or limit its use. In addition, there can be no assurance that the efficiency and accuracy of the HIV probe array in providing sequence information from HIV will be better than current technologies, such as gel-based sequencing. In October 1996, the Company and bioMerieux Vitek, Inc. ("bioMerieux") signed a collaboration agreement to develop GeneChip probe arrays for clinical diagnostic kits for bacterial identification and antibiotic resistance analysis, to be marketed exclusively by bioMerieux worldwide. The Company is evaluating the development of additional GeneChip probe tests for other infectious organisms. The Company intends to seek collaborators to participate in the funding, development and marketing of these tests. CANCER. In the United States, approximately 1.1 million new cases of cancer are diagnosed annually and the incidence of cancer deaths is approximately 520,000 individuals each year. Colorectal, breast, prostate and lung cancer account for approximately half of all diagnoses. The p53 gene encodes a protein whose normal function is to control cell replication. However, mutations in the p53 gene can result in the loss of this function and are known to contribute to the aggressive growth of some types -9- of cancer, including colorectal, breast and bladder cancers. Mutations have been observed to date at more than 400 distinct sites in the p53 gene sequence. Currently available diagnostic tests include IN VITRO assays that use antibodies to detect the accumulation of p53 molecules in cells but cannot directly detect mutations in the p53 gene. Gel-based sequencing methods are impractical because mutations can occur over a large area of the genome, requiring significant effort to sequence the entire gene. As a result, these methods are unable to predict the rate of cancer progression. Understanding the rate of progression is often necessary to determine whether to treat the cancer with chemotherapy, radiation or surgery. The Company is currently developing a GeneChip p53 probe array that contains DNA probes to detect known mutation sites, as well as to detect areas of the p53 gene where other mutations may occur but have currently not been identified. Initially, the Company intends to market these p53 probe arrays to academic research centers and reference laboratories to study the p53 gene. In September 1996, Affymetrix entered into a collaboration agreement with OncorMed, Inc. ("OncorMed") under which Affymetrix will make p53 and potentially other chip products that may be used by OncorMed in its clinical reference laboratory. Pursuant to the agreement with OncorMed, the Company will also be able to sell these products to third parties under specified financial terms. The Company is currently evaluating other genes associated with cancer for potential product development. There can be no assurance that the p53 probe array or other cancer products will be developed, receive regulatory approvals or be successfully commercialized. OTHER APPLICATIONS. The Company is developing its GeneChip technology to address other applications in pharmaceutical research, such as monitoring drug metabolism. Monitoring drug metabolism is an essential component in drug development. Drug metabolism determines how quickly or slowly a drug is eliminated or rendered inactive and whether any of the drug is processed into a toxic compound. Genetic differences among patients are an important factor in drug metabolism. Variations in drug metabolism are important to the development of new drugs because these variations determine how patients will react to drugs and which drugs will have relatively uniform effects across a broad population. Certain of the genes coding for metabolic enzymes have been identified and sequenced by researchers. Patients who have mutations in these genes may be poor metabolizers of drugs and may suffer from excessive drug accumulation and severe toxicity from standard drug doses. Pursuant to its 1994 collaboration with HP, Affymetrix has developed a GeneChip p450 probe array to detect mutations in two genes coding for metabolic enzymes. Mutations in these two genes have been associated with patients who are poor metabolizers of numerous drugs including tricyclic antidepressants and beta blockers. Under the terms of the revised agreement between the Company and HP announced in February 1997, Affymetrix has re-acquired all marketing rights for its GeneChip products, including the co-developed p450 drug metabolism assay. There can be no assurance that these DNA probe arrays will be developed or commercialized or will result in revenues to the Company. There can be no assurance that the Company's genomic or diagnostic collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, testing or marketing of the Company's potential products developed under the collaborations. Further, there can be no assurance that any products for genomics or diagnostic applications will be successfully developed, be proven to be accurate and efficacious in any markets, be protected from competition by others, avoid infringing the proprietary rights of others, be manufactured in sufficient quantities or at reasonable costs, or be marketed successfully. MANUFACTURING The Company's current strategy is to manufacture its disposable DNA probe arrays in-house and contract with third-party suppliers to manufacture the fluidics station and scanner for its GeneChip system. The Company is currently manufacturing limited quantities of probe arrays for internal and collaborative purposes and for initial "research use only" product sales. The Company's probe array manufacturing process involves wafer preparation, probe synthesis, dicing of synthesized wafers into chips, assembly of chips into cartridges, and quality control. Affymetrix has developed software programs that automatically design photolithographic masks used in probe array manufacturing and control the probe array manufacturing lines. Glass wafers are prepared for synthesis through the application of chemical coatings. DNA probes are synthesized on the wafers using the Company's proprietary photolithographic process. The completed wafers are then diced to yield individual probe arrays, which are assembled into disposable cartridges and packaged for shipment. The Company's -10- probe array synthesis, dicing and assembly processes use robotics, but the overall manufacturing process is only partially automated. The Company intends to further automate the manufacturing process. There can be no assurance that manufacturing and quality control problems will not arise as the Company attempts to scale-up its manufacturing facilities or that such scale-up can be achieved in a timely manner or at commercially reasonable costs. The Company relies on outside vendors to manufacture its fluidics stations and scanners. The Company's first generation scanner, which can read up to 64,000 features per 1.28 cm by 1.28 cm probe array was manufactured for the Company by Molecular Dynamics, Inc. ("Molecular Dynamics"). The Company's HIV probe array currently has 20,000 features on a 1.28 cm by 1.28 cm probe array and may be used with the Molecular Dynamics scanner. As part of the Company's 1994 collaboration agreement with HP, HP and Affymetrix developed a higher resolution scanner. The HP scanner is designed to read probe arrays with up to 400,000 features per 1.28 cm by 1.28 cm probe array. The Company expects that the HP scanner will be commercially available to ship for use with the Company's probe arrays in the second quarter of 1997. The Company and HP entered into a revised agreement in February 1997. Under the terms of the revised agreement, Affymetrix has re-acquired all marketing rights for its GeneChip products, including the co-developed p450 drug metabolism assay. Additionally, Affymetrix expanded its right to sell the HP GeneArray scanner as part of the Affymetrix GeneChip System to all potential markets. The new agreement provides for continued cooperation between Affymetrix and HP for worldwide marketing and distribution services and requires Affymetrix to purchase a minimum number of HP GeneArray scanners from HP over a three-year period. In November 1995, the Company entered into an agreement with RELA, Inc. ("RELA"), a private company, for the supply of fluidics stations. Pursuant to the Company's supply agreement with RELA, the Company must provide a six-month rolling forecast of its purchase requirements for fluidics stations and is obligated to make certain minimum purchases, at prices that vary depending on the volume ordered. There can be no assurance that the HP scanner will be introduced and marketed successfully. Further, no assurance can be given that scanners, fluidics stations or reagents will be available in commercial quantities at acceptable costs. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive. In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these suppliers were delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. The GeneChip system is a complex set of instruments and includes DNA probe arrays, which are produced in an innovative and complicated manufacturing process. During the beta testing phase of the GeneChip system's development, the Company and its vendors have encountered and satisfactorily addressed a number of technical problems, including software failures, improper alignment of probe array wafers, valve and tube failures in the fluidics station, sensor wiring issues and scanner control problems. Due to the complexity and lack of operating history of these products, the Company anticipates that additional technical problems may occur or be discovered as more systems are placed into operation. If these problems cannot be readily addressed, they could cause delays in shipments, warranty expenses and damages to customer relationships, which would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company does not currently need to comply with Good Manufacturing Practices ("GMP") to manufacture probe arrays and related instrumentation for sale for research purposes, it may need to be GMP compliant to sell these products to clinical reference laboratories and it will need to be compliant to sell these products for clinical use. There can be no assurance that manufacturing and quality control problems will not arise as the Company attempts to scale-up its manufacturing facilities or that such scale-up can be achieved in a timely manner at commercially reasonable costs. SALES AND MARKETING The Company intends to market the GeneChip system for diagnostic applications through direct sales efforts and collaborative arrangements with corporate partners and distributors. The Company intends to market the GeneChip system for genomics applications through collaborations with corporate partners. The Company's near -11- term strategy is to commercialize the GeneChip system for research use only. The Company's longer term strategy is to seek regulatory approval for and to commercialize GeneChip systems as diagnostic tests for clinical use. As of December 31, 1996, the Company had sold 16 systems for research use in the United States. Six of these systems were sold for HIV applications. The Company believes that the primary market for diagnostic applications in the United States will be academic research centers, pharmaceutical and biotechnology companies and reference laboratories. The Company intends to establish a direct sales force to market to these potential customers for research use. The Company believes that academic research centers could use the GeneChip system in their disease related research. Affymetrix believes pharmaceutical companies could use the GeneChip system to study genetic variations in patients participating in clinical trials of new drugs. Currently, there are three major reference laboratory companies in the United States, two of which are associated with large pharmaceutical companies. These reference laboratories are specialized laboratories at multiple locations that conduct complex testing for the diagnosis and monitoring of disease and clinical trials and testing for pharmaceutical and biotechnology companies. The Company believes that each of these reference laboratories could be a customer for the GeneChip system and may require multiple systems at each location depending on the volume and complexity of the tests. The Company believes that the primary international customers for diagnostic applications of its GeneChip system will be academic research centers, pharmaceutical and biotechnology companies, and independent testing laboratories. The Company initially intends to market to these customers through collaborative partners. As of December 31, 1996, one GeneChip system had been placed outside the United States. Affymetrix believes that the primary customers for genomics applications of its GeneChip system will be pharmaceutical and biotechnology companies that would use the GeneChip system to understand gene function and variability in order to discover new therapeutics. Affymetrix intends to market to these customers directly and to form non-exclusive contracts for the design, manufacture and supply of custom GeneChip probe arrays to these customers. Affymetrix currently has a small internal technical support group to service its GeneChip system, which the Company intends to expand as necessary. The Company believes that it will need to develop a larger technical support infrastructure to service these collaborations. Market acceptance will depend on many factors, including convincing researchers the GeneChip system is an attractive alternative to current technologies for the acquisition, analysis and management of genetic information; the receipt of regulatory clearances in the United States, Europe, Japan and elsewhere; the need for laboratories to license other technologies, such as amplification technologies that may be required to use the GeneChip system for certain applications; and the availability of new proprietary markers that may be important to the diagnosis, monitoring and treatment of disease for incorporation with the Company's probe arrays. Market acceptance may be adversely affected by ethical concerns that may limit the use of the GeneChip system for certain diagnostic applications or the analysis of genetic information. In addition, potential customers will need skilled laboratory technicians to operate the GeneChip system. Market acceptance of the GeneChip system could also be adversely affected by limited funding available for academic research centers and other research centers that are the potential customers for the GeneChip system. The Company anticipates a long sales cycle to market the GeneChip system to its potential customers. There can be no assurance that the Company will be able to establish a direct sales force or to establish collaborative or distribution arrangements to market its products. Failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. RESEARCH AND DEVELOPMENT The Company believes that substantial investment in research and development is essential to obtaining a competitive position in the genetic information and diagnostics markets. Affymetrix focuses on three types of research and development: applied research, including diagnostic product research and discovery; core technology development, including manufacturing process refinement, new instrumentation design, and novel chemical synthesis; and basic research to explore and expand the potential uses of DNA probe arrays and to discover new technologies. APPLIED RESEARCH. Affymetrix has diagnostic research projects in three major diagnostic fields: infectious disease, cancer and other diseases. In the infectious disease area, the Company is evaluating probe array applications -12- for several infectious organisms, such as tuberculosis and CMV. The Company's research in cancer is focused on monitoring mutations associated with cancer progression and the discovery of diagnostic markers for cancers such as breast and colorectal cancers. CORE TECHNOLOGY DEVELOPMENT. The Company conducts research in several areas, including novel and improved synthesis chemistries, manufacturing processes, new manufacturing instrumentation, and enhancements in the design of fluidics stations and scanners. Significant research effort is dedicated to designing data analysis software to extract information from DNA probe arrays. BASIC RESEARCH. Affymetrix' basic research efforts are focused on expanding the applications of the GeneChip system and developing related new technologies. These efforts are focused on improving sensitivity, increasing capacity and conducting more complex assays. The Company's research and development expenses for the years ended December 31, 1996, 1995 and 1994, were $18.8 million, $12.4 million and $9.5 million, respectively. Genomics and diagnostic technologies have undergone and are expected to continue to undergo rapid and significant change. Rapid technological development by the Company or others may result in products or technologies becoming obsolete. In addition, any products offered by the Company would be made obsolete by less expensive or more effective tests based on other technologies or by new therapeutic or prophylactic agents that obviate the need for diagnostic and monitoring information. There is no assurance that the Company will be able to make the enhancements to its technology necessary to compete successfully with newly emerging technologies. COLLABORATIVE AGREEMENTS AND GRANTS The Company's strategy regarding collaborative agreements is to expand the applications of the Company's technology and to acquire access to complementary technologies and resources, such as manufacturing and marketing, from its collaborative partners. Accordingly, the Company's agreements emphasize preserving the Company's rights to technological improvements and future business opportunities rather than large up-front fees or sizable commitments of research funding from its partners. GENETICS INSTITUTE, INC. In November 1994, the Company entered into a collaboration with GI to develop and apply new technologies for understanding the functions of human genes. Under the agreement, GI has provided research funding to the Company for the development of DNA probes to enable GI to discover new genes and uses for genes and to rapidly screen for the expression of specified genes in both normal and diseased tissues. The initial term of the research collaboration with GI was three years. The Company completed performance of the 1994 agreement and, accordingly, development funding under the agreement has been discontinued. The agreement provides that as the Company enters into similar agreements for gene expression with other third parties, it may be required to refund a portion of the development funding received from GI. As a result of the agreement entered into with Incyte in April 1996, the Company expects to refund a portion of such funding to GI. Affymetrix has agreed to supply custom probe arrays to GI for gene discovery and gene expression research in certain designated fields in return for specified payments for up to five years from the end of the research collaboration. GI was obligated to pay Affymetrix milestone payments. GI will have all rights to therapeutic compounds discovered through the use of DNA probes provided by the Company, and the Company will receive royalties on certain such therapeutic compounds. The Company retains all rights to enhancements to the GeneChip system technology developed in the collaboration. In December 1995, the Company and GI expanded their relationship by entering into a supply agreement under which the Company will manufacture and supply additional custom probe arrays based on specific genes identified and selected by GI. Unlike the 1994 agreement with GI, this agreement does not provide research funding to the Company. Pursuant to the agreement, GI is obligated to purchase and the Company is obligated to supply certain minimum quantities of the custom probe arrays developed for GI until the later of 2001 or four years after development of specified probe arrays. The Company will receive fees for the design and delivery of the custom probe arrays, as well as certain milestone payments and royalties on most therapeutic compounds, if developed by GI using these probe arrays. -13- As of December 31, 1996, the Company had received a total of $2.8 million from GI, a portion of which is subject to refund. HEWLETT-PACKARD COMPANY In November 1994, the Company entered into a collaborative agreement with HP to combine the Company's GeneChip technology and HP's measurement and instrument capabilities to develop and manufacture a more advanced scanner for use with GeneChip probe arrays. The agreement granted certain marketing rights to HP. Pursuant to the agreement, the Company agreed to develop and manufacture probe arrays and HP agreed to develop and manufacture instruments to read the arrays. Each of the parties agreed to supply the components of the system developed by it to the other party. Under certain circumstances, if either party ceased to supply its component, the other party could obtain the manufacturing rights to such component. The Company and HP entered into a revised agreement in February 1997. Under the terms of the revised agreement, Affymetrix has re-acquired all marketing rights for its GeneChip system. Additionally, Affymetrix expanded its right to sell the HP GeneArray scanner as part of the Affymetrix GeneChip System to all potential markets. The new agreement provides for continued cooperation between Affymetrix and HP for worldwide marketing and distribution services and requires Affymetrix to purchase a minimum number of HP GeneArray scanners from HP over a three-year period. As of December 31, 1996, the Company had received a total of $3.6 million from HP under this collaboration, consisting of research funding, license fees and option payments. Of these funds, $292,000 had not been earned by the Company and were refunded in 1997 pursuant to the revised agreement between HP and the Company. BIOMERIEUX VITEK, INC. In September 1996 the Company and bioMerieux entered into a collaborative development agreement and associated probe array supply agreement for probe arrays directed to identifying the species and drug resistance profile of bacterial organisms causing human infection. The agreement provides that the Company will not market or provide probe arrays for such tests to others that are in a format that would reasonably be considered approvable by the United States Food and Drug Administration ("FDA"). Under the terms of the agreements, bioMerieux provides research and development support and will make payments to Affymetrix upon achievement of certain development goals. In addition, bioMerieux will pay specified prices for supply of probe arrays and royalties on any resulting products. bioMerieux has an option to extend the agreement on a non-exclusive basis to viral agents. ADVANCED TECHNOLOGY PROGRAM (UNITED STATES DEPARTMENT OF COMMERCE) In October 1994, the Company and Molecular Dynamics were awarded a $31.5 million five-year grant to develop novel point-of-care diagnostic systems under the National Institute of Standards and Technology's Advanced Technology Program ("ATP"). Pursuant to the grant, $20.8 million is designated for the Company and its subcontractors and $10.7 million for Molecular Dynamics and its subcontractors subject to the requirement of each company to match such funding. The grant specifies the development of an advanced miniaturized nucleic acid diagnostic device intended to reduce the costs and increase the speed and reliability of DNA diagnostic tests. The device would be used in point-of-care settings, such as hospitals, clinics and doctors' offices. The research agreements between the Company and its subcontractors under the ATP grant (the University of California, Stanford University and the University of Washington) require that the universities assign the rights to any project inventions made by them to the Company, subject to specified royalty payments. The ATP agreement provides that the Company and Molecular Dynamics retain rights in their respective fields to intellectual property developed as part of the project. The ATP grant is administered by the United States Department of Commerce. As of December 31, 1996, the Company had received $2.9 million under the ATP grant. The grant is subject to yearly appropriations by the United States Congress for the ATP program, and legislation has been introduced to eliminate the program. There can be no assurance that funding for the ATP program will not be reduced or eliminated at any time. The reduction or elimination of the ATP grant could have a material adverse effect on the Company's business, financial condition and results of operations. NATIONAL INSTITUTES OF HEALTH In August 1995, the Company received a three-year grant for approximately $6.0 million from the National Institute of Health ("NIH") National Center for Human Genome Research, for a project entitled "Sequencing and Mapping with DNA Probe Arrays." Under the project, the Company is developing applications of DNA probe -14- arrays for larger scale gene sequencing and creating a laboratory at the Company for use by outside researchers. The grant also includes a subcontract with Stanford University to continue research and development of the DNA probe array technology. The Company has been awarded approximately $4.0 million for the first two years of the grant, and the remaining amounts are subject to yearly appropriations by the NIH. There can be no assurance that the NIH will obtain the necessary funding from the United States Congress to continue to fund this grant. INTELLECTUAL PROPERTY In 1993, Affymetrix and Affymax entered into a technology license agreement (the "Technology License Agreement") pursuant to which Affymax granted to Affymetrix an exclusive, worldwide, royalty-free license with right to sublicense to certain patents and patent applications (and any foreign counterparts) to develop, make, use and sell certain products for the clinical diagnostic and research supply markets, including rights to sell DNA probe arrays. In February 1997, the Company entered into an agreement with Affymax and several of its affiliated entities that supersedes the earlier Technology License Agreement effective as of 1995 (the "1997 Technology Agreement"). Under the terms of the 1997 Technology Agreement, Affymax assigned to Affymetrix all rights in patents relating to light directed synthesis and probe array technologies. Affymetrix' license rights in certain technologies, including "encoded synthetic library" technology, were terminated. Affymetrix retains or was assigned rights to use certain trademarks, including "Affymetrix." Effective as of December 31, 1996 and pursuant to the 1997 Technology Agreement, Affymetrix held 72 pending United States patent applications and had 21 issued patents in the United States. Many of these patents and applications have been filed and/or issued in one or more foreign countries. Affymetrix also relies upon copyright protection, trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position. The Company's success will depend in part on its ability to obtain patent protection for its products and processes, to preserve its copyright and trade secrets and to operate without infringing the proprietary rights of third parties. The Company is party to various license option and license agreements with third parties (including Stanford University, Scientific Generics, Ltd., Concordia University, and the University of California) which give it rights to use certain technologies. Failure of the Company to maintain rights to such technology could have a material adverse effect on the Company's business, financial condition and results of operations. For example, inability of the Company to exercise the option for the Stanford technology under commercially reasonable terms could have an adverse effect on the ability of the Company to sell certain of its products. The patent positions of pharmaceutical, biopharmaceutical and biotechnology companies, including the Company, are generally uncertain and involve complex legal and factual questions. There can be no assurance that any of the Company's pending patent applications will result in issued patents, that the Company will develop additional proprietary technologies that are patentable, that any patents issued to the Company or its strategic partners will provide a basis for commercially viable products or will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the ability of the Company to do business. In addition, patent law relating to the scope of claims in the technology fields in which the Company operates is still evolving. The degree of future protection for the Company's proprietary rights, therefore, is uncertain. Furthermore, there can be no assurance that others will not independently develop similar or alternative technologies, duplicate any of the Company's technologies, or, if patents are issued to the Company, design around the patented technologies developed by the Company. In addition, the Company could incur substantial costs in litigation to defend itself in patent suits brought by third parties, or if it initiates such suits. The commercial success of the Company also depends in part on the Company neither infringing patents or proprietary rights of third parties nor breaching any licenses that may relate to the Company's technologies and products. For example, the Company, its collaborators and customers may need to acquire a license for an amplification technology to use the GeneChip system, and there is no assurance such a license will be available on commercially reasonable terms. The Company is aware of third-party patents that may relate to the Company's technology, including reagents used in probe array synthesis and in probe array assays, probe array scanners, synthesis techniques, oligonucleotide amplification techniques, assays, and probe arrays. There can be no assurance that the Company will not infringe on these patents or other patents or proprietary rights of third parties. In addition, -15- the Company has received and may in the future receive a notice claiming infringement from third parties as well as invitations to take licenses under third party patents. On March 3, 1997, Hyseq, Inc. ("Hyseq") filed a lawsuit in United States District Court for the Northern District of California (the San Jose Division) alleging that certain Affymetrix products infringe United States patents 5,202,231 and 5,525,464. The Hyseq action and any other legal action against the Company or its collaborative partners claiming damages and seeking to enjoin commercial activities relating to the affected products and processes could, in addition to subjecting the Company to potential liability for damages, require the Company or its collaborative partners to obtain a license in order to continue to manufacture or market the affected products and processes. While the Company believes the Hyseq complaint is without merit, there can be no assurance that the Company will prevail in the Hyseq action or that the Company or its collaborative partners will prevail in any other action nor can there be any assurance that any license (including licenses proposed by third parties) required would be made available on commercially acceptable terms, if at all. There are a significant number of United States and foreign patents and patent applications in the Company's areas of interest, and the Company believes that there may be significant litigation in the industry regarding patent and other intellectual property rights. The Hyseq action and any other such litigation could consume substantial managerial and financial resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Others may have filed and in the future are likely to file patent applications that are similar or identical to those of the Company or those of its licensors. To determine the priority of inventions, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial cost to the Company. No assurance can be given that any such patent application will not have priority over patent applications filed by the Company. The enactment of legislation implementing the General Agreement on Trade and Tariffs has resulted in certain changes in United States patent laws that became effective on June 8, 1995. Most notably, the term of patent protection for patent applications filed on or after June 8, 1995 is no longer a period of seventeen years from the date of grant. The new term of United States patents will commence on the date of issuance and terminate twenty years after the earliest effective filing date of the application. Because the time from filing to issuance of biotechnology patent applications in the Company's area of interest is often more than three years, a twenty-year term after the effective date of filing may result in a substantially shortened term of the Company's patent protection which may adversely affect the Company's patent position. The Company also relies upon copyright and trade secret protection for its confidential and proprietary information. There can be no assurance, however, that such measures will provide adequate protection for the Company's trade secrets or other proprietary information. In addition, there can be no assurance that proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's copyrights and trade secrets or disclose such technology, or that the Company can effectively protect its trade secrets. The Company's academic collaborators have certain rights to publish data and information in which the Company has rights. There is considerable pressure on academic institutions to publish discoveries in the genetics and genomics fields. There can be no assurance that such publication would not adversely affect the Company's ability to obtain patent protection for some genes in which it may have a commercial interest. GOVERNMENT REGULATION The Company anticipates that the manufacturing, labeling, distribution and marketing of some or all of the Company's diagnostic products will be subject to government regulation in the United States and in certain other countries. In the United States, the FDA regulates, as medical devices, most diagnostic tests and IN VITRO reagents that are marketed as finished test kits or equipment. Some clinical laboratories, however, purchase individual reagents intended for specific analytes, and use those reagents to develop and prepare their own finished diagnostic tests. Although the FDA has not generally exercised regulatory authority over these individual reagents or the finished tests prepared from them by the clinical laboratories, the FDA has recently proposed a rule that, if adopted, would regulate reagents sold to clinical laboratories as medical devices. The proposed rule would also restrict sales of these reagents to clinical laboratories certified under Clinical Laboratory Improvement Amendments of 1988 ("CLIA") as high -16- complexity laboratories. The Company intends to market some diagnostic products as finished test kits or equipment and others as individual reagents; consequently, some or all of these products will be regulated as medical devices. The Food, Drug, and Cosmetic Act requires that medical devices introduced to the United States market, unless exempted by regulation, be the subject of either a premarket notification clearance (known as a "510(k)") or an approved premarket approval ("PMA"). Some of the Company's products and those of its collaborators may require a PMA and others may require a 510(k). With respect to devices reviewed through the 510(k) process, a company may not market a device until an order is issued by the FDA finding the product to be substantially equivalent to a legally marketed device known as a "predicate device." A 510(k) submission may involve the presentation of a substantial volume of data, including clinical data, and may require a substantial review. The FDA may agree that the product is substantially equivalent to a predicate device and allow the product to be marketed in the United States. The FDA, however, may (i) determine that the device is not substantially equivalent and require a PMA, or (ii) require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. By requesting additional information, the FDA can further delay market introduction of a company's products. If the FDA indicates that a PMA is required for any of the Company's products, the application will require extensive clinical studies, manufacturing information and likely review by a panel of experts outside the FDA. Clinical studies to support either a 510(k) submission or a PMA application would need to be conducted in accordance with FDA requirements. Failure to comply with FDA requirements could result in the FDA's refusal to accept the data or the imposition of regulatory sanctions. FDA review of a PMA application could take significantly longer than that for a 510(k). There can be no assurance that the Company or its collaborators will be able to meet the FDA's requirements or that any necessary approval will be received. Once granted, a 510(k) clearance or PMA approval may place substantial restrictions on how the device is marketed or to whom it may be sold. Even where a device is exempted from 510(k) clearance or PMA approval, the FDA may impose restrictions on its marketing. In addition to requiring clearance or approval for new products, the FDA may require clearance or approval prior to marketing products that are modifications of existing products. There can be no assurance that any necessary 510(k) clearance or PMA approval will be granted on a timely basis or at all. FDA imposed restrictions could limit the number of customers to whom particular products could be marketed or what may be communicated about particular products. Delays in receipt of or failure to receive any necessary 510(k) clearance or PMA, or the imposition of stringent restrictions on the Company's labeling and sales of its products could have a material adverse effect on the Company. As a medical device manufacturer, the Company would also be required to register and list its products with the FDA. In addition, the Company would be required to comply with the FDA's GMP regulations, which require that medical devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company would be required to comply with FDA requirements for labeling and promotion of its medical devices. For example, the FDA prohibits cleared or approved devices from being marketed for uncleared or unapproved uses. In addition, the medical device reporting regulation would require that the Company provide information to the FDA whenever there is evidence to reasonably suggest that one of its devices may have caused or contributed to a death or serious injury, or that there has occurred a malfunction that would be likely to cause or contribute to a death or serious injury if the malfunction were to recur. Medical device manufacturers are subject to periodic inspections by the FDA and state agencies. Additionally, FDA will conduct a preapproval inspection for all PMA devices and in some cases for 510(k) devices as well. If the FDA believes that a company is not in compliance with applicable laws or regulations, it can institute proceedings to issue a warning letter apprising of violative conduct, detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers or its employees. In addition, clearances or approvals could be withdrawn in appropriate circumstances. Failure to comply with regulatory requirements or any adverse regulatory action could have a material adverse effect on the Company. Medical device laws and regulations are also in effect in many of the countries in which the Company may do business outside the United States. These range from comprehensive device approval requirements for some or all of the Company's medical device products to requests for product data or certifications. The number and scope of these requirements are increasing. Medical device laws and regulations are also in effect in some states in which the Company does business. There can be no assurance that the Company will obtain regulatory approvals in such countries or that it will not be required to incur significant costs in obtaining or maintaining its foreign regulatory approvals. In addition, the export by the Company of certain of its products which have not yet been cleared for -17- domestic commercial distribution may be subject to FDA export restrictions. The failure to obtain product approvals in a timely fashion or to comply with state or foreign medical device laws and regulations may have a material adverse impact on the Company. In addition, federal, state and foreign laws and regulations regarding the manufacture and sale of medical devices are subject to future changes. For example, the FDA is currently considering significant changes to its GMP and to other regulations. The Company cannot predict what impact, if any, such changes might have on its business; however, such changes could have a material impact on the Company. Any of the Company's customers using its diagnostic devices for clinical use in the United States may be regulated under the CLIA. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in the areas of personnel qualifications, administration, participation in proficiency testing, patient test management, quality control, quality assurance and inspections. The regulations promulgated under CLIA establish three levels of diagnostic tests ("waived," "moderately complex" and "highly complex") and the standards applicable to a clinical laboratory depend on the level of the tests it performs. CLIA requirements may prevent some clinical laboratories from using certain of the Company's diagnostic products. In addition, the FDA has recently proposed regulation of certain "analyte specific reagents" used in clinical reference laboratories. There can be no assurance that the CLIA regulations and future administrative interpretations of CLIA or future regulatory requirements of the FDA will not have a material adverse impact on the Company by limiting the potential market for the Company's products. The Company is also subject to numerous environmental and safety laws and regulations, including those governing the use and disposal of hazardous materials. Any violation of, and the cost of compliance with, these regulations could have a material adverse effect on the Company's business, financial condition and results of operations. REIMBURSEMENT The Company's ability to successfully commercialize its products may depend on the Company's ability to obtain adequate levels of third-party reimbursement for use of certain diagnostic tests, in the United States, Europe and other countries. Currently, the availability of third-party reimbursement is limited and uncertain for genetic tests. In the United States, the cost of medical care is funded, in substantial part, by government insurance programs, such as Medicare and Medicaid, and private and corporate health insurance plans. Third-party payors may deny reimbursement if they determine that a prescribed device or diagnostic test has not received appropriate FDA or other governmental regulatory clearances, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. The Company's ability to commercialize certain of its products successfully may depend on the extent to which appropriate reimbursement levels for the costs of such products and related treatment are obtained from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for medical products and services. The trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for certain of the Company's products. The cost containment measures that health care providers are instituting and the impact of any health care reform could have an adverse effect on the Company's ability to sell certain of its products and may have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Competition in genomics and diagnostics is intense and expected to increase. Further, the technologies for discovering genes associated with significant diseases and approaches for commercializing those discoveries are new and rapidly evolving. Currently, the Company's principal competition comes from existing technologies that are used to perform many of the same functions for which the Company plans to market its GeneChip systems. In the diagnostic field, -18- these technologies are provided by established diagnostic companies such as Abbott Laboratories, Boehringer Mannheim GmbH, Roche, Johnson & Johnson, and SmithKline Beecham plc. These technologies include a variety of established assays, such as immunoassays, histochemistry, flow cytometry and culture, and newer DNA probe diagnostics to analyze certain limited amounts of genetic information. In the genomics field, competitive technologies include gel-based sequencing using instruments provided by companies such as the Applied Biosystems division of Perkin Elmer and Pharmacia Biotech AB. In order to compete against existing technologies, the Company will need to demonstrate to potential customers that the GeneChip system provides improved performance and capabilities. Additional competition arises from smaller companies in the genomics and diagnostic markets. The market for diagnostic products derived from gene discovery is currently limited and will be highly competitive. Many companies are developing and marketing DNA probe tests for genetic and other diseases. Other companies are conducting research on new technologies for diagnostic tests based on advances in genetic information. Established diagnostic companies could provide significant competition to Affymetrix through the development of new products. These companies have the strategic commitment to diagnostics, the financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. These companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which are not compatible with the GeneChip system. In addition, these companies have formed alliances with genomics companies which provide them access to genetic information that may be incorporated into their diagnostic tests. In the genomics field, future competition will likely come from existing competitors as well as other companies seeking to develop new technologies for sequencing and analyzing genetic information. In addition, pharmaceutical and biotechnology companies, such as Genome Therapeutics Corporation, Human Genome Sciences, Inc., Incyte, Millennium Pharmaceuticals, Inc., Myriad Genetics, Inc. and Sequana Therapeutics, Inc. have significant needs for genomic information and may choose to develop or acquire competing technologies to meet these needs. Smaller companies such as Synteni, Inc., Hyseq, and Nanogen, Inc. also are developing or have developed DNA probe based assays, some of which may be competitive with the products of the Company. There can be no assurance that such companies will not be successful in capturing a portion of the market of the Company. Genomics and diagnostic technologies have undergone and are expected to continue to undergo rapid and significant change. The Company's future success will depend in large part on its ability to maintain a competitive position with respect to these technologies. Rapid technological development by the Company or others may result in products or technologies becoming obsolete. In addition, products offered by the Company would be made obsolete by less expensive or more effective tests based on other technologies or by new therapeutic or prophylactic agents that obviate the need for diagnostic and monitoring information. There is no assurance that the Company will be able to make the enhancements to its technology necessary to compete successfully with newly emerging technologies. EMPLOYEES As of March 24, 1997, Affymetrix had 161 full-time employees, 37 of whom hold Ph.D. degrees. The employee group includes chemists, engineers, computer scientists, mathematicians and molecular biologists with experience in the diagnostic products, medical products, semiconductor, computer software and electronics industries. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company experienced work stoppages. The Company believes that it maintains good relationships with its employees. Affymetrix' success will depend in large part on its ability to attract and retain skilled and experienced employees. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel, and its failure to do so could have a material adverse impact on the business and financial condition of the Company. -19- ADDITIONAL RISK FACTORS This Form 10-K contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this document. EARLY STAGE OF DEVELOPMENT The Company has not commercialized significant quantities of products based on its technologies. As of December 31, 1996, the Company had placed only 19 GeneChip systems, all of which have been solely for research use and only 17 of which have been purchased by customers. The majority of the Company's revenues have been derived from payments from collaborative research and development agreements and government research grants. The Company's GeneChip system and other potential products will require significant additional development and investment, including testing to further validate performance and demonstrate cost effectiveness. While the Company's initial product sales for research use have not required regulatory approval, the Company expects that such approval will be required in the future. The Company may need to undertake costly and time-consuming efforts to obtain this approval. There can be no assurance that any future products will be successfully developed, be proven to be accurate and efficacious in any markets, meet applicable regulatory standards in a timely manner or at all, be protected from competition by others, avoid infringing the proprietary rights of others, be manufactured in sufficient quantities or at reasonable costs, or be marketed successfully. The Company has experienced significant operating losses since inception and expects these losses to continue for at least the next several years. Whether the Company can successfully manage the transition to a commercial-scale enterprise will depend upon a number of factors including establishing its commercial manufacturing capability, developing its marketing capabilities, establishing a direct sales force and entering into collaborative arrangements to market its products. Failure to make such a transition successfully would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATING TO TECHNOLOGICAL APPROACHES; NEED FOR ADDITIONAL RESEARCH AND DEVELOPMENT The Company intends to develop its GeneChip system for genomics and diagnostics applications. The GeneChip system involves several new technologies, including a complex chemical synthesis process necessary to create DNA probe arrays. In addition, technicians using the GeneChip system require new technical skills and training. There can be no assurance that technicians will not experience difficulties with the system that would prevent or limit its use. The instrumentation and software that comprise the GeneChip system are new and have not been previously used in commercial applications. As the system is used, it is possible that previously unrecognized defects will emerge. In addition, DNA probe arrays are tested only on a random sample basis, and quality problems could develop with the untested arrays. Further, in order for the Company to address new applications for the GeneChip system, the Company may be required to reduce the size of its probe arrays, increase the number of features on these arrays, develop instruments capable of processing the information from such probe arrays, and design software capable of managing such information. There can be no assurance that the Company will be capable of validating or achieving the improvements in the components of the GeneChip system necessary for its successful commercialization. The Company's GeneChip technology will also need to compete against well-established techniques and enhancements to such techniques for analyzing genes and for diagnostics. There can be no assurance that the GeneChip system will replace or compete successfully against existing techniques and instruments. Furthermore, there can be no assurance that the Company's GeneChip technology will be useful in providing information on the function of genes or for the analysis of larger sequences of genes. The development of research, diagnostic, and therapeutic products based on the Company's technologies will be subject to the risks of failure inherent in the development of products based on new technologies. These risks include possibilities that any products based on these technologies will be found to be ineffective, unreliable or unsafe, or otherwise fail to receive necessary regulatory clearances; that products will be difficult to manufacture on a large scale or will be uneconomical to market; that proprietary rights of third parties will preclude the Company or its collaborative partners from marketing products; or that third parties will market superior or equivalent products. -20- Furthermore, there can be no assurance that the Company's research and development activities will result in any commercially viable products. UNCERTAINTY OF MARKET ACCEPTANCE The commercial success of the Company's GeneChip system will depend upon market acceptance by academic research centers, pharmaceutical and biotechnology companies and reference laboratories. Market acceptance will depend on many factors, including convincing researchers that the GeneChip system is an attractive alternative to current technologies for the acquisition, analysis and management of genetic information; the receipt of regulatory clearances in the United States, Europe, Japan and elsewhere; the need for laboratories to license other technologies, such as amplification technologies that may be required to use the GeneChip system for certain applications; and the availability of new proprietary markers that may be important to the diagnosis, monitoring and treatment of disease for incorporation on the Company's probe arrays. Market acceptance may be adversely affected by ethical concerns that may limit the use of the GeneChip system for certain diagnostic applications or the analysis of genetic information. In addition, potential customers will need skilled laboratory technicians to operate the GeneChip system. Market acceptance of the GeneChip system could also be adversely affected by limited funding available for academic research centers and other research organizations that are the potential customers for the GeneChip system. Potential customers of the GeneChip system will need to acquire the Company's fluidics station and probe array scanner in order to utilize the DNA probe arrays. The cost of this instrumentation may deter certain potential customers from purchasing probe arrays. The Company may be required to discount the price of its GeneChip system in order to place the system with customers. The failure of the Company to place sufficient quantities of the instruments for the GeneChip system would have a material adverse effect on its ability to sell the disposable probe arrays. There can be no assurance that academic research centers, pharmaceutical or biotechnology companies or reference laboratories will replace existing instrumentation and techniques with the GeneChip system. Because of these and other factors, there can be no assurance that the Company's products will gain market acceptance. The Company expects that its customers will be concentrated in a small number of academic research centers, pharmaceutical and biotechnology companies and reference laboratories. As a result, the Company's financial performance may depend on large orders from a limited number of customers. There are only three major reference laboratories in the United States, two of which are associated with large pharmaceutical companies. There can be no assurance that the Company will be able to successfully market the GeneChip system to reference laboratories or that the affiliation of these laboratories with pharmaceutical companies will not adversely affect their decision to purchase GeneChip systems. The Company's dependence on sales to a few large reference laboratories may also strengthen the purchasing leverage of these potential customers, which could reduce the sales price of the GeneChip system. Also, the Company believes that the sales cycle for the GeneChip system will be lengthy due to the need to educate potential customers about its characteristics. The failure of the Company to gain additional customers, the loss of any customer or a significant reduction in the level of sales to any customer would have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATED TO THE HIV PROBE ARRAY The first commercial application of the Company's GeneChip system is an HIV probe array designed to detect mutations in HIV, the virus that causes AIDS. The HIV probe array provides sequence information from the reverse transcriptase and protease genes of HIV and the system includes a fluidics station, a scanner and related software. In April 1996, the Company introduced the HIV probe array for research purposes only. As of December 31, 1996, the Company had placed only 8 Genechip systems at HIV probe array customer sites. These systems have been in operation for only a limited period of time, and their accuracy and efficacy have not been fully demonstrated. There are other uncertainties relating to the system, including that the Company has no prior experience in introducing a commercial product, that technicians may encounter difficulties with the system that would prevent or limit its use, and that the Company will rely on third parties to manufacture and service its instruments. Furthermore, there can be no assurance that the accuracy of the HIV probe array in providing sequence information from HIV will be better than current technologies, such as gel-based sequencing techniques. -21- As new therapies and combinations of therapies for treating HIV are employed, new mutations in the HIV genome may be discovered that would require the Company to redesign its current probe array or develop new probe arrays. Advanced therapies could be discovered that target other components of the virus or which do not generate drug resistance. In addition, cost containment pressures for treating HIV patients may limit the price the Company may be able to charge potential customers for its HIV probe array. There can be no assurance that the HIV probe array will provide useful diagnostic and monitoring information, that it will operate without difficulties, that technicians will have adequate training to use the system, or that the Company will not experience manufacturing or marketing difficulties selling the HIV probe array to academic research centers, pharmaceutical and biotechnology companies and reference laboratories. Furthermore, there can be no assurance that the HIV probe array will gain regulatory approval for clinical use. There can be no assurance that these revenues will be realized in the near term, or at all. Failure of the Company to successfully commercialize the HIV probe array could have a material adverse effect on the Company's business, financial condition and results of operations, and may adversely affect the Company's ability to commercialize future products. HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES The Company has incurred operating losses in each year since its inception, including net losses of approximately $10.7 million during the year ended December 31, 1995, and $12.2 million during the year ended December 31, 1996, and at December 31, 1996, the Company had an accumulated deficit of approximately $44.7 million. The Company's losses have resulted principally from costs incurred in research and development and from general and administrative costs associated with the Company's operations. These costs have exceeded the Company's interest income and revenues which, to date, have been generated principally from collaborative research and development agreements and government research grants. The Company expects to incur substantial additional operating losses over the next several years as a result of increases in its expenses for research and product development, manufacturing scale-up, expanding sales and marketing and capital expenditures. PROFITABILITY UNCERTAIN The Company has experienced substantial operating losses and has never been profitable. The Company may have to discount the price of the GeneChip system to gain market acceptance, which could adversely affect gross margins. The Company's future gross margins, if any, will be dependent on, among other factors, the Company's ability to cost-effectively manufacture the GeneChip system, its product mix and the degree of price discounts required to market its products to academic research centers, pharmaceutical and biotechnology companies and reference laboratories. The amount of future operating losses and time required by the Company to reach profitability, if ever, are highly uncertain. The Company's ability to generate significant revenues and become profitable is dependent in large part on the ability of the Company to enter into additional collaborative arrangements and on the ability of the Company and its collaborative partners to successfully commercialize products developed under the collaborations. In addition, delays in receipt of any necessary regulatory approvals by the Company or its collaborators, or receipt of approvals by competitors, could adversely affect the successful commercialization of the Company's technologies. There can be no assurance that the Company will successfully commercialize any product or that the Company will achieve profitability. FLUCTUATIONS IN OPERATING RESULTS The Company's quarterly operating results will depend upon the volume and timing of orders for GeneChip systems and probe arrays received and delivered during the quarter, variations in payments under collaborative agreements, including milestones, royalties, license fees, and other contract revenues, and the timing of new product introductions by the Company. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors; regulatory actions; market acceptance of the GeneChip system and other potential products; adoption of new technologies; manufacturing capabilities; variations in gross margins of the Company's products; competition; the cost, quality and availability of reagents and components; the mix of products sold; changes in government funding; and third-party reimbursement policies. -22- DEPENDENCE UPON COLLABORATIVE PARTNERS An important element of the Company's business strategy involves collaborations with pharmaceutical, diagnostic and biotechnology companies that have discovered genes and may seek to use the Company's technologies to discover genetic mutations or develop diagnostic and therapeutic products. The Company has significant collaborations with HP, bioMerieux, Incyte and GI. The Company has received a material portion of its revenue since inception from its collaborative partners and intends to enter into collaborative arrangements with other companies to apply its technology, fund development, commercialize potential future products, and assist in obtaining regulatory approval. There can be no assurance that any of the Company's present or future collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, clinical testing or marketing of the Company's potential products developed under the collaborations. Any parallel development by a partner of alternative technologies or components of the GeneChip system, preclusion of the Company from entering into competitive arrangements, failure to obtain timely regulatory approvals, premature termination of an agreement, or failure by a partner to devote sufficient resources to the development and commercialization of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's agreements with consultants and collaborators are complex. There may be provisions within such agreements which give rise to disputes regarding the rights and obligations of the parties. These and other possible disagreements could lead to delays in collaborative research, development or commercialization of certain products, or could require or result in litigation or arbitration, which would be time-consuming and expensive, and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to negotiate future collaborative arrangements on acceptable terms, if at all, or that such collaborations will be successful. ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC PREDISPOSITION TESTING The Company's success will depend in part upon the Company's ability to develop genetic tests for genes discovered by the Company and others. Genetic tests, such as certain of the Company's GeneChip tests, may be difficult to perform and interpret and may lead to misinformation or misdiagnosis. Further, even when a genetic test identifies the existence of a mutation in an individual, the interpretation of the result is often limited to the identification of a statistical probability that the tested individual will develop the disease or condition for which the test is performed. In addition, once available, such tests may be subject to ethical concerns or reluctance to administer or pay for tests for conditions that are not treatable. Further, it is possible that gene-based diagnostic tests marketed by other companies could encounter specific difficulties, resulting in societal and governmental concerns regarding genetic testing. The prospect of broadly available genetic predisposition testing has raised issues regarding the appropriate utilization and the confidentiality of information provided by such testing. It is possible that discrimination by insurance companies could occur through the raising of premiums by insurers to prohibitive levels, outright cancellation of insurance or unwillingness to provide coverage to patients shown to have a genetic predisposition to a particular disease. In addition, employers could discriminate against employees with a positive genetic predisposition due to the increased risk for disease resulting in possible cost increases for health insurance and the potential for lost employment time. Finally, governmental authorities could, for social or other purposes, limit the use of genetic testing or prohibit testing for genetic predisposition to certain conditions which could adversely affect the use of the Company's products. There can be no assurance that ethical concerns about genetic testing will not adversely affect market acceptance of the Company's GeneChip system. LIMITED MANUFACTURING CAPABILITY; SOLE SOURCE SUPPLIERS The Company has limited experience manufacturing products for commercial purposes. To date, the Company has a small scale facility providing limited quantities of probe arrays for internal and collaborative purposes and initial sales of the GeneChip system to the research market. To achieve the production levels of probe arrays necessary for successful commercialization of its products, the Company will need to scale-up its manufacturing facilities and establish automated manufacturing capabilities. The Company may also need to comply with the -23- current GMP prescribed by the FDA for sale of products in the United States, ISO standards for sale of products in Europe, as well as other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries. Although the Company does not currently need to comply with GMP to manufacture probe arrays and related instrumentation for sale for research purposes, it may need to be GMP compliant to sell these products to clinical reference laboratories, and it will need to be compliant to sell these products for clinical use. There can be no assurance that manufacturing and quality control problems will not arise as the Company attempts to scale-up its manufacturing facilities or that such scale-up can be achieved in a timely manner or at commercially reasonable costs. The Company's probe array manufacturing process is complex and involves a number of technologies that have never before been combined in the manufacture of a single product. The Company tests only selected probe arrays from each wafer and only selected probes on each probe array. It is therefore possible that defective probe arrays might not be identified before they are shipped. The Company therefore relies on quality control procedures, including controls on the manufacturing process and sample testing, to verify the correct completion of the manufacturing process. In addition, there may be certain aspects of the Company's manufacturing that are not fully understood and cannot be readily replicated for commercial use. If the Company is unable to manufacture probe arrays on a timely basis because of these or other factors, its business, financial condition and results of operations could be adversely affected. As the Company's technologies evolve, new manufacturing techniques and systems will be required. For example, it is anticipated that batch processing systems will be needed to meet the Company's future probe array manufacturing needs. Further, as products requiring increased density are developed, miniaturization of the features on the arrays will be necessary, requiring new or modified manufacturing equipment and processes. Further, the Company's manufacturing equipment requires significant capital investment. The Company presently relies on a single manufacturing facility for its probe arrays for the foreseeable future. This manufacturing facility is subject to natural disasters such as earthquakes and floods. The former are of particular significance since the manufacturing facility is located in an earthquake prone area. In the event that its manufacturing facility were to be affected by accidental or natural disasters, the Company would be unable to manufacture products for sale until the facility was replaced or restored to operation. Certain key parts of the GeneChip system, such as the scanner, the fluidics station, and certain reagents, are currently available only from a single source or a few sources. The Company currently obtains the scanners for its GeneChip probe arrays from HP. The Company is dependent on HP for quality testing and service of this instrument. The Company's ability to commercialize a probe array with more features is dependent upon successful introduction of the HP scanner. The Company has contracted with RELA to supply the fluidics station that is part of the GeneChip system. No assurance can be given that scanners, fluidics stations or reagents will be available in commercial quantities at acceptable costs. If the Company is required to seek alternative sources of supply, it could be time consuming and expensive. In addition, the Company is dependent on its vendors to provide components of appropriate quality and reliability and to meet applicable regulatory requirements. Consequently, in the event that supplies from these suppliers were delayed or interrupted for any reason, the Company's ability to develop and supply its products could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTIES RELATED TO GOVERNMENT FUNDING A significant portion of the Company's products for research use are likely to be sold to universities, government research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies such as the NIH. Research funding by the government, however, may be significantly reduced under several budget proposals being discussed by the United States Congress. Any such reduction may materially affect the ability of the Company's prospective research customers to purchase the Company's products for research use. The Company has received and expects to continue to receive significant funds under various United States Government research and technology programs. While the programs are generally multi-year awards, they are subject to a yearly appropriations process in the United States Congress. Proposed legislation being debated in the United States Congress would eliminate or reduce the program under which the Company's ATP grant is funded by the Department of Commerce. There can be no assurance that the Company will receive the entire $20.8 million of -24- funding designated for it under the ATP grant, and termination of the ATP grant could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's grants from the Departments of Commerce and Energy and the NIH give the government certain rights to license for its own use inventions resulting from funded work. There can be no assurance that the Company's proprietary position will not be adversely affected should the government exercise these rights. ATTRACTION AND RETENTION OF KEY EMPLOYEES AND CONSULTANTS The Company is highly dependent on the principal members of its management and scientific staff. The loss of services of any of these persons could have a material adverse effect on the Company's product development and commercialization objectives. In addition, recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to the Company's success. There can be no assurance that the Company will be able to attract and retain such personnel. Product development and commercialization will require additional personnel in areas such as diagnostic testing, regulatory affairs, manufacturing and marketing. The inability to acquire such services or to develop such expertise could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company relies on its scientific advisors to assist the Company in formulating its research and development strategy. All of the scientific advisors are employed by employers other than the Company and have commitments to other entities that may limit their availability to the Company. Some of the Company's scientific advisors also consult for companies that may be competitors of the Company. EXPOSURE TO PRODUCT LIABILITY CLAIMS The Company's business exposes it to potential product liability claims that are inherent in the testing, manufacturing, marketing and sale of human diagnostic and therapeutic products. The Company intends to acquire additional insurance, should it be desirable, for clinical liability risks. There can be no assurance that it will be able to obtain such insurance or general product liability insurance on acceptable terms or at reasonable costs or that such insurance will be in sufficient amounts to provide the Company with adequate coverage against potential liabilities. A product liability claim or recall could have a material adverse effect on the Company's business, financial condition and results of operations. CONTROL BY GLAXO, MANAGEMENT AND RELATED PERSONS Glaxo beneficially owns approximately 33% of the Company's outstanding Common Stock and executive officers, directors and principal shareholders (other than Glaxo) beneficially own approximately 14% of the Company's outstanding Common Stock. Accordingly, Glaxo and these shareholders may be able to influence the outcome of shareholder votes, including votes concerning the election of directors, adoption of amendments to the Company's Articles of Incorporation and Bylaws and approval of mergers and other significant corporate transactions. Glaxo and the Company have executed a governance agreement that confers rights on Glaxo in certain circumstances. ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS Certain provisions of the Company's Articles of Incorporation and Bylaws and certain other contractual provisions could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, or control the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock. Certain of these provisions allow the Company to issue Preferred Stock with rights senior to those of the Common Stock without any further vote or action by the shareholders, eliminate the right of shareholders to act by written consent which could make it more difficult for shareholders to affect certain corporate actions. These provisions could also have the effect of delaying or preventing a change in control of the Company. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could -25- adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. VOLATILITY OF STOCK PRICE The trading price of the Company's Common Stock could be subject to significant fluctuations in response to announcements of results of research activities, collaborative agreements, technological innovations, or new commercial products by the Company, collaborative partners or competitors, changes in government regulations, regulatory actions, changes in patent laws, developments concerning proprietary rights, quarterly variations in operating results, litigation and other events. The stock market has from time to time experienced significant price and volume fluctuations which have particularly affected the market prices of the stocks of technology companies, and which may be unrelated to the operating performance of particular companies. Further, there has been particular volatility in the market prices of securities of biotechnology and other life sciences companies. -26- ITEM 2. PROPERTIES Affymetrix leases 47,000 square feet in Santa Clara, California for research laboratories and administrative offices under a lease expiring in 2003. The Company has leased an additional 45,000 square feet, beginning in the first half of 1997, in the same business complex of Santa Clara and for the same lease term. The Company leases 20,000 square feet of space for manufacturing operations in Sunnyvale, California under a lease that expires in 2000. The Company has options to renew this lease for two successive three-year terms. The Company also leases 31,000 square feet of research and development space in Sunnyvale, California under a lease that expires in 1999. The Company may need to add to its existing facilities, including manufacturing facilities, over the next few years. ITEM 3. LEGAL PROCEEDINGS On March 3, 1997, Hyseq, Inc. filed a complaint against the Company for infringement of United States patent 5,202,231 and 5,525,464 in United States District Court for the Northern District of California (the San Jose Division). If the outcome of this or any other litigation is unfavorable to the Company, it could have a material adverse effect on the Company's financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market System under the symbol of AFFX. The following table sets forth, for the periods indicated, the low and high bid prices per share for the Company's Common Stock as reported by the Nasdaq National Market. 1996 Low High ---- --- ---- Second Quarter $14.50 $17.88 (beginning June 6, 1996) Third Quarter $ 9.00 $19.00 Fourth Quarter $15.88 $23.50 As of December 31, 1996, there were approximately 290 holders of record of the Company's Common Stock. No dividends have been paid on the Common Stock. The Company currently intends to retain all future earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. -27- ITEM 6. SELECTED FINANCIAL DATA The following selected historical information have been derived from the audited financial statements of the Company. The financial statements as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 are derived from the financial statements which have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Form 10-K. The table should be read in conjunction with Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8. "Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenue: Product........................................... $ 1,389 $ - $ - $ - $ - Contract and grant................................ 10,583 4,625 1,574 1,413 43 -------- -------- -------- -------- ------- Total revenue................................. 11,972 4,625 1,574 1,413 43 -------- -------- -------- -------- ------- Cost and expenses: Cost of product revenue........................... 2,178 - - - - Research and development.......................... 18,762 12,420 9,483 6,566 4,106 General and administrative........................ 7,569 3,833 2,303 577 582 -------- -------- -------- -------- ------- Total cost and expenses....................... 28,509 16,253 11,786 7,143 4,688 -------- -------- -------- -------- ------- Loss from operations................................. (16,537) (11,628) (10,212) (5,730) (4,645) Interest income (expense), net....................... 4,310 881 532 138 (15) -------- -------- -------- -------- ------- Net loss............................................. $(12,227) $(10,747) $ (9,680) $ (5,592) $(4,660) -------- -------- -------- -------- ------- -------- -------- -------- -------- ------- Pro forma net loss per share......................... $ (0.61) $ (0.61) $ (0.55) $ (0.52) Shares used in computing pro forma net loss per share (1).................................... 20,131 17,664 17,653 10,715 BALANCE SHEET DATA: Cash, cash equivalents, and short-term investments... $108,982 $ 38,883 $ 17,805 $ 20,392 $ 94 Working capital...................................... 107,668 36,070 15,677 17,452 (320) Total assets......................................... 118,860 44,552 19,861 22,817 813 Long-term obligations................................ 741 948 7,135 - 564 Accumulated deficit.................................. (44,743) (32,516) (21,769) (12,089) (6,497) Total shareholders' equity (net capital deficiency).. 112,493 38,519 9,170 19,214 (181)
(1) See Note 2 of Notes to Financial Statements for an explanation of the determination of the number of shares used in computing pro forma net loss per share. -28- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operation contains forward-looking statements, such as financial projections, information and expectations about the Company's products and markets, which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements, as a result of certain factors, including those set forth under the heading "Additional Risk Factors" and elsewhere in this Form 10-K. OVERVIEW Affymetrix is focused on developing GeneChip based systems and related applications and technologies for the acquisition, analysis and management of complex genetic information. The business and operations of Affymetrix were commenced in 1991 by Affymax and were initially conducted within Affymax. In March 1992, Affymetrix was incorporated as a California corporation and became a wholly-owned subsidiary of Affymax. Beginning in September 1993, Affymetrix issued equity securities which diluted Affymax' shareholding in Affymetrix. In March 1995, Glaxo purchased Affymax, including its then 65% interest in Affymetrix. Glaxo owned approximately 46% of Affymetrix at December 31, 1995. Glaxo's ownership of Affymetrix at December 31, 1996 was approximately 33%. Through March 31, 1996, Affymetrix was in the development stage. In April 1996, Affymetrix commenced commercial sales of the GeneChip system and an HIV probe array for research use. Therefore Affymetrix is no longer considered to be in the development stage. Affymetrix has a limited operating history that, to date, has focused primarily on the development of its technology. Based on its GeneChip technology platform, Affymetrix is developing a portfolio of products for academic research centers, pharmaceutical and biotechnology companies and reference laboratories. As of December 31, 1996, Affymetrix had placed 19 of its GeneChip systems with customers for validation, initial testing and certain research applications. The Company commercially introduced its first product, the research use only GeneChip system and the HIV probe array, in April 1996. Payments received for certain systems prior to April 1996 were recorded as contract revenues pursuant to development agreements. Failure of the Company to successfully develop, manufacture and market additional products or to realize product revenues would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has incurred operating losses in each year since its inception, including net losses of approximately $12.2 million during the year ended December 31, 1996 and, as of such date, had an accumulated deficit of approximately $44.7 million. The Company's losses have resulted principally from costs incurred in research and development and from general and administrative costs associated with the Company's operations. These costs have exceeded the Company's interest income and revenues which to date have been generated principally from collaborative research and development agreements and government research grants. The Company expects to incur substantial additional operating losses over the next several years as a result of increases in its expenses for research and product development, general and administrative, manufacturing and marketing capabilities. The Company's quarterly operating results will depend upon the volume and timing of orders for GeneChip systems and probe arrays received and delivered during the quarter, variations in payments under collaborative agreements, including milestones, royalties, license fees, and other contract revenues, and the timing of new product introductions by the Company. The Company's quarterly operating results may also fluctuate significantly depending on other factors, including the introduction of new products by the Company's competitors; regulatory actions; market acceptance of the GeneChip system and other potential products; adoption of new technologies; manufacturing capabilities; variations in gross margins of the Company's products; competition; the cost, quality and availability of reagents and components; the mix of products sold; changes in government funding; and third-party reimbursement policies. Affymetrix may have to discount the price of the GeneChip system to gain market acceptance, which could adversely affect gross margins. The Company's future gross margins, if any, will be dependent on, among other factors, the Company's ability to cost-effectively manufacture the GeneChip system, product mix and the degree of price discounts required to market its products to academic research centers, pharmaceutical companies and -29- reference laboratories. The amount of future operating losses and time required by the Company to reach profitability are uncertain. The Company's ability to generate significant revenues and become profitable is dependent in large part on the ability of the Company to enter into additional collaborative arrangements and on the ability of the Company and its collaborative partners to successfully commercialize products incorporating the Company's technologies. In addition, delays in receipt of any necessary regulatory approvals by the Company or its collaborators, or receipt of approvals by competitors, could adversely affect the successful commercialization of the Company's technologies. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 PRODUCT REVENUE. In April 1996, Affymetrix commenced commercial sales of the GeneChip system and an HIV probe array for research use. Product revenue of $1.4 million and costs of product revenue of $2.2 million were recognized in the last nine months of 1996 as a result. CONTRACT AND GRANT REVENUE. Contract and grant revenue increased to $10.6 million for 1996 from $4.6 million for 1995 as a result primarily of its ATP grant, NIH grant and revenue earned from collaborative agreements with GI, HP and bioMerieux. RESEARCH AND DEVELOPMENT. Research and development expenses increased to $18.8 million for 1996 compared to $12.4 million for 1995. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel, costs incurred to further product development and increased purchases of research supplies. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $7.6 million in 1996 compared to $3.8 million for 1995. The increase in general and administrative expenses was attributable primarily to the hiring of additional management personnel and the incurring of legal and other professional fees in connection with the overall scale-up of operations and business development efforts. INTEREST INCOME. Interest income was $4.4 million for 1996 compared to $1.3 million for 1995. The increase resulted from the investment of net proceeds from Affymetrix' private placement of Series B Senior Convertible Preferred Stock in August 1995 and net proceeds from its initial public offering in June 1996. Interest expense decreased to $106,000 for 1996 from $420,000 in 1995 as a result of the conversion of a $6.0 million subordinated convertible promissory note held by Affymax in August 1995. YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 CONTRACT AND GRANT REVENUE. Contract and grant revenue increased to $4.6 million for 1995 from $1.6 million for 1994 primarily as a result of the Company's ATP grant and revenue earned from collaborative agreements with GI and HP. RESEARCH AND DEVELOPMENT. Research and development expenses increased to $12.4 million for 1995 compared to $9.5 million for 1994. The increase in research and development expenses was attributable primarily to the hiring of additional research and development personnel, costs incurred to establish a pilot manufacturing facility, and increased purchases of research supplies. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $3.8 million for 1995 compared to $2.3 million for 1994. The increase in general and administrative expenses was attributable primarily to the hiring of additional management personnel and the incurring of legal and other professional fees in connection with the overall scale-up of operations and business development efforts. INTEREST INCOME. Interest income was $1.3 million for 1995 compared to $575,000 for 1994. The increase resulted from the investment of net proceeds from Affymetrix' private placement of Series B Senior Convertible Preferred Stock in August 1995. Interest expense resulted from lease financing for manufacturing equipment and facilities. -30- LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations primarily through the sale of equity securities, contributions from Affymax, government grants, collaborative agreements, and interest income. Proceeds raised through the sale of equity securities include net proceeds of $85.1 million from its initial public offering in June 1996 and aggregate net proceeds of $53.6 million from private placements in August 1995 and September 1993. Affymetrix' cash and cash equivalents increased by $11.7 million during 1996. Net cash used in operating activities was $11.8 million in 1996 compared to $10.2 million for 1995 and $7.4 million for 1994. The cash used for operations was primarily to fund research and development expenses and manufacturing start-up costs related to the introduction and support of Affymetrix' products. Affymetrix has also received collaborative research and government grant funding totaling $11.0 million, of which $10.6 million has been recognized as contract and grant revenue. Net cash used by the Company in investing activities was $61.6 million in 1996 compared to $26.7 million for 1995 and $1.1 million of cash provided by investing activities in 1994. Capital expenditures totaled $3.5 million for 1996 compared to $2.3 million in 1995 and $1.2 million in 1994. Purchases of available-for-sale securities were $149.4 million, $38.4 million and $3.0 million for 1996, 1995 and 1994, respectively. Proceeds from sales and maturities of available-for-sale securities were $91.3 million, $14.0 million and $5.3 million for 1996, 1995 and 1994, respectively. Net cash provided by financing activities was $85.0 million in 1996 compared to $32.7 million and $6.5 million in 1995 and 1994, respectively. These cash flows from financing activities are primarily the result of public and private placements of securities, contributions from Affymax and equipment lease financing. As of December 31, 1996, Affymetrix had cash, cash equivalents, and short-term investments of approximately $109.0 million. The Company anticipates that these existing capital resources will enable it to maintain currently planned operations through at least 1999. However, this expectation is based on the Company's current operating plan, which could change and the Company could require additional funding sooner than anticipated. In addition, the Company may choose to raise additional capital due to market conditions or strategic considerations even if it continues to have sufficient funds for its operating plan. The Company's requirements for additional capital will be substantial and will depend on many factors, including payments received under existing and possible collaborative agreements; the availability of government research grant payments; the progress of the Company's collaborative and independent research and development projects; the costs of preclinical and clinical trials for the Company's products; the prosecution, defense and enforcement of patent claims and other intellectual property rights; and the development of manufacturing, sales and marketing capabilities. The Company has no credit facility or other committed sources of capital. To the extent capital resources, including payments from existing and possible future collaborative agreements and grants, together with the net proceeds of the offering are insufficient to meet future capital requirements, the Company will have to raise additional funds to continue the development of its technologies. There can be no assurance that such funds will be available on favorable terms, or at all. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in dilution to the Company's shareholders. If adequate funds are not available, the Company may be required to curtail operations significantly or to obtain funds through entering into collaborative agreements on unattractive terms. The Company's inability to raise capital would have a material adverse effect on the Company's business, financial condition and results of operations. Affymetrix expects its capital requirements to increase over the next several years as it expands its facilities and acquires scientific equipment to support manufacturing and research and development efforts. The Company's expenditure requirements will depend on numerous factors, including the progress of its research and development programs; the development of commercial scale manufacturing capabilities; its ability to maintain existing collaborative arrangements and establish and maintain new collaborative arrangements; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the effectiveness of product commercialization activities and arrangements and other factors. -31- As of December 31, 1996, Affymetrix has net operating loss carryforwards for income tax purposes of approximately $31.0 million which will expire at various dates beginning in 2008 through 2011, if not utilized. Because Affymetrix has experienced ownership changes, future utilization of these carryforwards may be subject to certain limitations as defined by Internal Revenue Code and similar state regulations. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce income tax liabilities. -32- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS - ----------------------------- PAGE NO. AFFYMETRIX, INC. Report of Ernst & Young LLP, Independent Auditors ........................ 34 Balance Sheets............................................................ 35 Statements of Operations.................................................. 36 Statement of Shareholders' Equity......................................... 37 Statements of Cash Flows.................................................. 38 Notes to Financial Statements............................................. 39 SUPPLEMENTARY DATA - ------------------ All schedules are omitted because they are not required or the required information is included in the financial statements or notes thereto. -33- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS To the Board of Directors and Shareholders Affymetrix, Inc. We have audited the accompanying balance sheets of Affymetrix, Inc. at December 31, 1996 and 1995, and the related statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Affymetrix, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP Palo Alto, California, January 23, 1997 -34- AFFYMETRIX, INC. BALANCE SHEETS (In thousands, except share amounts) ASSETS December 31, ------------------- 1996 1995 --------- -------- Current assets: Cash and cash equivalents.............................. $ 14,143 $ 2,481 Short-term investments................................. 94,839 36,402 Accounts receivable.................................... 1,888 1,342 Inventories............................................ 1,901 670 Other current assets................................... 523 260 --------- -------- Total current assets................................. 113,294 41,155 Property and equipment Equipment and furniture.............................. 7,307 4,254 Leasehold improvements............................... 946 586 --------- -------- 8,253 4,840 Less accumulated depreciation and amortization....... (2,856) (1,583) --------- -------- Net property and equipment............................. 5,397 3,257 Other assets............................................. 169 140 --------- -------- $ 118,860 $ 44,552 --------- -------- --------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities............... $ 5,023 $ 2,469 Payable to Affymax..................................... - 89 Deferred revenue....................................... 396 2,340 Current portion of capital lease obligation............ 207 187 --------- -------- Total current liabilities............................ 5,626 5,085 Noncurrent portion of capital lease obligation........... 741 948 Commitments and contingencies Shareholders' equity: Convertible Preferred Stock, no par value; 27,500,000 shares authorized; none and 23,166,666 shares issued and outstanding at December 31, 1996 and 1995, respectively......................................... - 70,439 Common stock, no par value; 50,000,000 shares authorized; 22,535,203 and 536,267 shares issued and outstanding at December 31, 1996 and 1995, respectively............. 158,687 2,717 Note receivable from officer........................... (40) (42) Unrealized gain on available-for-sale securities....... 49 281 Deferred compensation.................................. (1,460) (2,360) Accumulated deficit.................................... (44,743) (32,516) --------- -------- Total shareholders' equity........................... 112,493 38,519 --------- -------- $ 118,860 $ 44,552 --------- -------- --------- -------- See Accompanying Notes -35- AFFYMETRIX, INC. STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended December 31, ------------------------------ 1996 1995 1994 -------- -------- -------- REVENUE: Product........................................................... $ 1,389 $ - $ - Contract and grant................................................ 10,583 4,625 1,574 -------- -------- -------- Total revenue................................................... 11,972 4,625 1,574 -------- -------- -------- COSTS AND EXPENSES: Cost of product revenue........................................... 2,178 - - Research and development.......................................... 18,762 12,420 9,483 General and administrative........................................ 7,569 3,833 2,303 -------- -------- -------- Total costs and expenses (includes related-party expense of $1,422, $1,432 and $1,647, respectively)...................... 28,509 16,253 11,786 -------- -------- -------- Loss from operations............................................ (16,537) (11,628) (10,212) Interest income................................................. 4,416 1,301 575 Interest expense (includes related-party expense of $320 in 1995)......................................................... (106) (420) (43) -------- -------- -------- Net loss........................................................ $(12,227) $(10,747) $ (9,680) -------- -------- -------- -------- -------- -------- Historical net loss per share................................... $ (0.82) -------- -------- Shares used in computing historical net loss per share.......... 14,834 -------- -------- Pro forma net loss per share.................................... $ (0.61) $ (0.61) $ (0.55) -------- -------- -------- -------- -------- -------- Shares used in computing pro forma net loss per share........... 20,131 17,664 17,653 -------- -------- -------- -------- -------- --------
See Accompanying Notes -36- AFFYMETRIX, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share amounts)
CONVERTIBLE NOTES PREFERRED COMMON RECEIVABLE UNREALIZED DEFERRED STOCK STOCK FROM OFFICER GAIN/(LOSS) COMPENSATION ------------- ------------- ------------- ------------- ------------- Balance, December 31, 1993...................... $ 31,283 $ 100 $ (80) $ - $ - Issuance of 74,200 shares of Common Stock upon exercise of stock options.............. - 22 - - - Interest accrued on notes receivable from officers.................................... - - (4) - - Unrealized loss on available-for-sale securities.................................. - - - (382) - Net loss...................................... - - - - - ------------- ------------- ------------- ------------- ------------- Balance, December 31, 1994...................... 31,283 122 (84) (382) - ------------- ------------- ------------- ------------- ------------- Issuance of 7,333,333 shares of Series B Senior Convertible Preferred Stock for cash, net of issuance costs................ 32,836 - - - - Conversion of note payable to Affymax into 1,333,333 shares of Series B Senior Convertible Preferred Stock................. 6,000 - - - - Issuance of 62,749 shares of Common Stock for cash upon exercise of stock options..... - 23 - - - Issuance of 65,320 shares of Common Stock for financing commissions................... - 44 - - - Issuance of warrants to Affymax for 202,441 shares of Series 2 Subordinated Convertible Preferred Stock in lieu of interest......... 320 - - - - Interest received on notes receivable from officer..................................... - - 2 - - Reclassification of notes receivable from officers to other assets.................... - - 40 - - Compensation from accelerated options......... - 40 - - - Deferred compensation related to grant of stock options............................... - 2,488 - - (2,488) Amortization of deferred compensation......... - - - - 128 Unrealized gain on available -for-sale securities.................................. - - - 663 - Net loss...................................... - - - - - ------------- ------------- ------------- ------------- ------------- Balance, December 31, 1995...................... 70,439 2,717 (42) 281 (2,360) ------------- ------------- ------------- ------------- ------------- Issuance of 215,945 shares of Common Stock exercise of stock options................... - 127 - - - Conversion of 23,166,166 shares of Preferred Stock to 15,629,991 shares of Common Stock................................ (70,119) 70,119 - - - Conversion of warrants to purchase 202,441 shares of Series 2 Subordinated Convertible Preferred Stock to warrants to purchase 134,961 shares of Common Stock.............. (320) 320 - - - Issuance of 6,153,000 shares of Common Stock, net of issuance costs and commissions....... - 85,069 - - - Interest received on notes receivable from officer..................................... - - 2 - - Deferred compensation related to grant of stock options............................... - 335 - - (335) Amortization of deferred compensation......... - - - - 1,235 Unrealized loss on available-for-sale securities.................................. - - - (232) - Net loss...................................... - - - - - ------------- ------------- ------------- ------------- ------------- Balance, December 31, 1996...................... $ - $ 158,687 $ (40) $ 49 $ (1,460) ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
TOTAL ACCUMULATED SHAREHOLDERS' DEFICIT EQUITY ------------- ------------- Balance, December 31, 1993...................... $ (12,089) $ 19,214 Issuance of 74,200 shares of Common Stock upon exercise of stock options.............. - 22 Interest accrued on notes receivable from officers.................................... - (4) Unrealized loss on available-for-sale securities.................................. - (382) Net loss...................................... (9,680) (9,680) ------------- ------------- Balance, December 31, 1994...................... (21,769) 9,170 ------------- ------------- Issuance of 7,333,333 shares of Series B Senior Convertible Preferred Stock for cash, net of issuance costs................ - 32,836 Conversion of note payable to Affymax into 1,333,333 shares of Series B Senior Convertible Preferred Stock................. - 6,000 Issuance of 62,749 shares of Common Stock for cash upon exercise of stock options..... - 23 Issuance of 65,320 shares of Common Stock for financing commissions................... - 44 Issuance of warrants to Affymax for 202,441 shares of Series 2 Subordinated Convertible Preferred Stock in lieu of interest......... - 320 Interest received on notes receivable from officer..................................... - 2 Reclassification of notes receivable from officers to other assets.................... - 40 Compensation from accelerated options......... - 40 Deferred compensation related to grant of stock options............................... - - Amortization of deferred compensation......... - 128 Unrealized gain on available -for-sale securities.................................. - 663 Net loss...................................... (10,747) (10,747) ------------- ------------- Balance, December 31, 1995...................... (32,516) 38,519 ------------- ------------- Issuance of 215,945 shares of Common Stock exercise of stock options................... - 127 Conversion of 23,166,166 shares of Preferred Stock to 15,629,991 shares of Common Stock................................ - - Conversion of warrants to purchase 202,441 shares of Series 2 Subordinated Convertible Preferred Stock to warrants to purchase 134,961 shares of Common Stock.............. - - Issuance of 6,153,000 shares of Common Stock, net of issuance costs and commissions....... - 85,069 Interest received on notes receivable from officer..................................... - 2 Deferred compensation related to grant of stock options............................... - - Amortization of deferred compensation......... - 1,235 Unrealized loss on available-for-sale securities.................................. - (232) Net loss...................................... (12,227) (12,227) ------------- ------------- Balance, December 31, 1996...................... $ (44,743) $ 112,493 ------------- ------------- ------------- ------------- See Accompanying Notes -37- AFFYMETRIX, INC. STATEMENTS OF CASH FLOWS (In thousands)
Year ended December 31, ------------------------------- 1996 1995 1994 ---------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss......................................................... $ (12,227) $(10,747) $ (9,680) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................. 1,286 701 689 Amortization of deferred compensation......................... 1,235 128 - Other......................................................... (518) 357 565 Changes in operating assets and liabilities: Accounts receivable......................................... (546) (1,252) (90) Inventories................................................. (1,231) (670) - Other assets................................................ (292) (252) 560 Accounts payable and other accrued liabilities.............. 945 1,263 295 Accrued warranty............................................ 1,609 160 - Payable to Affymax.......................................... (89) (165) (1,320) Deferred revenue............................................ (1,944) 253 1,627 ---------- -------- -------- Net cash used in operating activities..................... (11,772) (10,224) (7,354) ---------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures............................................. (3,488) (2,283) (1,207) Proceeds from sale of available-for-sale securities.............. 48,417 8,538 5,308 Proceeds from maturities of available-for-sale securities........ 42,859 5,485 - Purchases of available-for-sale securities....................... (149,363) (38,428) (2,990) ---------- -------- -------- Net cash provided by(used in) investing activities........ (61,575) (26,688) 1,111 ---------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuances of Common Stock, net................................... 85,196 23 22 Issuances of Preferred Stock, net................................ - 32,880 - Proceeds from capital lease obligation........................... - - 1,307 Principal payments on capital lease obligation................... (187) (169) (3) Issuance of convertible note payable to Affymax.................. - - 6,000 Principal payments on notes payable.............................. - - (819) ---------- -------- -------- Net cash provided by financing activities................. 85,009 32,734 6,507 ---------- -------- -------- Net increase (decrease) in cash and cash equivalents...... 11,662 (4,178) 264 Cash and cash equivalents at beginning of year..................... 2,481 6,659 6,395 ---------- -------- -------- Cash and cash equivalents at end of year........................... $ 14,143 $ 2,481 $ 6,659 ---------- -------- -------- ---------- -------- -------- SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Conversion of note payable and contributions from Affymax to Preferred Stock.............................................. $ - $ 6,000 $ - ---------- -------- -------- ---------- -------- -------- Assets purchased under capital lease obligation.................. $ - $ - $ 1,297 ---------- -------- -------- ---------- -------- --------
See Accompanying Notes -38- NOTE 1 - NATURE OF OPERATIONS Affymetrix, Inc. ("Affymetrix" or the "Company") is focused on developing GeneChip-TM- based products and related technology for the acquisition, analysis, and management of complex genetic data. The business and operations of Affymetrix commenced in 1991 by Affymax N.V. and subsidiaries ("Affymax") and were initially conducted within Affymax. In March 1992, Affymetrix was incorporated as a California corporation and became a wholly owned subsidiary of Affymax. Beginning in September 1993, Affymetrix issued equity securities which diluted Affymax' shareholding in Affymetrix. In March 1995, Glaxo plc, now Glaxo Wellcome plc ("Glaxo"), purchased Affymax, including its then 65% interest in Affymetrix. Affymax owned approximately 46% of Affymetrix on December 31, 1995. Glaxo owns approximately 33% of Affymetrix at December 31, 1996. Through March 31, 1996, the Company was in the development stage. In April 1996, the Company commenced commercial sales of the GeneChip system and an HIV probe array for research use. Therefore the Company is no longer considered to be in the development stage. Affymetrix' success will depend on timely development and market acceptance of new products, the impact of competitive products and technological change, the impact of intellectual property, limited manufacturing capability and sole source providers, and dependence on collaborative partners. The factors that could affect the performance of the Company are more fully described elsewhere in this document. Actual results could differ materially from those anticipated in any forward-looking statements, and Affymetrix does not undertake any obligation to publicly release the result of any revisions to the forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of any unanticipated events. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies is presented to assist the reader in understanding and evaluating the financial statements. These policies are in conformity with generally accepted accounting policies. Certain amounts for prior years have been reclassified to conform to current year presentation. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. REVENUE RECOGNITION Contract and grant revenue is recorded as earned as defined within the specific agreements. Payments received in advance under these arrangements are recorded as deferred revenue until earned. Direct costs associated with these contracts and grants are reported as research and development expense. Revenue for product shipment during the development stage are recorded as contract revenue pursuant to the development agreements. The Company recognizes product revenue from the sale of its products upon shipment to its customers. Reserves are provided for anticipated product returns and warranty expenses at the time of shipment. Revenue from customers representing 10% or more of total contract and grant revenue during fiscal 1996, 1995 and 1994 is as follows: 1996 1995 1994 ------- ------- ------- CUSTOMER: A 18% 25% - B 18% 23% - C 15% 22% - D 19% 17% 54% E - - 29% -39- Product sales were approximately $1.4 million in the year ended December 31, 1996 and none for the years ended December 31, 1995 and 1994. RESEARCH AND DEVELOPMENT Research and development expenses consist of costs incurred for internal, contract and grant-sponsored research and development. These costs include direct and research-related overhead expenses. NET LOSS PER SHARE Except as noted below, historical net loss per share is computed using the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation as their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common and common equivalent shares (stock options, convertible notes payable, Convertible Preferred Stock, and warrants) issued during the 12 months prior to the initial filing of the proposed offering at prices below the assumed public offering price have been included in the calculation as if they were outstanding for all periods presented (using the treasury stock method for stock options and warrants and the if-converted method for Convertible Preferred Stock). Historical net loss per share information for the years ended December 31, 1996, 1995 and 1994 is summarized as follows: 1996 1995 1994 ---------- --------- --------- Net loss per share..................... $(0.82) $(1.38) $(1.24) Shares used in computing net loss per share................................ 14,834,000 7,812,000 7,801,000 Pro forma per share data is provided to show the calculation on a consistent basis for the periods presented. It has been computed as described above and also gives retroactive effect from the date of issuance to the conversion of Preferred Stock which automatically converted to common shares upon the closing of the Company's initial public offering. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents and short-term investments consist of debt securities. Management determines the appropriate classification of debt securities at the time of purchase. As of December 31, 1996, Affymetrix' debt securities are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in shareholders' equity. Affymetrix reports all liquid securities with maturities at date of purchase of three months or less that are readily convertible into cash and have insignificant interest rate risk as cash equivalents. All other available-for-sale securities are recorded as short-term investments. The cost of debt securities is adjusted for amortization of premiums and discounts to maturity. This amortization is included in interest income. Realized gains and losses on available-for-sale securities are included in interest income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. The fair values of securities are based on quoted market prices. INVENTORIES Inventories are stated at the lower of cost, as determined by the first-in, first-out method, or market and consist of $358,000 of raw materials, $178,000 of work in progress and $1.4 million of finished goods at December 31, 1996 and entirely of finished goods at December 31, 1995. -40- PROPERTY AND EQUIPMENT The costs of property and equipment, including equipment under capital leases, are depreciated for financial reporting purposes using the straight-line method over the estimated useful lives of the assets ranging from two to five years. Leasehold improvements are amortized over the useful lives of the assets or the lease-term, whichever is shorter. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities as of December 31, 1996 and 1995, consist of the following (in thousands): 1996 1995 -------- -------- Accounts payable................................. $ 1,284 $ 928 Accrued compensation and related................. 445 576 Accrued warranty................................. 1,769 160 Collaborative research refund.................... 450 360 Other............................................ 1,075 445 -------- ------- Total................................... $ 5,023 $ 2,469 -------- ------- -------- ------- STOCK BASED COMPENSATION In October 1995, the Financial Accounting Standards Board issued "Accounting for Stock-Based Compensation" ("Statement No. 123") which is effective for fiscal 1996. Under Statement No. 123, stock-based compensation expense is measured using either the intrinsic-value method as prescribed in APB Opinion No. 25 or the fair value method described in Statement No. 123. Affymetrix has adopted the disclosure only alternative under Statement No. 123 and, accordingly, Affymetrix has disclosed the pro forma net income or loss and per share amounts in the notes to the financial statements using the fair value based method. CONCENTRATIONS OF RISK Cash equivalents and investments are financial instruments which potentially subject Affymetrix to concentrations of risk to the extent of amounts recorded in the Balance Sheet. Corporate policy restricts the amount of credit exposure to any one issuer and to any one type of investment, other than securities issued by the United States Government. NOTE 3 - COLLABORATIVE AGREEMENTS AND GRANTS The Company has agreements with several entities to develop and test probe arrays for the detection of certain gene sequences, mutations or organisms. Under such agreements, the Company is typically paid a development fee and may receive milestone payments upon achievement of certain technical goals. The Company also has research agreements with several universities and research organizations. The Company generally obtains rights to intellectual property arising from these agreements. If a project is successful, the Company and the third-party collaborator would negotiate the right to commercialize products resulting from such project. The Company has received a substantial portion of its revenues since inception from its collaborative partners and intends to enter into collaborative arrangements with other companies to apply its technology, fund development, commercialize potential future products, and assist in obtaining regulatory approval. Total costs incurred under contract and grant arrangements for the years ended December 31, 1996, 1995 and 1994 were approximately $8.8 million, $5.2 million and $1.5 million, respectively, and are included in research and development expenses. In November 1996, Incyte Pharmaceuticals, Inc. ("Incyte") and Affymetrix entered into a joint program to develop and commercialize novel and disease-specific gene expression databases and services. This agreement is an -41- expansion of a feasibility agreement initiated in April 1996. Under the terms of the agreement, novel and disease-specific genes will be selected from Incyte's LifeSeq-TM- genomic databases to generate DNA probe arrays using the Affymetrix GeneChip system. The resulting LifeChip products will allow the generation of information on the preselected genes across biological specimens to identify molecules and expression patterns associated with human disease. Initially, chips derived from LifeSeq information will be designed for use in such fields as prostate and breast cancer, inflammation, and G-protein coupled receptor pathways. Affymetrix and Incyte will share all profits and co-own the intellectual property generated under the collaboration. In October 1996, bioMerieux Vitek, Inc. ("bioMerieux") and Affymetrix executed a collaboration agreement to develop DNA probe arrays using the Affymetrix GeneChip technology for clinical diagnostic kits for bacterial identification and antibiotic resistance analysis. The agreement provides for certain research funding, license and milestone payments. bioMerieux will also fund certain research activities at Affymetrix for a minimum of three years. Additionally, a manufacturing agreement was signed under which Affymetrix will manufacture GeneChip probe arrays for sale to bioMerieux. The agreement provides for royalties to Affymetrix on bioMerieux' sales of GeneChip probe arrays. In September 1996, OncorMed, Inc. ("OncorMed") and Affymetrix entered into an agreement to collaborate in the development and clinical validation of genetic testing services using the Affymetrix GeneChip system for analysis of genes associated with cancer. The collaborative effort will begin with the p53 gene and may include genes involved with breast, colon, ovarian and other cancers. Affymetrix began its collaboration with Genetics Institute ("GI") in November 1994 to develop and apply new technologies for understanding the functions of human genes. Under this agreement, GI funded Affymetrix' research to determine the feasibility of this application of GeneChip technology and agreed to make milestone and royalty payments. Under certain circumstances, Affymetrix may pay royalty payments to GI. As a result of entering into similar agreements for gene expression with third parties, Affymetrix is required to refund a portion of the development funding received from GI. In December 1995, Affymetrix and GI expanded their relationship by entering into a supply agreement in the field of genomics under which Affymetrix will manufacture and supply additional custom probe arrays based on specific genes identified and selected by GI. Unlike the 1994 agreement with GI, this agreement does not provide research funding to Affymetrix. Pursuant to the agreement, GI is obligated to purchase and Affymetrix is obligated to supply certain minimum quantities of custom probe arrays developed for GI until the later of 2001 or four years after development of specified probe arrays. Affymetrix will receive fees for the design and delivery of the custom probe arrays, and may receive milestone payments and royalties on therapeutic compounds if developed by GI using these probe arrays. GI has exclusive rights to specific probe arrays supplied by Affymetrix. In August 1995, Affymetrix received a three-year grant from the National Institutes of Health ("NIH") National Center for Human Genome Research for approximately $6.0 million. The Company has been awarded approximately $4.0 million for the first two years of the grant, and the remaining amounts are subject to yearly appropriations by the NIH. In November 1994, the Company entered into a collaborative agreement with Hewlett-Packard Company ("HP") to combine the Company's GeneChip technology and HP's measurement and instrument capabilities to develop and manufacture a more advanced scanner for use with GeneChip probe arrays. In exchange for certain rights, Affymetrix received and would receive certain payments, including milestone payments, as defined research and development objectives are achieved. The Company expects that HP will be the sole source for its scanners. Accordingly, if the HP scanner does not become available on a timely basis or fails to meet its performance and cost specifications, it would have a material adverse effect on the Company's business. -42- In November 1994, Affymetrix received a license payment from HP of $1.2 million that was classified as deferred revenue at December 31, 1995. Due to the expiration of certain restrictions, this amount was recognized as grant revenue in November 1996. In October 1994, Affymetrix and Molecular Dynamics, Inc. ("Molecular Dynamics") were awarded a five-year matching grant for a total of $31.5 million under the Advanced Technology Program within the National Institute of Standards and Technology to develop a miniaturized DNA diagnostic device, of which approximately $10.7 million will be available to Molecular Dynamics. The contract provides that Affymetrix will receive matching funding up to $20.8 million, some of which will be used to fund activities at collaborating academic institutions. The award is subject to yearly congressional authorization, which is uncertain. Affymetrix expects to receive payments monthly based on costs incurred and has received $2.9 million of funding to date. NOTE 4 - AVAILABLE-FOR-SALE SECURITIES The following is a summary of available-for-sale securities as of December 31, 1996 (in thousands):
Gross Unrealized Gross Unrealized Estimated Fair Cost Gains Losses Value --------- ---------------- ---------------- -------------- U.S. Government obligations $ 88,758 $ 134 $ 86 $ 88,806 U.S. Corporate securities 17,017 9 8 17,018 --------- ------ ----- --------- Total securities $ 105,775 $ 143 $ 94 $ 105,824 --------- ------ ----- --------- --------- ------ ----- --------- Amounts included in: cash equivalents $ 10,985 $ - $ - $ 10,985 short-term investments 94,790 143 94 94,839 --------- ------ ----- --------- Total securities $ 105,775 $ 143 $ 94 $ 105,824 --------- ------ ----- --------- --------- ------ ----- ---------
The following is a summary of available-for-sale securities as of December 31, 1995 (in thousands):
Gross Unrealized Gross Unrealized Estimated Fair Cost Gains Losses Value --------- ---------------- ---------------- -------------- U.S. Government obligations $ 38,115 $ 309 $ 27 $ 38,397 --------- ------ ----- --------- --------- ------ ----- --------- Amounts included in: cash equivalents $ 1,995 $ - $ - $ 1,995 short-term investments 36,120 309 27 36,402 --------- ------ ----- --------- Total securities $ 38,115 $ 309 $ 27 $ 38,397 --------- ------ ----- --------- --------- ------ ----- ---------
The realized gains and losses on sales of available-for-sale securities were immaterial for the years ended December 31, 1996 and 1995. -43- The following is a summary of the contractual maturity of available-for-sale securities at December 31, 1996 (in thousands): Estimated Fair Value -------------- Mature in one year or less $ 59,544 Mature after one year through three years 46,280 -------------- Total $ 105,824 -------------- -------------- NOTE 5 - RELATED PARTY TRANSACTIONS In December 1994, Affymetrix issued a $6.0 million subordinated convertible promissory note to Affymax. In August of 1995, the note was converted into 1,333,333 shares of Series B Senior Convertible Preferred Stock issued at $4.50 per share. Affymetrix also exercised an option to satisfy interest due on the note through July 1995, amounting to $319,856, by issuing Affymax five-year warrants to purchase 202,441 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per share. In connection with the Company's initial public offering, the Preferred Stock converted to 888,888 shares of Common Stock and the warrants converted to warrants to purchase 134,960 shares of Common Stock at $8.25 per share. Affymetrix and Affymax are parties to a technology license agreement whereby Affymetrix retains an exclusive worldwide royalty-free license from Affymax to certain technology and to certain future inventions in diagnostics and research supply markets. Two directors of Affymetrix are each employees of a subsidiary of Glaxo. Affymetrix received legal services from Townsend and Townsend and Crew LLP ("Townsend") related to the intellectual property rights of Affymetrix. A partner of Townsend was also an employee of Affymetrix on a part time basis. The employee is now a full-time employee of the Company. Legal expenses related to services performed by Townsend are approximately $793,000 in 1996, $612,000 in 1995 and $369,000 in 1994. In December 1994, in connection with a lease agreement between Affymetrix and a third party, Affymax, with approval of the third party lessor, agreed to release Affymetrix of certain financial covenants to the third party. In exchange for this release, Affymetrix issued a five-year warrant to Affymax to purchase 103,382 shares of Series 2 Subordinated Convertible Preferred Stock at $5.50 per share. In connection with the Company's initial public offering, the warrant was converted to a warrant to buy 68,921 shares of Common Stock at $8.25 per share. NOTE 6 - COMMITMENTS CAPITAL LEASES In December 1994, Affymetrix entered into a financing arrangement with a leasing company for existing equipment. Under the terms of the lease, Affymetrix received a single minimum aggregate lease payment of $1.3 million at the inception of the lease. The leaseback contract includes a five-year term expiring January 2, 2000, with an option to purchase the equipment at the greater of the residual value or fair market value. Under certain provisions, the lease may be extended for an additional year. The amount included in property and equipment related to the lease is $1.2 million with accumulated depreciation of $1.2 million and $818,000 at December 31, 1996 and December 31, 1995, respectively. Amortization of this property and equipment is included in depreciation expense. OPERATING LEASES Since January 1, 1993, Affymetrix has been occupying a research facility in Santa Clara, California originally leased to Affymax. In February 1994, Affymetrix entered into an operating sublease agreement with Affymax for a 33 month period. Amounts expensed under this agreement are approximately $534,000 in 1996, $529,000 in 1995 -44- and $472,000 in 1994. In May 1996, Affymetrix canceled the sublease with Affymax and is directly leasing the facility from a third party. In December 1994, Affymetrix entered into a five-year lease for the rental of a manufacturing facility in Sunnyvale, California. Affymetrix has options to renew the lease for two additional three-year terms. In October 1995, Affymetrix entered into a four-year lease, and a 17 month sublease, for the rental of a research and development facility in Sunnyvale, California. Rent expense related to operating leases was approximately $950,000 in 1996, $664,000 in 1995 and $472,000 in 1994. Future minimum lease obligation at December 31, 1996 under all leases are as follows (in thousands): Capital Operating Leases Leases --------- --------- 1997....................................................... $ 292 $ 1,543 1998....................................................... 292 1,706 1999....................................................... 291 1,816 2000....................................................... 280 1,292 2001....................................................... - 1,228 Thereafter................................................. - 2,047 --------- --------- Total minimum lease payments............................... 1,155 $ 9,632 --------- --------- Less amount representing interest.......................... (207) --------- Present value of minimum lease payments.................... 948 Less current portion....................................... (207) --------- Noncurrent obligation under capital lease.................. $ 741 --------- --------- NOTE 7 - SHAREHOLDERS' EQUITY PREFERRED SHARES In March 1996, the Board authorized the filing of a registration statement with the Securities and Exchange Commission permitting Affymetrix to sell shares of its Common Stock to the public. Also, the Board of Directors approved a two-for-three reverse stock split of its Common Stock through an amendment to its Articles of Incorporation which was effective on May 20, 1996. As a result, all of the then outstanding Preferred Stock automatically converted into 15,629,991 shares of Common Stock at the completion of the offering in June 1996. All common share and per share amounts have been retroactively adjusted to reflect this event. The conversion rates for the various issues of Preferred Stock have been retroactively adjusted to reflect the reverse stock split as well as an anti-dilution adjustment, where required. Each share of Series A, Series B and Series 1 Preferred Stock converted into approximately 0.6823, 0.6667, and 0.6775 shares of Common Stock, respectively, at the completion of the offering. COMMON SHARES The Company's initial public offering on June 6, 1996 generated net proceeds of approximately $83.0 million from the sale of 6,000,000 shares of Common Stock. In July 1996, the Company's underwriters purchased 153,000 shares of Common Stock pursuant to the over-allotment option, for additional net proceeds of $2.1 million. Total number of shares reserved for future issuance is 3,500,000 shares. -45- STOCK WARRANTS At December 31, 1996, there were outstanding warrants to purchase 203,881 shares of Common Stock at $8.25 per share which expire at various dates beginning December 1999 through July 2000. STOCK OPTION AND BENEFIT PLANS In 1993, the Board adopted the Affymetrix 1993 Stock Plan (the "Stock Plan") under which incentive stock options, nonqualified stock options and purchase rights may be granted to employees and outside consultants. Options granted under the Stock Plan expire no later than ten years from the date of grant. The option price shall be at least 100% of the fair value on the date of grant (110% in certain circumstances), as determined by the Board of Directors. Options may be granted with different vesting terms from time to time but not to exceed five years from the date of grant. As of December 31, 1996, a total of 3,700,000 million shares of Common Stock have been reserved for issuance under the Stock Plan and 106,400 shares were subject to repurchase by the Company. In March 1996, the Board adopted the 1996 Nonemployee Directors Stock Option Plan (the "Directors Plan"). There are 300,000 shares of Common Stock reserved for issuance under the Directors Plan. Only nonemployee directors of the Company are eligible to participate in the Directors Plan and only nonstatutory stock options can be granted. Activity under the stock plans through December 31, 1996 are as follows: Outstanding options -------------------------- Weighted Number of Average Price shares per share --------- ------------- Balance at December 31, 1993.................. 380,749 $ 0.30 Options granted.................................... 634,238 0.52 Options exercised.................................. (74,200) 0.30 Options canceled................................... (38,799) 0.30 --------- ------------- Balance at December 31, 1994.................. 901,988 0.47 Options granted.................................... 1,423,917 0.68 Options exercised.................................. (62,749) 0.36 Options canceled................................... (104,032) 0.43 --------- ------------- Balance at December 31, 1995.................. 2,159,124 0.60 Options granted.................................... 309,167 10.26 Options exercised.................................. (215,945) 0.59 Options canceled................................... (20,403) 0.75 --------- ------------- Balance at December 31, 1996.................. 2,231,943 $ 0.60 --------- ------------- --------- ------------- For options granted through June 6, 1996, Affymetrix recognized an aggregate of $2.8 million as deferred compensation for the excess of the deemed fair value for financial statement presentation purposes of the Common Stock issuable on exercise of such options over the exercise price. The deferred compensation expense is being recognized over the vesting period of the options. -46- Exercise prices for options outstanding as of December 31, 1996 ranged from $0.30 to $21.56 per share. The weighted-average contractual life of those options is 8.42 years as summarized below:
Options Outstanding Options Exercisable ----------------------------------------------- ------------------------- Weighted- Weighted- Weighted- Average Remaining Average Average Range of Contractual Life Exercise Price Exercise Price Exercise Prices Number (in years) Per Share Number Per Share - --------------- --------- ----------------- -------------- ------- -------------- $ 0.30 - 0.675 2,009,193 8.42 $ 0.609 471,113 $ 0.570 4.80 - 12.000 52,250 9.30 5.144 3,600 4.800 2.625 - 21.563 170,500 8.14 16.196 - - - --------------- --------- ----------------- -------------- ------- -------------- $ 0.30 - 21.563 2,231,943 8.42 $ 1.935 474,713 $ 0.602 - --------------- --------- ----------------- -------------- ------- -------------- - --------------- --------- ----------------- -------------- ------- --------------
PRO FORMA DISCLOSURE UNDER STATEMENT NO. 123 In accordance with the provisions of Statement No. 123, the Company is disclosing pro forma information regarding net loss and net loss per share as if the Company had accounted for its stock based compensation plans under the fair value method of Statement No. 123. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for 1996 and 1995: risk free interest rate of 6.36%; a dividend yield of zero; volatility factors of the expected market price of the Company's Common Stock price of .53; and a weighted average expected option term of one year from vested date. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The weighted average fair value of options granted during 1996 and 1995 was $4.72 and $0.30, respectively. For purposes of pro forma disclosures the estimated fair value of the options in excess of the expense recognized in conjunction with the amortization of deferred compensation is amortized to expense over the options' vesting period, generally five years. The pro forma effect on net loss is not necessarily indicative of potential pro forma effects on results for future years. The Company's pro forma information as of December 31, 1996 and 1995 is as follows (in thousand excepts per share amounts): 1996 1995 --------- --------- Pro forma net loss $ (12,345) $ (10,747) --------- --------- --------- --------- Pro forma net loss per share $ (0.62) $ (0.61) --------- --------- --------- --------- NOTE 8 - INCOME TAXES As of December 31, 1996, Affymetrix has net operating loss carryforwards of approximately $31.0 million, which will expire at various dates beginning on 2008 through 2011, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses and credits before utilization. -47- Significant components of Affymetrix deferred tax assets as of December 31, 1996 and 1995 are as follows (in thousands): 1996 1995 --------- --------- Net operating loss carryforwards......... $ 10,705 $ 8,063 Research credits......................... 1,457 1,167 Deferred revenue......................... 126 1,041 Other-net................................ 2,425 532 --------- --------- Total deferred tax assets................ 14,713 10,803 Valuation allowance for deferred tax assets................................. (14,713) (10,803) --------- --------- Net deferred tax assets.................. $ - $ - --------- --------- --------- --------- The valuation allowance increased by $3.9 million, $4.9 million and $3.7 million during 1996, 1995, and 1994, respectively. NOTE 9 - CONTINGENCIES The Company routinely receives communications from third parties asserting patent or other rights covering its products and technologies. Based upon the Company's evaluation, it may take no action or it may seek to obtain a license. There can be no assurance in any given case that a license will be available on terms the Company considers reasonable, or that litigation will not ensue. NOTE 10 - EVENTS SUBSEQUENT TO BALANCE SHEET DATE (UNAUDITED) In February 1997, Affymetrix and Affymax, as well as certain Affymax and Glaxo affiliates, entered into a revised technology agreement. Under the terms of the agreement, the Affymax entities assigned all rights in their light directed synthesis technology patents to Affymetrix and canceled their prior agreements relating to technology licensing and Affymetrix relinquished its licenses to certain technologies including encoded synthetic libraries. In February 1997, Affymetrix and HP announced the availability of HP's GeneArray scanner as a part of the Affymetrix GeneChip system. Affymetrix and HP also redefined their 1994 business alliance. Under the terms of the revised agreement, Affymetrix has re-acquired all marketing rights for its GeneChip products and has expanded its right to sell the HP GeneArray scanner as part of the Affymetrix GeneChip system to all potential markets. In March 1997, Hyseq Inc. ("Hyseq") filed a suit against Affymetrix in the United States District Court alleging that Affymetrix infringes United States patent 5,202,231 and 5,525,464 issued to Drs. Drmanac and Crkvenjakov. In the opinion of management, the outcome of the action will not have a material adverse effect on the Company's financial position. -48- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference to the sections of the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders entitled "Election of Directors." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the sections of the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders entitled "Executive Compensation," "Compensation Committee Report on Executive Compensation," "Compensation Committee Interlocks and Insider Participation," and "Compensation of Directors." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the section of the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders entitled "Ownership of Principal Shareholders and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the section of the Company's definitive proxy statement for the 1997 Annual Meeting of Shareholders entitled "Certain Transactions." -49- PART IV EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Index to Financial Statements set forth in response to Item 8. (a)(2) The schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Financial Statements or notes thereto. (a)(3) Exhibits: Exhibit Number Description of Document - --------- ----------------------- (1) 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Form of Amended and Restated Articles, to be effective upon closing of the Registrant's initial public offering (1) 3.3 Bylaws (1) 3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation (1)10.1 1993 Stock Plan, as amended (1)10.2 1996 Nonemployee Directors Stock Option Plan *(1)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 *(1)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 *(1)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 *(1)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 (1)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 (1)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993 *(1)10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated January 12, 1995 pursuant to the National Institute of Standards and Technology's Advanced Technology Program. (1)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996 *(1)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995 (1)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993 (1)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994 (1)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995 (1)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995 (1)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994 *(1)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995 (1)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993 (1)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994 (1)10.20 Form of Director and Officer Indemnification Agreement *(1)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996 (1)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994 (2)10.23 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway, Santa Clara, CA) (2)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA) *10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *10.26 Manufacturing Agreement between bioMerieux Viteck, Inc. and Affymetrix, Inc. effective as of September 1, 1996 -50- Exhibit Number Description of Document - ------- ----------------------- 10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of November 11, 1996 11.1 Statement of computation of net loss per share 23.1 Consent of Ernst & Young LLP, independent auditors 24.1 Power of Attorney (included on page 52) 27.0 Financial Data Schedule __________ (1) Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended (2) Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 * Confidential treatment requested (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fiscal quarter ended December 31, 1996 -51- SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. AFFYMETRIX, INC. (Registrant) March 26, 1997 By /s/ Stephen P.A. Fodor, Ph.D. ---------------------------------------------------- Stephen P.A. Fodor, Ph.D. Chief Executive Officer and Director March 26, 1997 By /s/ Kenneth J. Nussbacher ---------------------------------------------------- Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen P.A. Fodor, Ph.D. and Kenneth J. Nussbacher, or either of them, each with the power of substitution, his attorney-in-fact, to sign any amendments to this Form 10-K (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 26, 1997 By /s/ Stephen P.A. Fodor, Ph.D. ---------------------------------------------------- Stephen P.A. Fodor, Ph.D. Chief Executive Officer and Director (Principal Executive Officer) March 26, 1997 By /s/ Kenneth J. Nussbacher ---------------------------------------------------- Kenneth J. Nussbacher Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) March 26, 1997 By /s/ John D. Diekman, Ph.D. ---------------------------------------------------- John D. Diekman, Ph.D. Chairman of the Board March 26, 1997 By /s/ Paul Berg, Ph.D. ---------------------------------------------------- Paul Berg, Ph.D. Director March 26, 1997 By /s/ Douglas M. Hurt ---------------------------------------------------- Douglas M. Hurt Director March 26, 1997 By /s/ Vernon R. Loucks, Jr. ---------------------------------------------------- Vernon R. Loucks, Jr. Director March 26, 1997 By /s/ Barry C. Ross, Ph.D. ---------------------------------------------------- Barry C. Ross, Ph.D. Director -52- March 26, 1997 By /s/ David B. Singer ---------------------------------------------------- David B. Singer Director March 26, 1997 By /s/ Lubert Stryer, M.D. ---------------------------------------------------- Lubert Stryer, M.D. Director March 26, 1997 By /s/ John A. Young ---------------------------------------------------- John A. Young Director March 26, 1997 By /s/ Alejandro C. Zaffaroni, Ph.D. ---------------------------------------------------- Alejandro C. Zaffaroni Ph.D Director -53- INDEX TO EXHIBITS Exhibit Number Description of Document - --------- ----------------------- (1) 3.1 Amended and Restated Articles of Incorporation (1) 3.2 Form of Amended and Restated Articles, to be effective upon closing of the Registrant's initial public offering (1) 3.3 Bylaws (1) 3.4 Form of Certificate of Amendment of Amended and Restated Articles of Incorporation (1)10.1 1993 Stock Plan, as amended (1)10.2 1996 Nonemployee Directors Stock Option Plan *(1)10.3 Collaboration Agreement by and between Hewlett-Packard Company and Affymetrix, Inc. dated November 11, 1994 *(1)10.4 Development and Supply Agreement between Affymetrix, Inc. and Genetics Institute, Inc. dated November 15, 1994 *(1)10.5 Supply Agreement with Genetics Institute, Inc. dated December 8, 1995 *(1)10.6 Technology License Agreement among Affymax N.V., Affymax Technologies, N.V., the Affymax Research Institute, and Affymetrix, Inc. dated January 1, 1993 (1)10.7 Severance Agreement and Release between Affymetrix, Inc. and David B. Singer dated June 15, 1995 (1)10.8 Loan and Pledge Agreement between David B. Singer and Affymetrix, Inc. effective December 7, 1993 *(1)10.9 ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. dated January 12, 1995 pursuant to the National Institute of Standards and Technology's Advanced Technology Program. (1)10.10 Amendment 1 to the ATP Participation Agreement between Affymetrix, Inc. and Molecular Dynamics, Inc. effective January 13, 1996 *(1)10.11 Governance Agreement between Affymetrix, Inc. and Glaxo Wellcome plc dated July 6, 1995 (1)10.12 Services Agreement between Affymax Research Institute and Affymetrix, Inc. effective October 1, 1993 (1)10.13 Loan Agreement between Affymax Technologies N.V. and Affymetrix, Inc. dated December 1, 1994 (1)10.14 Lease between Solar Oakmead Joint Venture and Affymetrix, Inc. dated October 20, 1995 (1)10.15 Sublease between Salutar, Inc. and Affymetrix, Inc. dated October 20, 1995 (1)10.16 Sublease between Affymax Research Institute and Affymetrix, Inc. dated February 1, 1994 *(1)10.17 Manufacturing and Supply Agreement between Affymetrix, Inc. and RELA, Inc. dated November 27, 1995 (1)10.18 Loan and Pledge Agreement between Stephen P.A. Fodor and Affymetrix, Inc. effective December 7, 1993 (1)10.19 Agreement between Stephen P.A. Fodor and Affymetrix, Inc. dated November 1, 1994 (1)10.20 Form of Director and Officer Indemnification Agreement *(1)10.21 Demonstration Agreement between Affymetrix, Inc. and Glaxo Wellcome, Inc. dated May 1, 1996 (1)10.22 Lease between Harry Locklin and Affymetrix, Inc. dated December 5, 1994 (2)10.23 Fourth Amendment to Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3380 Central Expressway, Santa Clara, CA) (2)10.24 Lease between Sobrato Interest and Affymetrix, Inc. dated May 31, 1996 (3450 Central Expressway, Santa Clara, CA) *10.25 Collaboration Agreement between bioMerieux Vitek, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *10.26 Manufacturing Agreement between bioMerieux Viteck, Inc. and Affymetrix, Inc. effective as of September 1, 1996 *10.27 Collaboration Agreement between Incyte Pharmaceuticals, Inc. and Affymetrix, Inc. made as of November 11, 1996 11.1 Statement of computation of net loss per share 23.1 Consent of Ernst & Young LLP, independent auditors 24.1 Power of Attorney (included on page 52) 27.0 Financial data schedule __________ (1) Incorporated by reference to the same number exhibit filed with Registrant's Registration Statement on Form S-1 (File No. 333-3648), as amended (2) Incorporated by reference to the same number exhibit filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 * Confidential treatment requested EX-10.25 2 EXHIBIT 10.25 [ * ] Confidential Treatment Requested by Affymetrix, Inc. - -------------------------------------------------------------------------------- COLLABORATION AGREEMENT between BIOMERIEUX VITEK, INC. and AFFYMETRIX, INC. - -------------------------------------------------------------------------------- [ * ] Confidential Treatment Requested by Affymetrix, Inc. COLLABORATION AGREEMENT AGREEMENT effective as of September 1, 1996 (the "Effective Date") between AFFYMETRIX, INC., a California corporation having its principal place of business at 3380 Central Expressway, Santa Clara, California 95051 (hereinafter referred to as "AFFX") and BIOMERIEUX VITEK, INC., a Missouri corporation, having its principal place of business at 595 Anglum Drive, Hazelwood, Missouri 63042-2395 (hereinafter referred to as "BMX"). INTRODUCTION BMX plans to develop DNA probe-based diagnostic systems for a wide variety of indications, including, but not limited to, microbiology, [ * ], and genetic screening. The systems will make use of disposable reagent kits which incorporate DNA probe arrays. BMX intends that this system ultimately be self- contained and fully automated including sample preparation, amplification, detection, data analysis and reporting of results. However, BMX may initially offer a system which is not self-contained or fully automated in order to achieve early product launch. BMX desires to use AFFX Licensed Core Technology, as defined below, for detection and identification of bacterial and fungal micro-organisms and certain viral agents and for determination of the susceptibility of those micro-organisms and agents to treatment, for use in Clinical Diagnosis in the Licensed Field, as defined below, with such additional options for the [ * ] and [ * ] fields as are provided herein. AFFX has research and development facilities and experienced scientists, engineers, technical associates and assistants and other personnel and has rights to and has developed certain AFFX Licensed Core Technology that can be applied to clinical diagnostics and related areas. BMX has research and development facilities and experienced scientists, engineers, technical associates and assistants and other personnel which enable it to conduct research and development activities in clinical diagnostics and related areas defined in this Agreement. AFFX has agreed to manufacture DNA Probe Arrays pursuant to a Manufacturing Agreement of even date herewith. Accordingly, AFFX and BMX desire to enter into a collaboration, and, in consideration of the mutual covenants and promises contained in this Agreement and other good and valuable consideration, AFFX and BMX agree as follows: -2- ARTICLE I. DEFINITIONS As used in this Agreement, the following terms, whether used in the singular or plural, shall have the following meanings: 1.1 "Affiliate" of a Party means at any time any corporation or other active business entity which controls, is controlled by or is under common control with a Party. For purposes of this Section 1.1, "control" shall mean direct or indirect ownership of at least 50% of the voting interest or income interest in a corporation or entity, or such other relationship as, in fact, constitutes actual control. As of the Effective Date, AFFX represents that it has no Affiliates actively engaged in business, and BMX represents that the Affiliates of BMX actively engaged in business are listed in Schedule 6 hereto. 1.2 "AFFX Collaboration Technology" shall mean all Collaboration Technology developed solely by AFFX employees and/or consultants. 1.3 "AFFX Licensed Core Technology" means Know-how and Copyrights of AFFX developed during or before the Collaboration, together with any improvements and related developments which do not constitute Collaboration Technology which are reasonably useful or necessary or required to develop, use, manufacture, maintain, incorporate in disposable reagent kits, read and interpret diagnostic results obtained through use of, DNA Probe Arrays developed in the Collaboration or based on specifications derived from prototypes so developed, and which AFFX has the right to legally license hereunder (subject to any third party royalty commitments), and the patents listed as owned by, -3- licensed to or otherwise available to AFFX that are set forth on Schedule 2 attached hereto and made a part hereof as well as all continuations in whole or in part, divisions, reissues, reexaminations, and foreign counterparts thereof, and any improvements thereof licensable hereunder before June 1, 2002 and which do not constitute Collaboration Technology. AFFX will not unreasonably delay filing to avoid capture by this Agreement. The foregoing shall include technology licensed by AFFX from third parties for which AFFX has the right to make the grants herein, subject to reimbursement by inclusion in Fully Loaded Manufacturing Cost of any out-of-pocket cost of AFFX. In addition, AFFX Licensed Core Technology shall include such improvements and developments to be made available pursuant to Section 2.4 hereof. 1.4 "Agreed Budget" and "Agreed Workplan" mean, respectively, the budget and Workplan for each Contract Year during the Collaboration for collaborative research to be conducted at AFFX under this Agreement, as reviewed and approved by the Committee pursuant to Section 2.5. The initial Agreed Budget and Agreed Workplan are set forth in Schedule 1, to this Agreement. 1.5 "Bacteriology Field" means the field of only (i) detection and/or identification of bacterial and fungal microorganisms, and (ii) the determination of antibiotic resistance of such bacterial and fungal microorganisms, both for use in the Clinical Diagnosis of human disease. 1.6 "BMX Collaboration Technology" shall mean Collaboration Technology developed solely by BMX employees and/or consultants. -4- 1.7 "Clinical Diagnosis" means a process in which a sample of fluid or other material collected from humans is used to aid in diagnosis of one or more human diseases for communication to such persons or their physicians or other caregivers for clinical decisions and other clinical uses in connection with such humans. 1.8 "Collaboration" means the research and development program jointly conceived, planned, organized, controlled and performed by AFFX and BMX pursuant to this Agreement. 1.9 "Collaboration Technology" means the Patents, Know-how and Copyrights developed by the Parties pursuant to the Collaboration. Such technology shall include and be limited to all technology developed by AFFX pursuant to Agreed Workplans or otherwise with funding from BMX hereunder and all technology developed by BMX relating to the adaptation of AFFX Licensed Core Technology for use in BMX diagnostic instrumentation and systems as the same exist or may be developed. Such technology does not include the AFFX Licensed Core Technology as it exists or may be developed outside of the Collaboration, and does not include the BMX instrumentation and system as it exists or may be developed, nor the BMX patents and applications referred to in Section 12.2(c). 1.10 "Confidential Information" means all information and materials, patentable or otherwise, of a Party which is disclosed by or on behalf of such Party to the other Party, including, but not limited to, DNA sequences, vectors, cells substances, formulations, techniques, methodology, equipment, data, reports, know-how, preclinical and clinical trials and the results thereof, sources of supply, patent positioning and business -5- plans, including any negative developments, which do not fall within any of the exceptions set forth in Section 8.2 of this Agreement, whether or not related to the Collaboration. 1.11 "Contract Year" means any year commencing on the Effective Date and ending on a day prior to an anniversary of the Effective Date during the term of this Agreement. 1.12 "Copyrights" means copyrights of a Party (whether solely or jointly owned or licensed to such Party), to the extent the same is licensable hereunder and related to the subject matter of the Collaboration. 1.13 "Development Coordinating Committee" or the "Committee" means the committee defined in Section 2.2 to aid in coordinating the Collaboration. 1.14 "DNA Probe Array" means any DNA probe array (including, as applicable, any RNA probe array) designed for use in Clinical Diagnosis in the Licensed Field. 1.15 "Full-Time Equivalent" or "FTE" means the equivalent of a full-time technical employee's work time over a 12-month period (including normal vacations and holidays); the portion of a Full-Time Equivalent year devoted by a technical employee to the Collaboration shall be determined by dividing the number of days during any 12-month period devoted by such employee to the Collaboration by the total number of working days during the 12-month period (including in each case an appropriate portion of normal vacations and holidays). As used in this Section 1.15, a "technical employee" shall include any scientist, engineer, technical associate or assistant and/or other personnel (whether an employee or consultant) assigned to the Collaboration. -6- [ * ] Confidential Treatment Requested by Affymetrix, Inc. 1.16 "Fully Loaded Manufacturing Cost" means (a) costs [ * ] including but not limited to, [ * ] on account of the manufacture of the Licensed DNA Probe Arrays to the extent that [ * ] plus [ * ] being determined in accordance with United States generally accepted cost accounting practices, and shall additionally include amounts [ * ] if the Parties so elect. 1.17 "High Density Probe Array" means (i) a DNA Probe Array having a Probe density of equal to or greater than [ * ] Probes per square centimeter (Probes/cm(2)), or (ii) a DNA Probe Array having such lesser number of Probes/cm(2), such Probe Array the subject of an applicable Valid Patent Claim included in the AFFX Licensed Core Technology issued to AFFX for the United States, by the European Patent Office of the European Union or for Japan, or (iii) a DNA Probe Array having fewer -7- Probes/cm(2) than included in (i) or (ii) above based on or derived from a Licensed DNA Probe Array or on prototypes thereof developed in connection with the Collaboration wherein the Probes are selected making substantial and material use of information derived from use of DNA Probe Arrays supplied to BMX by AFFX hereunder or pursuant to the Manufacturing Agreement, which use requires and is pursuant to the license granted hereby. 1.18 "Joint Collaboration Technology" means the Collaboration Technology which is jointly developed by employees and/or consultants of AFFX and BMX. 1.19 "Know-How" means unpatented information, patentable or otherwise, of a Party (whether solely or jointly owned or licensed to such Party) in which such Party has any proprietary rights recognized under applicable trade secret or other law, to the extent the same is licensable hereunder and related to the subject matter of the Collaboration. 1.20 "Licensed Diagnostic Assay" means a disposable diagnostic assay or reagent kit for use in Clinical Diagnosis, which assay or kit incorporates a Licensed DNA Probe Array supplied by AFFX to BMX pursuant to the Manufacturing Agreement or permissibly manufactured by BMX in accordance with Section 3.5 of the Manufacturing Agreement. 1.21 "Licensed Diagnostic Product" means (i) a Licensed Diagnostic Assay or (ii) any Other Licensed Diagnostic Product. 1.22 "Licensed DNA Probe Array" means any High Density DNA Probe Array developed in the Collaboration, or based on specifications derived from prototypes so developed, in all cases the manufacture, use, sale or importation of which is subject to -8- [ * ] Confidential Treatment Requested by Affymetrix, Inc. the AFFX Licensed Core Technology or AFFX Collaboration Technology licensed to BMX hereunder. 1.23 "Licensed Field" means the field which encompasses only (i) the Bacteriology Field and (ii) the field of detection, identification and/or determination of resistance to treatment of four viral agents commonly included in bacteriology testing, to be elected by BMX in accordance with Section 4.5, for use only in Clinical Diagnosis. [ * ] Research product applications are specifically excluded from the Licensed Field. 1.24 "Major Market Country" shall have the meaning set forth in Section 5.7(c)(i). 1.25 "Manufacturing Agreement" means the Manufacturing Agreement entered into by the Parties concurrently herewith, as the same may be modified, amended or supplemented from time to time. 1.26 "Net Sales" means, with respect to any Licensed Diagnostic Assays for a given period, the aggregate of [ * ]. No -9- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] except as permitted pursuant to clauses (a), (b), (c) and (d) of the foregoing sentence. Net Sales shall not include any transfer between BMX and any of its Affiliates for resale. In the event that BMX or any of its Affiliates shall make any transfer of Licensed Diagnostic Assays to third parties for other than monetary value in whole or in part, such transfer shall be considered a sale hereunder for accounting and royalty purposes. Net Sales for any such transfers shall be determined on a country-by-country basis and shall be the [ * ] -10- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] Notwithstanding the foregoing, no transfer of Licensed Diagnostic Assays for test or developmental purposes or as samples shall be considered a part of Net Sales unless such transfer is for monetary value. 1.27 "Other Licensed Diagnostic Product" means any instrument, reader, software, peripheral equipment or other product(s), excluding Licensed Diagnostic Assays and DNA Probe Arrays, used in connection therewith in the Licensed Field in connection with Licensed Diagnostic Assays to permit, facilitate or otherwise effect interpretation or diagnosis, or otherwise to carry out related operations or maintenance, which incorporates or is otherwise subject to AFFX Licensed Core Technology or AFFX Collaboration Technology licensed to BMX hereunder. 1.28 "Party" means AFFX or BMX; "Parties" means AFFX and BMX. 1.29 "Patents" or "Patent Rights" means patents and patent applications of a Party (whether solely or jointly owned or licensed to such Party), to the extent the same is licensable hereunder and subject to any applicable limitations. 1.30 "Probes" means oligonucleotides selected for use in the DNA Probe Arrays. 1.31 "Project Director" means either of the senior scientists for the Collaboration designated from time to time by AFFX or BMX. 1.32 "Related Funded Activities" are as defined in Section 3.3 of this Agreement. -11- 1.33 "Valid Patent Claim" means a claim of an unexpired Patent which shall not have been withdrawn, canceled or disclaimed, nor held invalid or unenforceable by a court of competent jurisdiction in an unappealed or unappealable decision, or the claim of a Patent application which claims priority to a date not more five (5) years earlier. 1.34 "Workplan" means any plan for collaborative research to be conducted under this Agreement, as provided in Section 2.5. Initial Workplans are set forth in Schedule 1 to this Agreement. ARTICLE II. THE COLLABORATION 2.1 PURPOSE. The purpose of the Collaboration shall be to collaborate on the further development and application of AFFX's existing AFFX Licensed Core Technology for use in and/or with Licensed Diagnostic Assays in the Licensed Field and otherwise as provided herein. The initial focus of the Collaboration shall be to develop Licensed DNA Probe Arrays for use in Licensed Diagnostic Assays in conjunction with the Other Licensed Diagnostic Products which read and interpret such assays, for use in the Licensed Field. BMX shall contribute its expertise in the general area of clinical diagnostics and its significant resources to adapt and apply AFFX Licensed Core Technology and Collaboration Technology and diligently develop the Licensed Diagnostic Assays for the Licensed Field. The Collaboration and its purpose may be extended pursuant to the options provided in Section 5.3, subject to the terms thereof. 2.2 COMMITTEE. The parties will form the Development Coordinating Committee (the "Committee") to aid in coordinating -12- their joint collaborative effort to adopt and develop AFFX Licensed Core Technology for use in diagnostic systems of BMX for use in Clinical Diagnostics in the Licensed Field. BMX will propose specific products for development in accordance with the terms of this Agreement. The Committee will have general responsibility for directing the research effort of the Collaboration and monitoring the work done and costs incurred pursuant to the Collaboration for such products. The Committee shall be composed of such representatives of AFFX and BMX as each shall respectively appoint, and each Party by its representative(s) shall cast one vote on the Committee. A quorum shall consist of at least one Committee representative from each Party. The Committee shall act only with the concurring votes of both Parties. A Party's representatives shall serve at the discretion of such Party and may be substituted for or replaced at any time by such Party. The Committee shall meet at least quarterly per Contract Year during the term of the Collaboration. The site of such meetings shall alternate between the offices of AFFX and BMX, or be arranged by video conference (or any other site mutually agreed upon by the Parties). The proceedings of all meetings of the Committee shall be summarized in writing and sent to both Parties. 2.3 FACILITIES. The Collaboration shall be conducted at and/or coordinated from the facilities of each Party under the supervision and direction of its Project Director. Each Party shall be responsible for the administrative management and fiscal control of the activities for the Collaboration conducted from its facilities. -13- 2.4 COMMITMENT. The development portion of the Collaboration will entail an initial commitment of each party of not less than three (3) years. Following completion of the initial commitment, AFFX will continue to collaborate, at the expense of BMX in accordance with the annual Agreed Budgets and Workplans (and otherwise in accordance with the Manufacturing Agreement) in the ongoing efforts of BMX to develop and place on the market Licensed Diagnostic Assays and such Other Licensed Diagnostic Products as may be required for their use. In this connection, and pursuant to the Manufacturing Agreement as applicable AFFX shall use reasonable efforts, on a timely basis, to advise BMX of such improvements and developments included in AFFX Licensed Core Technology and to make the same available to the Collaboration and for inclusion in Licensed Diagnostic Products, and further shall use reasonable efforts to obtain for BMX, in the event it becomes necessary for BMX to assume any responsibilities for manufacture, the right to use any third-party intellectual property necessary for such manufacture to the extent and on the same terms as the same is available to AFFX. The Parties recognize that in certain cases third parties may decline to allow such extension of rights, in which case the Parties will consult so as to obtain a reasonable solution. 2.5 AGREED BUDGETS AND WORKPLAN. In consultation with AFFX representatives, BMX representatives will prepare, for each Contract Year, Workplans for work to be done at BMX and AFFX facilities in pursuit of the collaboration and will prepare for such period a budget for work to be done at AFFX ("Budget"). Such annual Workplans and Budget shall be submitted to the -14- Committee sufficiently in advance to allow adequate discussion and comment and shall be approved by the Committee at least three (3) months prior to the commencement of the Contract Year to which they pertain. All Workplans including the work to be performed at BMX facilities shall be subject to review by the Committee; and the Workplan and Budget relating to work at AFFX shall be subject to written approval by the Committee (the "Agreed Budget" and "Agreed Workplan"). The Agreed Budget and Agreed Workplan for the first Contract Year and the Workplan for work to be done at BMX for the first Contract Year are annexed hereto as Schedule 1. Within a given Contract Year, all material changes to the Agreed Budget and Agreed Workplan and the Workplan for work to be done at AFFX shall require the written consent of both Parties, which consent shall not be unreasonably withheld. The Parties acknowledge that it may be necessary to make changes to Workplans during the course of the Collaboration and will consider in good faith any changes required for technical reasons or to avoid waste or unnecessary expenditures. 2.6 REPORTS. AFFX and BMX shall each provide the Committee and the other Party with written progress reports summarizing the technical progress of the Collaboration on a quarterly basis within thirty (30) days after the end of each consecutive three (3) month period during each Contract Year so long as the Collaboration continues. AFFX shall similarly keep the Committee and BMX informed of all improvements and developments of the AFFX Licensed Core Technology that may be relevant to the Collaboration; provided, however, that AFFX shall not be obligated to report any manufacturing technology to BMX under -15- [ * ] Confidential Treatment Requested by Affymetrix, Inc. this provision. Each Party shall also provide the Committee and the other Party with additional oral progress reports as requested from time to time by the Committee or the other Party. The Parties will further report on a mutual basis to track know-how ownership and use, determine whether and when know-how may have entered the public domain, determine ownership of Collaboration Technology and resolve similar matters of mutual concern. 2.7 STAFFING. Each Party shall, as soon as practicable, assemble a team of scientists, engineers, technical associates, consultants, and/or assistants and shall designate a Project Director of its own to manage its activities in the Collaboration, including its implementation of applicable Workplans. (a) AFFX shall initially make available a minimum of [ * ] Full-Time Equivalent ("FTE") scientific staff, whether employees or consultants, to the Collaboration, and in consultation with the Committee AFFX shall use good faith efforts to make available such additional scientific staff, services and facilities as the Agreed Budget and Agreed Workplan currently in effect may require, subject to reimbursement at the FTE funding level set forth in Section 3.1 and subject further to reasonable recognition of the other plans, obligations and programs of AFFX to the extent implementation of such plans, obligations and programs is reasonably consistent with the burdens and obligations of AFFX hereunder. BMX shall use all reasonable efforts to avoid requests for additional staff or reductions in staff that cause irregular fluctuations of Collaboration staff at -16- AFFX. BMX shall give twelve (12) months notice of any reduction in AFFX staffing for the Collaboration. To the extent that such twelve (12)-month notice is not given, BMX shall pay at the pre-notice FTE support level for the time equal to the difference between the notice period and twelve (12) months. AFFX shall not be obligated to assign any staff to the Collaboration that are not being funded in accordance with the Agreed Budget. (b) BMX will carry out a collaborative effort to adapt and develop its diagnostic technology and systems for use with AFFX Licensed Core Technology in the Licensed Field. BMX may, with reasonable advance notice and with the approval of the Committee, arrange that members of its own scientific staff work directly with AFFX employees at AFFX facilities and request AFFX to assign additional qualified staff to the Collaboration, all at BMX expense. The Parties expect that at least one BMX employee will be stationed at AFFX for such efforts. The Parties recognize that such individuals may be required to execute an adequately protective confidentiality agreement in such connection, which agreement shall otherwise be in a form reasonably acceptable to the parties and shall include restrictions on communication by such BMX employee of appropriate information to BMX. 2.8 INSPECTION. BMX shall have the right to arrange for its employees and consultants involved in the Collaboration, and other designated employees as it deems appropriate, to visit AFFX's facilities at BMX's expense to make all appropriate inquiries and inspections with respect to the Collaboration, including verification of compliance with applicable provisions -17- of Article 2 and Section 3.5, and to discuss the implementation of any applicable Workplan in detail with AFFX's technical personnel. BMX may also request that certain employees and consultants of AFFX travel to BMX facilities at BMX expense in order to assist BMX in such inquiries and inspections within Agreed Budgets, and AFFX, in its reasonable discretion, shall endeavor to accommodate such requests. AFFX shall have an independent right, at its expense, to arrange for its employees and consultants involved in the Collaboration to visit BMX's facilities and discuss AFFX concerns including any applicable Workplan and implementation thereof with BMX's technical personnel. All such visits by either Party to the facilities of the other shall be on mutually convenient dates and during mutually convenient business hours and shall not unreasonably interrupt the operations of the other Party, provided, however, that such other Party shall use reasonable efforts to accommodate such visits. 2.9 PATENT ASSIGNMENT AND CONFIDENTIALITY AGREEMENTS. Each Party shall require each of its employees and consultants assigned to the Collaboration to execute an agreement for the assignment of inventions and for the protection of Confidential Information in such reasonable form as may from time to time be used by such Party and approved by the other Party. 2.10 RESOLUTION OF IMPASSE. In the event that the Committee is unable to reach a decision by unanimous action with respect to any matter and such inability continues for a period of forty-five (45) days after the date on which the matter is first submitted to the Committee, each Party shall refer the matter to -18- [ * ] Confidential Treatment Requested by Affymetrix, Inc. the chief operating or executive officers of AFFX and BMX for resolution. Each Party shall set forth in writing a proposed solution to the impasse and, if a compromise solution is not achieved within fifteen (15) days after the date on which the matter is referred to the chief operating or executive officers, either Party may request that the more suitable of the two proposed solutions as finally submitted by the Parties be determined and adopted (without alteration) pursuant to arbitration as provided in Section 14.1. Any such arbitration shall be on an expedited basis. The Parties shall use reasonable efforts to maintain the Collaboration pending conclusion of the arbitration and the arbitrators may direct by interim award or otherwise how applicable time periods of the Collaboration and of this Agreement may be adjusted to permit protection of the rights of the Parties hereunder. ARTICLE III. FUNDING 3.1 COLLABORATION FUNDING. BMX shall fund the research work at AFFX pursuant to the Agreed Budget and Agreed Workplan on an annual basis at a level of not less than [ * ] FTEs at AFFX's facility for a period of not less that [ * ] years. BMX may request that AFFX assign additional qualified staff to the Collaboration, and AFFX shall endeavor to meet such requests, subject to reasonable notice and increased funding to cover added FTEs. BMX shall fund the technical support development efforts at AFFX at an initial rate equal to [ * ] per budgeted FTE per Contract Year in accordance with the Agreed Budget and Agreed Workplan. BMX may request that such -19- [ * ] Confidential Treatment Requested by Affymetrix, Inc. FTE support be based on fractional time of individuals at AFFX. The Parties recognize that BMX's FTE support requirements at AFFX will vary, and that from year to year BMX's budgeted support may vary by [ * ] BMX shall increase its funding at the foregoing rate to meet any additional requirements of an Agreed Budget and Agreed Workplan in excess of [ * ]. The yearly budgeted amount shall be paid to AFFX in equal monthly installments, the first such installment being payable upon execution of this Agreement and the remaining installments being payable on the first day of each month during each Contract Year thereafter. AFFX shall devote such FTE resources as are required to perform its respective tasks in the Agreed Workplan, up to the AFFX FTE resources as in the Agreed Budget, subject to further assignment by the Committee in the event of over allocation of resources. After the first two (2) years of the Collaboration and annually thereafter, the rate of funding per FTE shall be adjusted, as necessary, to reflect the actual FTE cost to AFFX. AFFX will obtain concurrence from its independent auditors as to any such change in costs, if required by BMX. Additional resources shall be allocated, subject to reasonable notice, as necessary to accommodate Agreed Workplans, at the expense of BMX. BMX shall also fund at its sole expense its own FTEs and all development efforts at BMX facilities in furtherance of the Collaboration. 3.2 DIRECT EXPENSES AND CAPITAL FUNDING FOR EQUIPMENT. BMX shall reimburse AFFX for any project specific direct expenses (such as manufacture of Additional DNA Probe Arrays, except to the extent otherwise provided under Section 4.2 herein) and any -20- [ * ] Confidential Treatment Requested by Affymetrix, Inc. capital equipment required originally for the Collaboration (costing over $10,000) as authorized by the Committee, provided that such expenses have not otherwise been or will not otherwise be reimbursed. For example, AFFX and BMX may mutually agree on direct reimbursement for an item of capital equipment (excluding DNA Probe Array manufacturing assets) to be used in the development phase or may decide to load such costs into the cost per Licensed DNA Probe Array, but not both. If BMX and AFFX agree to reimburse such equipment through loaded costs of the DNA Probe Arrays, BMX shall reimburse any unreimbursed costs if use of such equipment is discontinued before recovery of the cost of such equipment provided that such discontinuance is otherwise than for fault of AFFX. In the absence of agreement as to a different mode of reimbursement, such an authorized capital expenditure required for development work shall be directly reimbursed. Capital expenditures and costs related to manufacture shall be paid or financed by AFFX and shall be [ * ] In the event a given capital asset may have utility during both the development and manufacturing phases or may be useful both for purposes of the Collaboration and other activities of AFFX the Parties shall negotiate in good faith the manner in which relevant costs shall be borne and allocated. In the absence of agreement, each Party shall set forth a proposed allocation of the relevant costs between the development and manufacturing phases, and such proposals shall be submitted for arbitration on an expedited basis as provided in Section 14.1. The arbitrator shall select one proposal without alteration, which proposal -21- [ * ] Confidential Treatment Requested by Affymetrix, Inc. shall be adopted by the Parties. Any investment in equipment at BMX facilities shall be borne solely by BMX. 3.3 RELATED ACTIVITIES. Subject to the determination of the Committee that such activities are related to the objectives of the Collaboration, up to twenty-five percent (25%) of each Contract Year's total FTE funding at AFFX shall be allocated by the Committee to fund technology development activities which indirectly support the Collaboration (the "Related Funded Activities"); provided, however, that in no event shall such allocation exceed the funding allocable to one FTE. 3.4 OTHER EXPENDITURES. Except as provided in Sections 3.1 and 3.2 hereof, each Party shall bear its own expenses in connection with the Collaboration. 3.5 MILESTONE PAYMENTS. BMX will pay to AFFX a nonrefundable payment of [ * ] within thirty (30) days of signing this Agreement. Additional payments, totalling [ * ] in the aggregate, shall be paid within thirty (30) days of notice of completion of each of the following milestones, or in the case where BMX is the first Party aware of the completion of the milestone, then thirty (30) days after such completion, which milestones may be met and for which the payment shall become due without regard to any particular order: (a) [ * ] upon completion of [ * ] as determined in accordance with criteria set forth in Schedule 3; -22- [ * ] Confidential Treatment Requested by Affymetrix, Inc. (b) [ * ] upon agreement by the Committee regarding [ * ] Such payment shall in no event be made later than six (6) months after the Effective Date of this Agreement; (c) [ * ] upon achievement of [ * ] Such payment will be made in ten (10) months if [ * ] within three (3) months after the Effective Date; (d) [ * ] upon [ * ] (e) [ * ] upon the [ * ] (f) [ * ] upon -23- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] whichever is first; (g) [ * ] upon receipt of [ * ] and (h) [ * ] upon receipt of [ * ] Any late payments of amounts due hereunder shall bear interest at the rate of [ * ] percentage points above the prime interest rate quoted by the Bank of America on the unpaid amounts for the period of late payment. ARTICLE IV. DEVELOPMENT OBLIGATIONS -24- [ * ] Confidential Treatment Requested by Affymetrix, Inc. 4.1 GENERAL OBLIGATIONS. BMX shall have responsibility for over-all system planning and development, including, without limitation, instrument development, integrated device development, amplification technology development, DNA Probe Array packaging, regulatory approval and marketing, and shall use commercially reasonable efforts to commercialize products pursuant to this Agreement. In a manner responsive to over-all planning needs, AFFX shall assume primary responsibility for DNA Probe Array manufacturing process development and DNA Probe Array production, and the Parties shall share the tasks of Probe selection, DNA Probe Array design, optimization and assay development. BMX will have primary responsibility for all other aspects of the development. Drawing on the work of this Collaboration and subject to priorities by the Committee, BMX shall be free to develop Specifications for all products within the Licensed Field and to arrange for manufacture, according to the Manufacturing Agreement, of the corresponding Licensed DNA Probe Arrays under the Manufacturing Agreement. 4.2 SUPPLY OF DNA PROBE ARRAYS. During the development phase of the Collaboration and for use by BMX and AFFX in the Collaboration's development efforts, AFFX shall provide, at no additional charge to BMX, [ * ] DNA Probe Arrays per each fully funded AFFX FTE in the first Contract Year, [ * ] DNA Probe Arrays for each fully funded AFFX FTE in the second Contract Year, and [ * ] DNA Probe Arrays for each fully funded AFFX FTE in the third and each subsequent Contract Year, for use in connection with research and development pursuant to the Collaboration. Such DNA Probe Arrays -25- [ * ] Confidential Treatment Requested by Affymetrix, Inc. shall be packed by AFFX for shipment as diced wafers as reasonably directed by BMX and reasonably acceptable to AFFX. During the development phase BMX may purchase additional DNA Probe Arrays ("Additional DNA Probe Arrays") for such use [ * ] and AFFX shall use reasonable efforts to comply with requested schedules for delivery. DNA Probe Arrays and Additional DNA Probe Arrays shall be supplied in batch sizes of not less than one hundred (100) DNA Probe Arrays per order. AFFX shall not be obligated to supply more than [ * ] Additional DNA Probe Arrays [ * ] in any Contract Year, or in the aggregate more than [ * ] Additional DNA Probe Arrays, and any greater numbers shall be supplied [ * ] DNA Probe Arrays required for clinical trials of BMX products will be supplied pursuant to the Manufacturing Agreement [ * ] BMX and its designated Affiliates shall have the right to use the DNA Probe Arrays supplied under this Section in the Licensed Field for internal DNA Probe Array diagnostic product research (excluding research as to the matters referred to in Section 5.6), product development, process development and manufacturing purposes in furtherance of the Collaboration. Except for transfers to Affiliates contemplated by the foregoing sentence, BMX shall have no right to sell or transfer the DNA Probe Arrays, including, without limitation, Additional Probe Arrays, provided under this Section 4.2 to third parties without the express written permission of AFFX. It is understood that BMX intends to work -26- [ * ] Confidential Treatment Requested by Affymetrix, Inc. with a nonaffiliated collaborator to develop amplification, related technology and assays for use in association with Licensed Diagnostic Assays, and AFFX will permit the use of Licensed DNA Probe Arrays in such work, together with such exchange of information as may be reasonably necessary therefor, subject to AFFX' reasonable requirements as to preservation of confidentiality. 4.3 TRANSITION FROM DEVELOPMENT TO MANUFACTURE. The Collaboration shall continue as provided herein during the term of initial commitment and the term of any Agreed Budget and Agreed Workplan and thereafter, unless terminated pursuant to Section 9.2. The DNA Probe Arrays and prototypes for such arrays developed in the Collaboration shall serve as the basis for specifications for manufacture of Licensed DNA Probe Arrays, as provided in the Manufacturing Agreement. 4.4 BMX SUPPLY. If requested by AFFX, BMX will supply automated readers and related products (or major components thereof to be provided at BMX' sole reasonable discretion) developed in the Collaboration for use in agreed markets as mutually determined and outside the Licensed Field or other fields of activity of BMX or its Affiliates in accordance with normal commercial terms and conditions on the basis of an arm's length transfer price which shall reflect [ * ] together with an additional [ * ] to be negotiated in good faith by the Parties, substantially equivalent to the royalty, if any, to be received -27- [ * ] Confidential Treatment Requested by Affymetrix, Inc. by AFFX in connection with sale of AFFX High Density Probe Assays, based on similar considerations of cost savings in manufacture and product transfer price, and taking into account whether or not there are BMX Patent Rights covering such products. In no event will BMX be expected to supply readers for use in the Licensed Field or for use in the [ * ] or [ * ] field, regardless of the outcome of negotiations as to those Fields under Sections 5.3 and 5.4. In connection with any sale of such readers and other products to AFFX, and subject to disclaimer of indemnity to the extent of any matter within the Scope of AFFX Licensed Core Technology which may be incorporated therein, BMX shall indemnify AFFX for any infringement of any third party intellectual property rights resulting from the manufacture and/or sale of any such readers or other product to AFFX or the use or sale by AFFX of such reader or other product in the manner authorized above by BMX, up to the amount of the payments received. 4.5 VIRAL AGENT ELECTION. Within [ * ] of the Effective Date of this Agreement, BMX shall notify AFFX in writing of the [ * ] viral agents of those typically included in bacteriology test panels that it is electing for incorporation into the Licensed Field, such viral agents to be selected from those listed on Schedule 4 hereto. If BMX has not selected [ * ] viral agents within such period, AFFX shall be free to transfer rights to any unselected agents to third parties and shall have no further obligation to BMX with regard thereto. ARTICLE V. OWNERSHIP; TECHNOLOGY RIGHTS -28- 5.1 OWNERSHIP OF COLLABORATION DEVELOPMENTS. AFFX shall own all AFFX Collaboration Technology. Such ownership shall be subject to the license and rights as provided in Sections 5.2(a) and (b). BMX shall own all BMX Collaboration Technology. Such ownership shall be subject to the license and rights as provided in Section 5.2(c). AFFX and BMX shall own jointly all Joint Collaboration Technology, subject to the provisions of Section 5.2(d) and (e). 5.2 LICENSES. (a) Subject to the provisions of Sections 5.5-5.7 regarding exclusivity and other matters, AFFX hereby grants BMX the following licenses for the Licensed Field only, which shall be exclusive, subject to Sections 5.5 and 5.7, for the Bacteriology Field and non-exclusive for the balance of the Licensed Field: (i) A worldwide license under the Patent Rights, Know-How and Copyrights included in AFFX Licensed Core Technology and AFFX Collaboration Technology to import, use, distribute and sell (and copy and display in connection therewith as applicable) Licensed DNA Probe Arrays, and to incorporate or cause the incorporation of such Licensed DNA Probe Arrays, through processes of manufacture, into Licensed Diagnostic Assays, and to manufacture and have manufactured Licensed Diagnostic Assays (other than the Licensed DNA Probe Array component thereof except that such manufacturing license shall extend to such Licensed DNA Probe Array component under the limited circumstances provided in the Manufacturing Agreement), and to use, import, distribute and sell (and to copy and display in connection therewith as -29- [ * ] Confidential Treatment Requested by Affymetrix, Inc. applicable) Licensed Diagnostic Assays. Such licenses are subject to the royalties provided in Sections 6.1 and 6.2 as applicable. Except as explicitly provided in this subsection, no manufacture or have manufactured rights are included as to DNA Probe Arrays. (ii) With respect to Other Licensed Diagnostic Products that are to be used (A) solely with High Density Probe Arrays supplied by AFFX or permissibly made by BMX under this Agreement or the Manufacturing Agreement or (B) with High Density Probe Arrays and with one or more DNA Probe Arrays that have [ * ] or fewer Probes/cm(2) and are not otherwise included as a High Density Probe Array, a worldwide, license in the Licensed Field (i) under the Patent Rights included in the AFFX Licensed Core Technology and the AFFX Collaboration Technology to make, have made, use, import, distribute and sell and (ii) under the Know-how and Copyrights included in the AFFX Licensed Core Technology and AFFX Collaboration Technology to make, have made, copy, display, distribute, use, import and sell, all such Other Licensed Diagnostic Products solely for use in the Licensed Field. (iii) With respect to Other Licensed Diagnostic Products that are to be used solely with a DNA Probe Array that has [ * ] or fewer Probes/cm(2) and is not included as a High Density Probe Array ("Low Density Probe Array"), AFFX agrees to grant BMX a nonexclusive, worldwide license in the Licensed Field (A) under the Patent Rights included in the AFFX Licensed Core Technology and the AFFX Collaboration Technology to make, have made, use, import, distribute and sell and (B) under the Know-how -30- [ * ] Confidential Treatment Requested by Affymetrix, Inc. and Copyrights included in the AFFX Licensed Core Technology and the AFFX Collaboration Technology to make, have made, copy, display, distribute, use, import and sell, all such Other Licensed Diagnostic Products for use with such Low Density Probe Arrays solely for use in the Licensed Field on terms to be negotiated in good faith by the Parties, such terms not to be less favorable to BMX than those contained herein, any applicable compensation or royalty for such use not to exceed such royalty rates as may from time-to-time be applicable for sale of Licensed Diagnostic Assays. (iv) With respect to any DNA Probe Array that is not a High Density Probe Array, and that has more than [ * ] and is otherwise not a High Density Probe Array, AFFX will negotiate in good faith with BMX if requested an extension of the definition of High Density Probe Array hereunder to include such probe array and to arrange for manufacture of the same subject to AFFX' reasonable ability to expand its manufacturing capacity to include such product, all on terms which are substantially similar to and not more onerous for either Party than the terms and conditions applicable hereunder in respect of High Density Probe Arrays. With respect to any of the foregoing Licenses, BMX shall have the right to sublicense only its Affiliates provided that any such Affiliate must agree to abide by all of the terms of this Agreement. The term of such licenses shall continue on a product-by-product and country-by-country basis until the expiration of the last to expire Patent of the AFFX Licensed Core Technology and AFFX Collaboration Technology encompassed in such -31- Licensed Diagnostic Assay in the country in question and during the life of any subsequently issued AFFX patent included in the AFFX Licensed Core Technology and AFFX Collaboration Technology and so encompassed in such Licensed Diagnostic Assays in the country in question, and thereafter on a continuing basis in respect of any Know-how or Copyright thereof embodied in the Licensed Diagnostic Assay or its manufacture or use. All licenses may be terminated for breach and/or limited or modified for lack of diligence as set forth in this Article 5. (b) In addition to the foregoing license under Section 5.2(a) above, AFFX grants BMX, (i) with respect to AFFX Collaboration Technology, a nonexclusive, worldwide, research-use only license to use the AFFX Collaboration Technology (A) outside of the Licensed Field for BMX's own research purposes pertaining to Clinical Diagnostics, and (B) for the Licensed Field for BMX's purposes pertaining to this Collaboration and research and development in furtherance thereof; provided, however, that such license shall not include any rights under AFFX Licensed Core Technology or any rights to research or develop technology relating to the manufacture of Licensed DNA Probe Arrays; and provided that such research license may be sublicensed only to Affiliates or in connection with the research authorized hereby; and (ii) with respect to the AFFX Core Technology and the AFFX Collaboration Technology, a limited nonexclusive, worldwide research use only license to use High Density Probe Arrays referred to in Section 1.17(i) and (ii) to select probes for and only to select probes for development of High Density Probe Arrays referred to in Section 1.17(iii) for the Licensed Field -32- all for internal purposes of BMX and its Affiliates, not on a contract basis for third parties. (c) With respect to any BMX Collaboration Technology, BMX hereby grants to AFFX (i) for the Licensed Field, a nonexclusive, worldwide, research-use only license to use BMX Collaboration Technology in the Collaboration and as permitted under the Manufacturing Agreement; and (ii) a nonexclusive license for use of the BMX Collaboration Technology outside the Licensed Field for uses which do not compete with the activities of BMX and its Affiliates. Such license under subsection (ii) shall be subject to any additional restrictions provided in Section 5.11 in the event AFFX exercises its rights under such section and shall be sublicensable only with and for use with AFFX's AFFX Licensed Core Technology (and subject to the same limitations imposed on any concomitant license of such technology) to copy, display, distribute, make, have made, use, import and sell DNA Probe Arrays and products and services associated with and dependent upon use of such probe arrays. Such license shall be royalty free to AFFX except that AFFX shall be responsible for the payment of any royalty obligation incurred by BMX in connection with such use by AFFX. (d) With respect to Joint Collaboration Technology, the Parties shall each have plenary rights in common to use such technology within and without the Licensed Field and to sublicense the same for such use to their Affiliates; provided, however, that, with respect to Joint Collaboration Technology as specifically applied to design and function of Licensed DNA Probe Arrays (Specific DNA Probe Technology), BMX shall have rights in -33- [ * ] Confidential Treatment Requested by Affymetrix, Inc. the Licensed Field only within the scope of its license grants under Section 5.2 hereof and to sublicense the same to its Affiliates and AFFX shall have the sole right to use and license or sublicense such Specific DNA Probe Technology outside the Licensed Field; and provided further, that, in the event AFFX exercises its rights under Section 5.11 hereof, its use of any Collaboration Technology shall be subject to the limitations there provided. Except as provided above as to Specific DNA Probe Technology, BMX hereby grants AFFX the exclusive right to license Joint Collaboration Technology to third parties (so subject to Section 5.11) outside of the Licensed Field, subject to (i) the provisions of Section 5.2(e), (ii) BMX's right to share in revenues from such license as may be agreed to in good faith by the Parties, and (iii) the obligation to consult with BMX as to the grant and terms of such license. In the event that AFFX does not pursue any licensing opportunity brought to its attention by BMX within [ * ] then BMX shall have the right to pursue such opportunity and share revenues therefrom in accordance with the good faith agreement of the Parties. In the absence of agreement as to sharing of revenue, the matter shall be resolved as provided in Section 2.10 hereof, except that each Party shall set forth its proposal for such sharing and, if agreement is not reached, the more suitable proposal shall be determined and adopted without change from such Party's final proposal pursuant to arbitration as provided in Section 14.1 hereof. (e) With respect to grant of license of Joint Collaboration Technology to third parties for use outside the -34- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Licensed Field, in cases where BMX's Patent Right(s) or Know-how other than Joint Technology dominate such technology, the Parties agree as follows: (i) if such Joint Collaboration Technology is proposed to be licensed principally for use with AFFX Licensed Core Technology, then AFFX shall have primary responsibility for negotiating the terms and conditions of any such license but shall consult with BMX as to the grant and terms of such license; (ii) if such Joint Collaboration Technology is proposed to be licensed for any other use then BMX shall have primary responsibility for negotiating the terms and conditions of any such license but shall consult with AFFX as to the grant and terms of such license. In all cases under (i) and (ii) above each Party shall be entitled to share in revenues from the license as may be agreed in good faith by the Parties, and absent such agreement, sharing shall be determined as provided in the last sentence of Section 5.2(d). In no event shall either Party grant a license of technology of the other Party (other than Joint Collaboration Technology as provided above) without such other Party's consent. 5.3 OPTION FOR NON-EXCLUSIVE LICENSES IN THE [ * ] AND [ * ] FIELDS. Subject to pre-existing agreements, AFFX grants BMX non-exclusive options (the "Options") to enter into non-exclusive licenses under AFFX Licensed Core Technology (and Collaboration Technology, as applicable) to expand BMX's products for Clinical Diagnosis (and otherwise subject to the limitations of the Licensed Field except as expanded to include [ * ] and [ * ] as specified herein) that would use Licensed DNA Probe Arrays to -35- [ * ] Confidential Treatment Requested by Affymetrix, Inc. include categories of products for [ * ] (not otherwise included in the license granted hereby) ([ * ] Option") and products for the testing of [ * ] (for any condition, except for the diagnosis of [ * ] to the extent that such rights have been previously granted on an exclusive basis to a third party) ([ * ] Option"). Exercise of each Option shall be conditional upon AFFX and BMX executing a definitive agreement with regard to the relevant field, including a mutually acceptable work plan (and an appropriate budget, license fees, milestones and royalties no greater, in each case, than those agreed to for the exclusive license in the Bacteriology Field) not later than [ * ] after AFFX shall have sent BMX a substantive proposal in such regard. Prior to conclusion of any definitive agreement or any payment for the extension of the right to exercise an option as provided below, AFFX shall, at the request of BMX, disclose the existence and extent of any other agreements with third parties, or known third party rights or claims to which any option rights would potentially be subject. If a definitive agreement has not been signed under either Option by the end of the Initial Option Period, BMX may elect to extend either Option or both Options for a one-year period by paying [ * ] per Option extended on or before the end of the Initial Option Period. If, however, an agreement with respect to one such Option is concluded on or prior to the end of the Initial Option Period, the right to exercise the other Option will be automatically extended six (6) months from the end of the Initial Option Period (the "Second -36- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Option Period"), and the right to exercise such other Option may be further extended for a one-year period by paying [ * ] on or before the end of the Second Option Period. 5.4 INDUSTRIAL TESTING AND OTHER FIELDS. Subject to pre-existing agreements and within AFFX's sole discretion, AFFX shall give reasonable consideration to requests by BMX to expand the definition of Licensed Field to include the use of AFFX Licensed Core Technology and AFFX Collaboration Technology in conjunction with Licensed DNA Probe Arrays for Industrial Testing applications (food, pharmaceuticals, cosmetics), upon reasonable commercial terms, including without limitation, license fees, milestone payments, royalties and appropriate manufacturing arrangements. The Parties may also carry out good faith discussions as to extension of the Collaboration to other fields and for other applications as they may deem to be in their respective best interests. 5.5 EXCLUSIVITY OF LICENSE. Except as otherwise provided herein, the license granted BMX pursuant to Section 5.2(a) shall be the exclusive license of the AFFX Core Technology and the AFFX Collaboration Technology for assays containing DNA Probe Arrays for Clinical Diagnosis in the Bacteriology Field, except for fluorescence readers sold to hospitals (to the extent rights have been granted to a third party) for which the license shall be nonexclusive (such exclusivity being subject to the conditions set forth below), and nonexclusive in the balance of the Licensed Field. BMX may not assign its license rights and may grant sublicenses only to Affiliates. -37- 5.6 LIMITATIONS OF LICENSE. It is expressly understood that AFFX does not grant and has not granted BMX any license under any AFFX Licensed Core Technology or AFFX Collaboration Technology or any other AFFX technology or intellectual property rights, either express or implied, for research supply products, or to conduct any basic genomic research (e.g., gene expression, gene discovery, gene sequencing, marker discovery, functional discovery, or gene mapping, or polymorphism screening) with the Licensed DNA Probe Arrays (while the parties recognize that chips that are made for diagnostic purposes may incidentally result in genetic discoveries), or to manufacture or have a third party manufacture any DNA probe arrays, except as explicitly provided here and in the Manufacturing Agreement. BMX may not sublicense or assign the rights herein except as expressly provided herein. 5.7 TERMS AND CONDITIONS OF EXCLUSIVITY. (a) To retain its exclusivity in the Bacteriology Field, BMX shall use reasonable commercial efforts, comparable to those applied to its sole developments of its own major products, in the development, marketing and sales of Licensed Diagnostic Assays hereunder. The provisions below are to be considered as specific requirements for BMX to retain its exclusivity and not as an exhaustive description of the diligence obligations. (b) BMX shall have the following specific diligence obligations (provided that AFFX shall have fulfilled preconditions to BMX's meeting such requirements, including disclosure in full to BMX in a timely fashion of the results of any research and development work for which it is responsible and which is relevant to fulfillment of such BMX obligations). -38- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Initially, the exclusivity of the license in the Bacteriology Field shall continue for [ * ] (or any extension of such time period to which the Parties mutually agree) from the Effective Date of this Agreement, except that such license shall become nonexclusive upon failure of BMX to meet any of the following development milestones within the time period indicated (or any extension of such time period to which the Parties mutually agree). All such time periods are to be measured from the Effective Date of this Agreement. MILESTONES TIME PERIOD (i) [ * ] [ * ] (ii) [ * ] [ * ] (iii) [ * ] [ * ] (iv) [ * ] [ * ] -39- [ * ] Confidential Treatment Requested by Affymetrix, Inc. MILESTONES TIME PERIOD (v) [ * ] [ * ] The time periods indicated may be extended by the Committee and shall be extended as necessary where BMX's inability to comply results from failure of AFFX to fulfill preconditions that would have reasonably been necessary for BMX to meet the foregoing milestones. (c) In the event BMX maintains the exclusivity of its license in accordance with the foregoing milestones, such exclusivity shall continue during the remaining term of the license, except that such license shall become non-exclusive upon failure by BMX to meet any of the following criteria unless such failure is reasonably attributable to failure by AFFX to fulfill its supply obligations under the Manufacturing Agreement or other AFFX obligations hereunder: (i) BMX shall have launched and be diligently marketing a Licensed Diagnostic Assay in three of the following four countries by [ * ] Japan, France, Italy and Germany (together with the United States, hereinafter referred to as the "Major Market Countries"); (ii) BMX shall have made appropriate applications by [ * ] to the United States Food and Drug Administration for approval of a Licensed Diagnostic Assay; (iii) BMX shall attain the following minimum worldwide Net Sales of all Licensed Diagnostic Assays (in the -40- [ * ] Confidential Treatment Requested by Affymetrix, Inc. aggregate, "Worldwide Aggregate Net Sales") during the calendar years set forth below: Minimum Calendar Net Year Sales -------- ------- 2001 $ [ * ] 2002 [ * ] 2003 [ * ] 2004 [ * ] 2005 [ * ] 2006 [ * ] 2007 [ * ] (provided, however, that if actual Worldwide Aggregate Net Sales in any [ * ] calendar years between 2001 and 2007 fall short of the minimum sales set forth above, but are not less than [ * ] of such minimum sales, BMX shall have the right to maintain exclusivity by payment to AFFX of an amount that is equal to [ * ] of the difference, in dollars, between the minimum Worldwide Net Sales figure and the actual Worldwide Aggregate Net Sales for the calendar year in question). 5.8 SPECIFIC TESTS. Notwithstanding any termination of exclusivity in the Bacteriology Field which is due solely to failure to meet the criteria of Section 5.7(c)(iii) above, the exclusivity of BMX's rights Licensed Diagnostic Assays to the specific Licensed DNA Probe Arrays it is diligently selling in the Bacteriology Field at the time of such termination shall continue during the term of the license, provided that and so long as BMX is continuing to sell such product with reasonable diligence. (a) AFFX shall retain the sole right and no license is granted herein to supply instruments and components, including, without limitation, DNA Probe Arrays based on AFFX Licensed Core -41- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Technology, to third parties for "home brew" tests for targets in the Bacteriology Field in countries in which BMX is not diligently marketing a Licensed Diagnostic Assay that is configured substantially in such manner as to be approvable in the USFDA (or, in the case of the United States, is approved by the USFDA), if the same were to be offered for commercial sale in the United States. BMX shall have no obligation to sell readers, instruments or other products to AFFX for this purpose. AFFX shall act reasonably at all times to ensure its reasonable ability to terminate such supply in the country in question no later than such time as BMX shall commence the diligent marketing thereof a Licensed Diagnostic Assay that is substantially so configured as to be approvable by the USFDA for such target(s) that is a comparable substitute in performance and end-use for the "home brew" product concerned. Upon notice that BMX is commencing such marketing, AFFX shall reasonably endeavor promptly to terminate any such supply, provided that BMX will make such comparable substitute configured as above for sale in such country. Subject to the foregoing, AFFX shall not be obligated to terminate any such existing supply arrangement in such manner as to cause breach or default of such arrangement by AFFX. Upon commencement of such marketing as above, and except to the extent of any "home brew" supply arrangement which has not yet been terminated, in each case BMX shall then be accorded exclusivity with respect to such test(s) in the Bacteriology Field in accordance with the terms of this Article 5. 5.9 ASSAYS SUBJECT TO THIRD PARTY RIGHTS. If BMX retains its exclusivity in the Bacteriology Field after [ * ] -42- [ * ] Confidential Treatment Requested by Affymetrix, Inc. AFFX may, from time to time, request that BMX endeavor to include in one or more of its Licensed Diagnostic Assays an assay whose manufacture, use or sale is subject to intellectual property rights of a third party. If such request concerns an assay within the Bacteriology Field which the parties reasonably agree would have worldwide sales in excess of [ * ] per year ("Significant Assay") and would not compete with any assay already included or projected for inclusion in such Licensed Diagnostic Assays, BMX shall use reasonable efforts to seek, with the cooperation of AFFX, to obtain all licenses requisite for such assay or, if necessary, to develop an alternative means to make, use and sell such assay. If within [ * ] following such request BMX is unable or unwilling to make arrangements for development of such assay, the Parties will further consult, and, if AFFX so requests, BMX will make a limited and partial waiver of the exclusivity of its license in the Bacteriology Field solely to the extent necessary to permit development of such an assay by a third party under a separate license from AFFX and supply of DNA Probe Arrays therefor by AFFX. The terms and limitations of such waiver shall be set forth in writing by BMX and BMX shall retain all rights to develop or cause the development of such a product at a later time, if it should obtain the necessary rights from the third party or otherwise. Any waiver of exclusivity in the Bacteriology Field for purposes of introduction of a product under this section shall not be deemed to constitute a loss of exclusivity in such Field for the purposes of any other section of this Agreement. -43- 5.10 OTHER ASSAYS. In the event AFFX desires at any time during the term of this Agreement to develop or have a third party develop an assay in the Bacteriology Field that is not provided for in Section 5.8 and is not developed by BMX (such as where, for example, there may be an interest to have an assay developed to demonstrate clinical utility in a selected market), whether or not such assay is covered by any third party intellectual property rights, and AFFX can reasonably demonstrate that (i) the assay addresses only a limited geographic or otherwise selected market portion of the potential markets for the assay that would not compete significantly with any assay that is marketed, is being developed by or is projected to be developed by BMX, and (ii) BMX has no existing bona fide plans to develop such an assay, and (iii) AFFX presents a reasonable plan for development of such an assay by itself or in conjunction with a third party, and a reasonable level of detail regarding such product and the plan for development and funding of same, then BMX shall make a limited and partial written waiver in the manner described above, permitting development of such assay by AFFX or a third party under a separate license from AFFX, in accordance with such plan without prejudice to subsequent introduction of such a product by BMX provided, however, that if for any reason BMX elects not to make such a waiver, then BMX shall promptly generate, and provide to AFFX, a development plan for expeditiously and diligently developing and marketing the assay that is the subject of the waiver request, on a priority level at least as high as the other similar products then-currently under development, and fund such development within the Collaboration. -44- In connection with any such BMX plan, AFFX shall be prepared to make available to BMX cooperative arrangements and related benefits substantially as favorable as any that were to be offered to a third party under the plan for development originally presented by AFFX. If BMX fails to expeditiously develop such a plan and fund such development in reasonably timely fashion taking account of all relevant commitments hereunder, BMX shall be deemed to have granted the foregoing waiver of exclusivity, and AFFX shall be free to develop such assay with a third party and supply DNA Probe Arrays therefor under a separate license from AFFX. Any waiver of exclusivity in the Bacteriology Field for purposes of introduction of a product under this section shall not be deemed to constitute a loss of exclusivity in such Field for the purposes of any other section of this Agreement. BMX shall have no obligation to sell readers, instruments or other products to AFFX for this purpose. Such supply relationship between AFFX and such third party shall be rendered non-exclusive as to BMX and BMX may exercise its applicable rights hereunder and under the Manufacturing Agreement as related to Licensed DNA Probe Arrays pertaining to such assay if so requested by BMX upon notice that BMX represents in good faith that it would commence the diligent marketing of a Licensed Diagnostic Assay for such target(s) that is a comparable substitute in performance and end-use for the assay concerned. Subject to the foregoing, AFFX shall not be obligated to take any action with respect to such supply arrangement so as to cause breach or default of such arrangement by AFFX. Upon commencement of marketing by BMX of the assay concerned or an assay which is a -45- [ * ] Confidential Treatment Requested by Affymetrix, Inc. comparable substitute in performance or end-use therefor and except to the extent of any continuing third party arrangements as aforesaid with respect to the assay developed pursuant to the AFFX proposal, in each case BMX shall then again be accorded exclusivity with respect to such test(s) in the Bacteriology Field in accordance with the terms of this Article 5. 5.11 LOSS OF RIGHT TO INTRODUCE NEW ASSAYS AND OTHER PRODUCTS. (a) In the event that, BMX decides to market no broad-ranged Licensed Diagnostic Assay, (i.e., an assay capable of testing for [ * ] hereinafter referred to as a "Broad-Ranged Assay") in the Bacteriology Field in all or any of the three major world regions of the United States, Europe or Asia (the "Regions"), but still desires to sell Licensed Diagnostic Products (other than Broad Ranged Assays in the Bacteriology Field and Region), BMX's license to the Licensed Diagnostic Products it is then developing shall thereafter be non-exclusive in such Region(s), and BMX shall have no further right to make, have made, use, import, distribute or sell, or have AFFX manufacture, New Licensed Diagnostic Products using AFFX Licensed Core Technology or AFFX Collaboration Technology in the Region concerned. A product shall be considered a "New Licensed Diagnostic Product" (as such term is used herein) unless, at the time of the applicable loss of the rights with respect to New Licensed Diagnostic Products, such product or an earlier version thereof which differs only -46- [ * ] Confidential Treatment Requested by Affymetrix, Inc. evolutionarily from such product was being sold by BMX in any Region or was in clinical trials or subsequent stages of development, or an application for regulatory approval had been filed in a Major Market Country. (b) In addition, BMX shall lose all rights under its license to make, have made, use, import, distribute or sell, or have AFFX manufacture, New Licensed Diagnostic Products using AFFX Licensed Core Technology or AFFX Collaboration Technology as of the close of any calendar year referred to below in which it shall fail to meet the following worldwide sales for such year: Minimum Number Calendar of Licensed Diagnostic Year Assays --------- ----------------------- 2001 [ * ] 2002 [ * ] 2003 [ * ] 2004 [ * ] 2005 [ * ] 2006 [ * ] 2007 [ * ] and, for each year thereafter until the end of the calendar year 2010, minimum requirements of Licensed DNA Probe Arrays equal to the minimum of such sales for the preceding calendar year plus [ * ] of such minimum. (c) To maintain its licenses of AFFX Licensed Core Technology in respect of its Licensed Diagnostic Assays hereunder, notwithstanding any termination of exclusivity, BMX shall continue to have an obligation of reasonable diligence in the circumstances respecting such Licensed Diagnostic Assays as it shall continue to be permitted to sell, comparable to the diligence it normally exercises in connection with other -47- comparable products. In the event of lack of such reasonable diligence in respect of any such assay or of Licensed Diagnostic Assays in general, AFFX may call upon BMX to relinquish its license for such product or products, as applicable, but in such circumstances any loss of license rights shall be subject to a reasonable phase-out permitting orderly fulfillment of third-party obligations and business expectations. 5.12 ENTRY BY AFFX. Beginning on the seventh anniversary of the Effective Date, AFFX may exercise the right to make, use and sell diagnostic products including DNA Probe Arrays in the Bacteriology Field using AFFX's AFFX Licensed Core Technology on a co-exclusive basis with BMX, upon repayment by AFFX to BMX of one-half of the total amount of R&D support and one-half of the total amount of milestone payments received from BMX under this Agreement. In such case, AFFX shall have no right to sublicense, except to Affiliates. AFFX will in no case commence research or development work related to any such product until after July 1, 1999. This provision is not intended to give AFFX any rights or license to BMX intellectual property or instrumentation. AFFX shall have no right to use any technology developed at BMX's expense (other than the Related Funded Technology) in connection with the Collaboration in competing products or systems serving the same diagnostic purpose and market as the BMX products resulting from the Collaboration. In the event that AFFX converts BMX's license to a co-exclusive license as described in this provision, (i) the provisions and requirements of Section 5.10 shall cease to be applicable and (ii) the minimum Worldwide Aggregate Net Sales referred to above in Section 5.7(b)(iii) for -48- [ * ] Confidential Treatment Requested by Affymetrix, Inc. maintaining exclusivity shall be reduced by one-half on a going-forward basis, and, if BMX fails to meet such reduced minimums, its license shall be converted from co-exclusive to non-exclusive. 5.13 PATENT MARKING, LICENSE LEGEND AND TRADEMARKS. BMX shall mark each Licensed Diagnostic Assay and Other Licensed Product (i) with appropriate patent and copyright notices, (ii) with notices that the Licensed Diagnostic Assays are licensed for one-time use only and only in the Licensed Field, and not for research purposes, and (iii) with a trademark and other logo of AFFX, all in accordance with reasonable instructions to be provided by AFFX, and reasonably acceptable to BMX. BMX shall notify AFFX when such notice must be provided for each product release. ARTICLE VI. ROYALTIES 6.1 ROYALTIES PAYABLE TO AFFX IN RESPECT OF SALE OF AFFX HIGH DENSITY PROBE ARRAYS. (a) For the license to AFFX Licensed Core Technology and AFFX Collaboration Technology under Section 5.2(a)(i), AFFX shall receive a royalty based on the applicable royalty rate described below as applied to Net Sales of Licensed Diagnostic Assays by BMX and its Affiliates to non-Affiliated third parties, such sales being broken down by category depending upon the type of Licensed DNA Probe Array included in such Licensed Diagnostic Assays. For each quarter the applicable royalty rate shall be computed based on a fraction consisting of (A) [ * ] -49- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] as the numerator over (B) the denominator consisting of the Net Sales of the applicable Licensed Diagnostic Assays for such quarter expressed as a percentage (the "Cost Ratio") for that particular product. If the Cost Ratio is greater than or equal to [ * ] there shall be no royalty. If the Cost Ratio is greater than or equal to [ * ] but less than [ * ] the royalty rate shall be [ * ] less [ * ] of the Cost Ratio. If the Cost Ratio is greater than or equal to [ * ] but less than [ * ], the royalty rate shall be [ * ] less [ * ] of the Cost Ratio. If the Cost Ratio is less than [ * ] the royalty rate shall be [ * ] the Cost Ratio. Upon expiration or loss of exclusivity pursuant to Section 5.7, the royalty for such Licensed Diagnostic Assays under Section 5.2(a)(i) during the remainder of the royalty term shall be reduced by [ * ] (b) The Parties recognize that the above royalty structure is based on the assumption that BMX's dominant or sole source of profit in the Licensed Field is on disposable kits. Should BMX's business model change such that a significant profit source of BMX is in the distribution of instrumentation, software, data or otherwise, the Parties will confer to modify the above royalty structure accordingly. -50- [ * ] Confidential Treatment Requested by Affymetrix, Inc. 6.2 ROYALTY TERM. The royalty obligation shall continue during the life of any patent upon any invention included by way of patent or application in the licensed AFFX Licensed Core Technology and during the life of any subsequently issued AFFX patent included therein the claims of which cover the applicable Licensed Diagnostic Assay. In any event, royalties shall be payable on a product-by-product basis in each of the three major Regions for a minimum of ten (10) years from first sale of a Licensed Diagnostic Assay in a major country of each such Region, and in respect of any product as to which BMX has rights hereunder related to Know-how for the duration of such rights, provided that such Know-how is secret and substantial, and provided further that after the above-mentioned ten (10) year period and expiration of Patents in any territory, the royalty rate then applicable shall be reduced by [ * ] and provided further that if the only remaining AFFX Licensed Core Technology used in connection with the product consists of Copyright(s), the royalty rate for use thereof shall be a reasonable rate for such use to be agreed by the Parties. 6.3 REPORTS AND PAYMENT. BMX shall deliver to AFFX within sixty (60) days after the end of each calendar quarter a written report showing its computation of royalties due upon Licensed Diagnostic Assays under this Agreement upon Net Sales by BMX and its Affiliates during such calendar quarter. All Net Sales shall be segmented in each such report according to sales of applicable categories of Licensed Diagnostic Assays by BMX and each Affiliate, as well as on a country-by-country basis, including the rates of exchange used to convert such royalties to United -51- [ * ] Confidential Treatment Requested by Affymetrix, Inc. States Dollars from the currency in which such sales were made. Such calculation shall be made in accordance with the internal accounting procedures of bioMerieux S.A. as of the Effective Date and described in Schedule 7 hereto. Subject to the provisions of Section 6.4 of this Agreement, simultaneously with the delivery of each such report, BMX shall tender payment in United States Dollars of all royalties shown to be due therein. The balance remaining unpaid fifteen (15) days after the due date shall bear interest at the rate of [ * ] percentage points above the prime interest rate quoted by the Bank of America on the unpaid balance. 6.4 TAXES. Any and all taxes imposed or levied on account of royalties payable under this Agreement which are required to be withheld by BMX or its Affiliates shall be withheld by BMX and its Affiliates, as the case may be, and shall be paid to the proper taxing authority. Proof of payment shall be secured and sent to AFFX by BMX as evidence of such payment. Such taxes shall be deducted from the royalty that would otherwise be remittable by BMX and its Affiliates. 6.5 RECORDS. BMX shall keep, and shall require all its Affiliates to keep, for a period of at least three years, full, true and accurate books of account and other records containing all information and data which may be necessary to ascertain and verify the royalties payable hereunder. During the term of this Agreement and for a period of three years following its termination, AFFX shall have the right from time to time (not to exceed once during each calendar year) to inspect in confidence, or have an agent, accountant or other representative inspect in -52- [ * ] Confidential Treatment Requested by Affymetrix, Inc. confidence, such books, records and supporting data. If the inspection report discloses an underpayment of [ * ] or more in the amounts due, the cost of such inspection shall be borne by BMX and the underpaid amount shall be paid to AFFX within thirty (30) days of such reporting. 6.6 SPECIAL ARRANGEMENT AS TO CERTAIN THIRD PARTY ROYALTIES. The Parties acknowledge that the practice of the Know-how that is within the scope of the AFFX Core Technology as such scope is described on Schedule 6.6 hereto may involve the use of proprietary rights of third parties. The Parties shall endeavor to find a means of practicing such Know-how which does not fall within the ambit of any such third party rights or otherwide maintain such costs at a low level. ARTICLE VII. PATENT PROSECUTION AND INFRINGEMENT RIGHTS 7.1 RESPONSIBILITY FOR PATENTING OF TECHNOLOGY. (a) Except as otherwise provided in this Agreement, AFFX shall have the right to seek or continue to seek or maintain patent protection on any AFFX Collaboration Technology and any Joint Collaboration Technology in any country, in reasonable consultation with BMX and consistent with ownership and rights as herein agreed. If AFFX elects not to seek or continue to seek or maintain patent protection on any such AFFX Collaboration Technology or Joint Collaboration Technology in any country, BMX shall have the right, at its expense, (i) to require AFFX to file, procure or maintain any patent or patent application encompassed within AFFX Collaboration Technology, in AFFX's name, in such countries and (ii) to require AFFX to or to file, procure -53- and maintain in such countries patents on Joint Collaboration Technology. AFFX agrees to advise BMX of all significant decisions taken with respect to this section in a timely manner in order to allow BMX to protect its rights under this Section. Except as otherwise provided in this Agreement, BMX shall have the right to seek or continue to seek or maintain patent protection on any BMX Collaboration Technology in any country. Each Party shall bear all costs incurred by it in exercising the foregoing rights. (b) Each Party shall provide the other Party with copies of all substantive communications from all patent offices regarding applications or patents on any Joint Collaboration Technology promptly after the receipt thereof. Each Party shall provide the other Party with copies of all proposed substantive communications to such patent offices regarding applications or patents on any Joint Collaboration Technology in sufficient time before the due date in order to enable the other Party an opportunity to comment on the content thereof. (c) Each Party shall make available to the other Party or its authorized attorneys, agents or representatives, such of its employees whom the other Party in its reasonable judgment deems necessary in order to assist it in obtaining patent protection for the Joint Collaboration Technology. Each Party shall sign or use its reasonable efforts to have signed all legal documents necessary to file and prosecute patent applications or to obtain or maintain patents at no cost to the other Party. 7.2 INFRINGEMENT. -54- (a) Each Party shall promptly report in writing to the other Party during the term of this Agreement, with respect to the Licensed Diagnostic Products and the subject matter of the Collaboration, any (i) known infringement or suspected infringement of any of the Patent Rights, (ii) known infringement or suspected infringement of any of the Copyrights, or (iii) unauthorized use or misappropriation of Know-How or Confidential Information by a third party of which it becomes aware, and shall provide the other Party with all available evidence supporting said infringement, suspected infringement or unauthorized use or misappropriation. (b) Each Party shall have the right to initiate an infringement or other appropriate suit against any third party who at any time has infringed, or is suspected of infringing, any of such Party's solely owned Patent Rights or Copyrights or of using without proper authorization all or any portion of such Party's solely owned Know-How. Except as provided in subsection (d) below, AFFX shall have the first right to initiate an infringement or other appropriate suit against any third party who at any time has infringed, or is suspected of infringing, any of the Patent Rights constituting Joint Collaboration Technology or Copyrights constituting Joint Collaboration Technology or of using without proper authorization all or any portion of the Know-How constituting Joint Collaboration Technology. With respect to any suit involving such Joint Collaboration Technology, AFFX shall give BMX sufficient advance notice of its intent to file said suit and the reasons therefor, and shall provide BMX with an opportunity to make suggestions and comments -55- [ * ] Confidential Treatment Requested by Affymetrix, Inc. regarding such suit. AFFX shall keep BMX promptly informed, and shall from time to time consult with BMX regarding the status of any such suit and shall provide BMX with copies of all documents filed in, and all written communications relating to, such suit. (c) AFFX shall have the sole and exclusive right to select counsel for any suit involving the Joint Collaboration Technology referred to in subsection (b) above and shall, except as provided below, pay all expenses of the suit, including without limitation attorneys' fees and court costs. BMX, in its sole discretion, may elect, within sixty (60) days after the commencement of such litigation, to contribute a fixed percentage of up to [ * ] of the costs incurred by AFFX in connection with such litigation, including, without limitation, reimbursement of AFFX's expenses hereunder. If it so elects, any damages, royalties, settlement fees or other consideration received by AFFX or any of its Affiliates for past infringement or misappropriation as a result of such litigation shall be shared by the Parties pro-rata based on their respective sharing of the costs of such litigation. In the event that BMX elects not to contribute to the costs of such litigation, AFFX and/or its Affiliates shall be entitled to retain any damages, royalties, settlement fees or other consideration for past infringement or misappropriation resulting therefrom. If necessary or desirable, BMX shall join as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as the result of being a named party to the suit. If AFFX requires BMX to join in such suit and BMX has not elected to contribute to the costs of such -56- suit, AFFX shall indemnify and defend BMX against any claims or damages arising out of the initiation of such suits or any claims for injunctive relief against such third party infringers. BMX shall have the right to participate and be represented in any such suit by its own counsel at its own expense. BMX shall offer reasonable assistance to AFFX in connection therewith at no charge to AFFX except for reimbursement of reasonable out-of-pocket expenses, including salaries of BMX's personnel, incurred in rendering such assistance. BMX shall have the right to participate and be represented in any such suit by its own counsel at its own expense. (d) In the event that AFFX elects not to initiate an infringement or other appropriate suit involving the Joint Collaboration Technology pursuant to subsection (b) above, AFFX shall promptly advise BMX of its intent not to initiate such suit, and BMX shall have the right, at its expense, of initiating an infringement or other appropriate suit against any third party who at any time has infringed, or is suspected of infringing, any of the Patent Rights constituting Joint Collaboration Technology or Copyrights constituting Joint Collaboration Technology or of using without proper authorization all or any portion of the Know-How constituting Joint Collaboration Technology. In exercising its rights pursuant to this subsection (d), BMX shall have the sole and exclusive right to select counsel and shall, except as provided below, pay all expenses of the suit including without limitation attorneys' fees and court costs. AFFX in its sole discretion, may elect, within sixty (60) days after the commencement of such litigation, to contribute a fixed percentage -57- [ * ] Confidential Treatment Requested by Affymetrix, Inc. of up to [ * ] of the costs incurred by BMX in connection with such litigation, including, without limitation, reimbursement of BMX's expenses hereunder. If it so elects, any damages, royalties, settlement fees or other consideration received by BMX or any of its Affiliates for past infringement or misappropriation as a result of such litigation shall be shared by the Parties pro rata based on their respective sharing of the costs of such litigation. In the event that AFFX elects not to contribute to the costs of such litigation, BMX and/or its Affiliates shall be entitled to retain any damages, royalties, settlement fees or other consideration for past infringement or misappropriation resulting therefrom. If necessary or desirable, AFFX shall join as a party to the suit but shall be under no obligation to participate except to the extent that such participation is required as a result of being a named party to the suit. At BMX's request, AFFX shall offer reasonable assistance to BMX in connection therewith at no charge to BMX except for reimbursement of reasonable out-of-pocket expenses, including salaries of AFFX's personnel, incurred in rendering such assistance. If BMX requires AFFX to join in such suit and AFFX has not elected to contribute to the costs of such suit, BMX shall indemnify and defend AFFX against any claims or damages arising out of the initiation of such suits or any claims for injunctive relief against such third party infringers. AFFX shall have the right to participate and be represented in any such suit by its own counsel at its own expense. 7.3 CLAIMED INFRINGEMENT. -58- (a) In the event that a third party at any time provides written notice of a claim to, or brings an action, suit or proceeding against, either Party or any of their respective Affiliates, including claims made to BMX by distributors or customers, claiming infringement of its patent rights or copyrights or unauthorized use or misappropriation of its know-how, based upon an assertion or claim arising out of the development, use, manufacture, importation, distribution and/or sale of Licensed Diagnostic Products, such Party shall promptly upon learning thereof notify the other Party of the claim or the commencement of such action, suit or proceeding, enclosing a copy of the claim and/or all papers served. Each Party agrees to make available to the other Party its advice and counsel regarding the technical merits of any such claim at no cost to the other Party. (b) EXCEPT AS OTHERWISE PROVIDED IN THIS AGREEMENT, THE FOREGOING STATES THE ENTIRE RESPONSIBILITY OF THE PARTIES IN THE CASE OF ANY CLAIMED INFRINGEMENT OR VIOLATION OF ANY THIRD PARTY'S PATENT RIGHTS OR COPYRIGHTS OR UNAUTHORIZED USE OR MISAPPROPRIATION OF ANY THIRD PARTY'S KNOW-HOW. ARTICLE VIII. CONFIDENTIAL INFORMATION 8.1 TREATMENT OF CONFIDENTIAL INFORMATION. Each Party hereto shall maintain the Confidential Information of the other Party in confidence, and shall not disclose, divulge or otherwise communicate such Confidential Information to others, or use it for any purpose, except as permitted or contemplated by this Agreement or pursuant to, and in order to carry out, the terms and objectives of this Agreement, and hereby agrees to exercise -59- every reasonable precaution to prevent and restrain the unauthorized disclosure of such Confidential Information by any of its directors, officers, employees, consultants, collaborators, subcontractors, agents, Affiliates, Distributors or Sublicensees. Each party agrees to use reasonable efforts to maintain in confidence the Know-how licensed to or communicated to the Other Party; provided, however, that the foregoing shall not limit either party from disclosing its confidential information under appropriate terms of confidentiality to third party licensees as appropriate (but only if and to the extent AFFX can disclose such confidential AFFX information without making any disclosure of BMX confidential information). 8.2 RELEASE FROM RESTRICTIONS. The provisions of Section 8.1 shall not apply to any Confidential Information disclosed hereunder which: (a) was known or used by the receiving Party or its Affiliates prior to its date of disclosure to the receiving Party, as evidenced by the prior written records of the receiving Party or its Affiliates or was independently developed by employees or consultants of the receiving party who had no access to such Confidential Information of the disclosing party; or (b) either before or after the date of the disclosure to the receiving Party is lawfully disclosed without restriction on disclosure to the receiving Party or its Affiliates by an independent, unaffiliated third party rightfully in possession of the Confidential Information; or (c) either before or after the date of the disclosure to the receiving Party becomes published or generally known to -60- the public through no fault or omission on the part of the receiving Party or its Affiliates; or (d) is required to be disclosed by the receiving Party to comply with applicable laws, to defend or prosecute litigation or to comply with governmental regulations, provided that the receiving Party provides prior written notice of such disclosure to the other Party and takes reasonable and lawful actions to avoid and/or minimize the degree of such disclosure. 8.3 PUBLICATIONS. The following restrictions shall apply with respect to the disclosure in scientific journals or publications or oral communications at any trade show or conference by any Party or any of its Affiliates or any employee or consultant of any Party or any of its Affiliates of Confidential Information of the other Party relating to the Collaboration: (a) a Party (the "publishing Party") shall provide the other Party with an advance copy or summary of any proposed publication or communication (which may be in draft form) and such other Party shall have a reasonable opportunity to recommend any changes it reasonably believes are necessary to preserve patent rights, copyrights or know-how belonging in whole or in part to AFFX or BMX, and the incorporation of such recommended changes shall not be unreasonably refused; and (b) if such other Party informs the publishing Party, within thirty (30) days of receipt of an advance copy or summary of a proposed publication or communication, that such publication in its reasonable judgment could be expected to have a material adverse effect on any patent rights, copyrights or know-how -61- belonging in whole or in part to AFFX or BMX, the publishing Party shall, to the extent permitted by its agreements with its employees and consultants, delay or prevent such publication as proposed. In the case of inventions, the delay shall be sufficiently long, but not less that ninety (90) days, to permit the timely preparation and filing of a patent application or application(s) for a certificate of invention on the information involved. ARTICLE IX. TERMINATION 9.1 TERM OF AGREEMENT. Unless earlier terminated in accordance with the provisions of this Article IX, this Agreement shall remain in effect until the later of (a) the expiration of the licenses granted in Section 5.2(a) of this Agreement or (b) the supply obligations set forth in the Manufacturing Agreement. 9.2 TERMINATION OF COLLABORATION. AFFX may cause the development portion of the Collaboration to terminate, without prejudice to the licenses granted by this Agreement and the other provisions hereof, and without prejudice to the Manufacturing Agreement, upon six (6) months prior notice to BMX, provided that no such termination shall be effective until the completion of the term of the initial commitment as described in Section 2.4 and the substantial fulfillment of AFFX's obligations under any Agreed Budget and Agreed Workplan; provided, however, that without the written consent of BMX AFFX shall not terminate the development portion of the collaboration at such time or in such manner as to prevent the formulation of such specifications as may be reasonably necessary to permit implementation of the -62- Manufacturing Agreement as contemplated hereby. In the event that AFFX terminates the Collaboration pursuant to this Section 9.2 upon completion of the initial commitment as described in Section 2.4 and, notwithstanding request by BMX for continuation of the Collaboration for an additional Contract Year fails to negotiate in good faith such continuation, then the Collaboration shall cease without prejudice to the other obligations of the Parties as provided in Section 9.1; provided, however, that the licenses to AFFX under BMX's Collaboration Technology shall also terminate. BMX may cause the development portion of the Collaboration to terminate upon six (6) months prior notice to AFFX provided that termination occurs after completion of the initial commitment as described in Section 2.4 and the substantial fulfillment of BMX'S obligations under any Agreed Budget and Agreed Workplan. Such termination by BMX as permitted hereby shall be without prejudice to the licenses granted hereby, which shall continue in effect. 9.3 TERMINATION BY BMX. In the event that, at any time prior to first launch by BMX of a Licensed Diagnostic Assay in the Bacteriology Field in a Major Market Country, BMX decides not to continue to support the Agreed Budget and Agreed Workplan (and provided that BMX and AFFX are unable to agree on appropriate modifications to such Budget and Workplan), BMX shall promptly so notify AFFX in writing that it wishes to terminate the Collaboration and this Agreement and all licenses to AFFX technology hereunder shall terminate. In the event of such termination, to the extent BMX has not already funded its minimum commitment under Section 3.1 or under any Agreed Budget, as -63- applicable, BMX shall pay such amounts to AFFX, together with such additional amount as may be necessary to assure that AFFX receives funding at the level previously agreed by BMX for a 12-month period following notice of termination, and AFFX shall be free to use such funds on its own behalf or otherwise without any obligation to BMX. 9.4 TERMINATION OF AGREEMENT FOR BREACH. Each Party shall be entitled (but not required) to terminate this Agreement by written notice to the other Party in the event that the other Party shall be in default of any of its material obligations hereunder or if the other Party shall have materially breached a covenant, representation or warranty made in this Agreement, and shall fail to remedy any such default or breach within forty-five (45) days after notice thereof by the non-breaching Party; provided, however, that in the event of any dispute as to the existence of a default or the adequacy of remedy thereof the Party charged with breach or failure to remedy may require that the right to terminate be determined in arbitration pursuant to Section 14.1 and in the event the arbitrator(s) determine there were reasonable grounds for the Party so charged to dispute termination and that such Party acted in good faith, the arbitrator(s) may afford reasonable opportunity to cure upon such terms as they may direct. Any notice by a Party of termination pursuant to this section shall specifically state that the non-breaching Party intends to terminate this Agreement in the event that the breaching Party shall fail to remedy the default. Upon termination of this Agreement pursuant to this Section 9.4, all licenses and sublicenses granted pursuant to this Agreement shall -64- [ * ] Confidential Treatment Requested by Affymetrix, Inc. terminate. The election by a Party to terminate this Agreement shall be without prejudice to any other rights a Party may have with respect to such putative breach. 9.5 SURVIVAL OF OBLIGATIONS: RETURN OF CONFIDENTIAL INFORMATION. Upon any termination of this Agreement, neither Party shall be relieved of any obligations incurred prior to such termination. Notwithstanding any termination of this Agreement, the obligations of the Parties under Article 9 and Sections 6.3, 7.3, 10.1, Article 8 and Section 14.1, as well as under any licenses which are maintained in effect and any other provisions which by their nature are intended to survive any such termination, shall survive and continue to be enforceable. Upon any termination of this Agreement, each Party shall promptly return to the other Party all written Confidential Information, and all copies thereof, of the other Party which is not covered by a license surviving such termination, except for one copy thereof that may be retained by a Party's legal department for archival purposes. ARTICLE X. INDEMNIFICATION AND LIABILITY LIMITATIONS 10.1 PRODUCT LIABILITY INDEMNIFICATION. (a) Except to the extent otherwise provided herein and in the Manufacturing Agreement, BMX agrees to defend AFFX [ * ] -65- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] The indemnity set forth in the foregoing sentence shall not apply in the case of any Losses attributable to (i) [ * ] (b) Except to the extent otherwise provided herein and in the Manufacturing Agreement, AFFX agrees to defend BMX and [ * ] -66- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] The indemnity set forth in the foregoing sentence shall not apply in the case of [ * ] 10.2 INDEMNIFICATION OF BMX. Except to the extent otherwise provided herein and in the Manufacturing Agreement, and [ * ] AFFX agrees to defend BMX [ * ] -67- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] In addition to the foregoing indemnification, in the event of substantial and extended inability of AFFX to practice the AFFX Licensed Core Technology or to deliver Licensed DNA Probe Arrays due to circumstances as to which BMX would be indemnified under subsection (i) above, the Parties shall consult in good faith and, absent cure within a reasonable time, BMX shall be free to terminate this Agreement and the Manufacturing Agreement. 10.3 PROCEDURE FOR INDEMNIFICATION. In the event of any such claim against an indemnified party or its Affiliates or any of their agents, directors, officers or employees, the indemnified party shall promptly notify the indemnifying party in writing of the claim and the indemnifying party shall manage and control, at its sole expense, the defense of the claim and the settlement, the indemnified party shall cooperate with the indemnifying party and may, at its option and expense, be represented in any such action or proceeding. The parties shall consult as to any proposal for settlement of an indemnified claim -68- and neither party shall agree to any settlement which materially prejudices the interests of the other party without the prior written consent of such other party which shall not be unreasonably withheld. The indemnifying party shall not be liable for any settlements, litigation costs or expenses incurred by the indemnified party without the indemnifying party's written authorization. ARTICLE XI. EXPORT 11.1 ACKNOWLEDGMENT. The Parties acknowledge that the export of technical data, materials or products is subject to the exporting Party receiving the necessary export licenses and that the Parties cannot be responsible for any delays attributable to export controls which are beyond the reasonable control of either Party. The Parties agree that regardless of any disclosure made by the Party receiving an export of an ultimate destination of any technical data, materials or products, the receiving Party will not reexport either directly or indirectly, any technical data, material or products without first obtaining the applicable validated or general license from the United States Department of Commerce, United States Food and Drug Administration and/or any other agency or department of the United States Government, as required. The receiving Party shall provide the exporting Party with any information, materials, certifications or other documents which may be reasonably required in connection with such exports under the Export Administration Act of 1979, as amended, its rules and regulations, the Federal Food, Drug and Cosmetic Act and other applicable export laws. -69- 11.2 WRITTEN ASSURANCE. Without limitation of the foregoing, and in support of maintaining a general license for the export of technical data under this Agreement, a Party receiving an export agrees to not knowingly export or reexport any technical data or materials furnished to such Party under this Agreement, any part thereof or any direct product thereof, directly or indirectly, without first obtaining permission to do so from the United States Department of Commerce, the United States Food and Drug Administration and/or other appropriate United States governmental agencies, into any country to which restrictions apply. ARTICLE XII. REPRESENTATIONS AND WARRANTIES 12.1 REPRESENTATIONS AND WARRANTIES OF AFFX. AFFX represents and warrants to BMX as follows: (a) POWER AND AUTHORITY. The execution and delivery of this Agreement and the Manufacturing Agreement and the performance of the transactions contemplated hereby and thereby have been duly authorized by all appropriate corporate action, and AFFX has all requisite power and authority to enter into this Agreement and the Manufacturing Agreement and to perform its obligations hereunder and thereunder, and each of this Agreement and the Manufacturing Agreement constitutes a valid and binding obligation of AFFX, enforceable against AFFX in accordance with its terms. (b) NO BREACH. The performance by AFFX of any of the terms and conditions of this Agreement on its part to be performed does not and will not constitute a breach of any other -70- agreement or understanding, whether written or oral, to which it or any of its Affiliates is a party. (c) RIGHTS TO INTELLECTUAL PROPERTY. (i) Set forth on Schedule 2 is a listing, to the extent known as of the date hereof, identifying the Patents of AFFX (such Patents, along with associated Know-how and Copyrights referred to as the "AFFX IP") to be utilized, in the Collaboration and in connection with the Manufacturing Agreement. (ii) AFFX owns or has the right to use pursuant to license, sublicense, agreement or permission all the AFFX IP. 12.2 REPRESENTATIONS AND WARRANTIES OF BMX. (a) POWER AND AUTHORITY. The execution and delivery of this Agreement and the Manufacturing Agreement and the performance of the transactions contemplated hereby and thereby have been duly authorized by all appropriate corporate action, and BMX has all requisite power and authority to enter into this Agreement and the Manufacturing Agreement and to perform its obligations hereunder and thereunder, and each of this Agreement and the Manufacturing Agreement constitutes a valid and binding obligation of BMX, enforceable against BMX in accordance with its terms. (b) NO BREACH. The performance by BMX of any of the terms and conditions of this Agreement on its part to be performed does not and will not constitute a breach of any other agreement or understanding, whether written or oral, to which it or any of its Affiliates is a party. (c) RIGHTS TO INTELLECTUAL PROPERTY. -71- (i) Set forth on Schedule 5 is a listing, to the extent known as of the date hereof, identifying the Patents of BMX (such Patents, along with associated Know-how and Copyrights to the extent deemed applicable to the purposes of the Collaboration referred to as the "BMX IP") to be utilized to the extent that BMX deems it useful, in the Collaboration and in connection with the Licensed Diagnostic Products. (ii) BMX owns or has the right to use pursuant to license, sublicense, agreement or permission all the BMX IP. ARTICLE XIII. MISCELLANEOUS 13.1 PUBLICITY. Neither Party, nor any of its Affiliates, shall originate any publicity, news release or other public announcement, written or oral, relating to this Agreement or the existence of an arrangement between the Parties, without the prior written approval of the other Party, which approval shall not be unreasonably withheld, except as otherwise required by law. 13.2 ASSIGNMENT. Except as otherwise provided in this Agreement, neither this Agreement nor any of the rights or obligations hereunder may be assigned by either Party without the prior written consent of the other Party, except that either Party may assign to an Affiliate, or to a party who acquires all or substantially all of the relevant business relating to the subject matter of this Agreement by merger, acquisition, sale of assets or otherwise. 13.3 GOVERNING LAW. This Agreement shall be governed by and interpreted in accordance with the laws of California -72- (without regard to its or any other jurisdiction's choice of law principles) except that any arbitration hereunder shall be subject to the federal law applicable to arbitration. 13.4 FORCE MAJEURE. In the event that either Party is prevented from performing or is unable to perform any of its obligations under this Agreement due to any act of God; fire; casualty; flood; war; strike; lockout; failure of public utilities; injunction or any act, exercise, assertion or requirement of governmental authority; epidemic; destruction of production facilities; riots; insurrection; inability to procure or use materials, labor, equipment, transportation or energy; or any other cause beyond the reasonable control of the Party invoking this Section 13.4 if such Party shall have used its best efforts to avoid such occurrence, such Party shall give notice to the other Party in writing promptly, and thereupon the affected Party's performance shall be excused and the time for performance shall be extended for the period of delay or inability to perform due to such occurrence. 13.5 WAIVER. The waiver by either Party of a breach or a default of any provision of this Agreement by the other Party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either Party to exercise or avail itself of any right, power or privilege that it has or may have hereunder operate as a waiver of any right, power or privilege by such Party. 13.6 NOTICES. Any notice or other communication in connection with this Agreement must be in writing and if by mail, -73- by certified mail, return receipt requested, and shall be effective when delivered to the addressee at the address listed below or such other address as the addressee shall have specified in a notice actually received by the addressor. If to AFFX: Affymetrix, Inc. 3380 Central Expressway Santa Clara, California 95051 Attention: President If to BMX: bioMerieux Vitek, Inc. 595 Anglum Drive Hazelwood, Missouri 63042-2395 Attention: President 13.7 CALENDAR AND BUSINESS DAYS. Unless otherwise expressly stated to be business days, all references to days shall mean calendar days; provided, however, that if the last date or the deadline for the giving of notice or performance of any other act or fulfillment or satisfaction of any condition set forth in this Agreement shall fall on a day which is not a business day, then the time for the giving of such notice or performance of such act or fulfillment or satisfaction of such condition shall be extended to the next business day. As used herein, the term "business days" shall mean all days other than Saturdays, Sundays or state or federal holidays. 13.8 NO AGENCY. Nothing herein shall be deemed to constitute either Party as the agent or representative of the other Party, or both Parties as joint venturers or partners for any purpose. Each Party shall be an independent contractor, not an employee or partner of the other Party, and the manner in which a Party renders its services under this Agreement shall be within such Party's sole discretion. Neither Party shall be responsible for the acts or omissions of the other Party, and -74- neither Party will have authority to speak for, represent or obligate the other Party in any way without prior written authority from the other Party. 13.9 ENTIRE AGREEMENT. This Agreement, the Manufacturing Agreement and the Schedules, Annexes and Exhibits hereto and thereto (which Schedules, Annexes and Exhibits are deemed to be a part of this Agreement and the Manufacturing Agreement for all purposes) contain the full understanding of the Parties with respect to the subject matter hereof and supersede all prior understandings and writings relating thereto. No waiver, alteration or modification of any of the provisions hereof shall be binding unless made in writing and signed by the Parties by their respective officers thereunto duly authorized. 13.10 HEADINGS. The headings contained in this Agreement are for convenience of reference only and shall not be considered in construing this Agreement. 13.11 SEVERABILITY. In the event that any provision of this Agreement is held by a court or arbitral panel of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law of any relevant jurisdiction, the validity of the remaining provisions shall not be affected, and the rights and obligations of the Parties shall be construed and enforced as if the Agreement did not contain the particular provisions held to be unenforceable. 13.12 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their successors and permitted assigns. -75- 13.13 THIRD PARTIES. None of the provisions of this Agreement shall be for the benefit of or enforceable by any third party. 13.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. ARTICLE XIV. ARBITRATION 14.1 ARBITRATION. In the event of any controversy or claim relating to, arising out of or in any way connected to any provision of this Agreement ("Dispute"), the Parties shall seek to settle their differences amicably between themselves. Any unresolved Dispute shall be finally resolved by final and binding arbitration, subject to the patent exception referred to below (the "Patent Exception"). Whenever a Party shall decide to institute arbitration proceedings, it shall give written notice to that effect to the other Party. The Party giving such notice shall refrain from instituting the arbitration proceedings for a period of ten (10) days following such notice to allow the Parties to attempt to resolve the Dispute between themselves. If the Parties are still unable to resolve the dispute, the Party giving notice may institute the arbitration proceeding under the rules of the International Chamber of Commerce ("ICC Rules"). Arbitration shall be held in Chicago, Illinois. The arbitration shall be conducted before a single arbitrator mutually chosen by the Parties, but if the parties have not agreed upon a single arbitrator within fifteen (15) days after notice of the -76- institution of the arbitration proceeding, then the arbitration will be conducted by a panel of three arbitrators. In such case, each Party shall within thirty (30) days after notice of the institution of the arbitration proceedings appoint one arbitrator. The presiding arbitrator shall then be appointed in accordance with ICC Rules. All arbitrator(s) eligible to conduct the arbitration must undertake in writing as a condition of service to render their opinion(s) promptly after the final arbitration hearing. No arbitrator (nor the panel of arbitrators) shall have the power to award punitive damages or any award of multiple damages under this Agreement and such awards are expressly prohibited. Decisions of the arbitrator(s) shall be final and binding on the Parties. Notwithstanding the foregoing, if within ten (10) days of the first occasion when the Parties' representatives meet with the arbitrator(s) a Party give notice by written designation of any matter relating solely to the validity or scope of any Patent as being subject to the Patent Exception referred to above, the matter so designated shall be set aside by the arbitrator(s) and shall not be decided by them, provided that the matter so designated constitutes a matter of which a United States District Court would have jurisdiction pursuant to 28 U.S.C. Section 1338(a), whether by way of action for declaratory judgement or otherwise, and provided further that such matter is submitted by the designating Party for decision by such court upon a complaint filed within thirty (30) days of such designation, to be decided as such court may determine. In such case, the non-designating Party may elect (no later than the date on which it files its answer to the complaint -77- in the District Court) to refer the entire matter in controversy to such court, but if such Party does not make such election the arbitrator(s) shall proceed to decide the remaining matter before them to the extent feasible and shall take such other action in such regard as they deem appropriate. Judgment on the award of the arbitrator(s) may be entered in any court having jurisdiction thereof. Except to the extent entry of judgment and any subsequent enforcement may require disclosure, all matters relating to the arbitration, including the award, shall be held in confidence by the Parties. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed as a sealed instrument in their names by their properly and duly authorized officers or representatives as of the date first above written. AFFYMETRIX, INC. bioMERIEUX VITEK, INC. By: /s/ Stephen P.A. Fodor By: /s/ Philippe Archinard ----------------------------- ------------------------------- Its: President Its: President ----------------------------- ------------------------------- Date: October 14, 1996 Date: September 26, 1996 ----------------------------- ------------------------------- -78- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 1 Initial Agreed Budget and Agreed Workplan WORKPLAN FOR [ * ] Overview The agreement between bioMeriux and Affymetrix includes the objective of developing a new integrated DNA probe based diagnostic system for launch in major markets and submission to FDA by [ * ]. This workplan details the early phases of the work to establish the Product Concept and Technical Feasibility. It is intended to complement the parallel Workplan for the Mycobacterial Chip. Concept/feasibility - [ * ] Product Concept - The first objective of the concept/feasibility stage is to formulate, and then test with marketing studies, a product concept for the first generation system by [ * ]. This market concept will include: [ * ] A broad concept "goal" has been set as follows and will be refined through technical studies and market feedback during this concept/feasibility phase. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Feature [ * ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Menu [ * ] - -------------------------------------------------------------------------------- [ * ] - -------------------------------------------------------------------------------- Contamination control [ * ] - -------------------------------------------------------------------------------- Multidetection [ * ] - -------------------------------------------------------------------------------- First result available [ * ] - -------------------------------------------------------------------------------- Throughput [ * ] - -------------------------------------------------------------------------------- Automation and sample prep [ * ] - -------------------------------------------------------------------------------- Disposable [ * ] - -------------------------------------------------------------------------------- Quantification [ * ] - -------------------------------------------------------------------------------- Target market [ * ] - -------------------------------------------------------------------------------- Target launch date [ * ] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- -1- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ]- The second objective of the concept/feasibility phase is to [ * ] Technical approach - [ * ] will all be tested and scored. [ * ] [ * ]- The third objective of the concept/feasibility phase [ * ] Technical Approach - [ * ] and cost will be estimated. [ * ] -2- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] Technical Approach - [ * ] will be studied. Concept/Feasibility Demonstration - [ * ] The goal of the concept/feasibility phase is define the different elements of [ * ] The project aims to demonstrate a level of feasibility as described below, on or before [ * ] [ * ] -3- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 2 AFFX Licensed Patents [ * ] -4- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 3 [ * ] Milestone 3.5(a) Performance Criteria Milestone: [ * ] as follows: 1. [ * ] 2. [ * ] 3. [ * ] -5- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 4 Viral Agent Candidates [ * ] -6- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 5 BMX Collaboration Related Patents [To be provided in good faith by BMX within one (1) week of the Effective Date and included herein.] [ * ] -7- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 6 [ * ] -8- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Schedule 7 Currency Exchange The currency exchange rates used to covert Net Sales made in currencies other than the United States dollar by Affiliates of BMX shall be as follows. 1. Net Sales of Affiliates of BMX that are made in [ * ] (for which BMX will provide AFFX copies in English at AFFX' request), shall be calculated, and the Net Sales in such month converted using such conversion rate. Royalty reports shall state the aggregate Net Sales for the applicable quarter in U.S. dollars as so calculated, and shall state the conversion rates applicable for each month in such quarter. 2. Net Sales of Affiliates of BMX that are made neither in [ * ] in the manner set forth in paragraph 1. Royalty reports shall state the aggregate Net Sales of each country for the applicable quarter in U.S. dollars as so calculated, and shall state the conversion rates applied in each month to calculate the [ * ] if available, or otherwise the [ * ] or another applicable rate. -9- TABLE OF CONTENTS Page ---- ARTICLE I. DEFINITIONS.................................................... 3 1.1 "Affiliate"....................................................... 3 1.2 "AFFX Collaboration Technology"................................... 3 1.3 "AFFX Licensed Core Technology"................................... 3 1.4 "Agreed Budget" and "Agreed Workplan"............................. 4 1.5 "Bacteriology Field".............................................. 4 1.6 "BMX Collaboration Technology".................................... 5 1.7 "Clinical Diagnosis".............................................. 5 1.8 "Collaboration"................................................... 5 1.9 "Collaboration Technology"........................................ 5 1.10 "Confidential Information"........................................ 5 1.11 "Contract Year"................................................... 6 1.12 "Copyrights"...................................................... 6 1.13 "Development Coordinating Committee".............................. 6 1.14 "DNA Probe Array"................................................. 6 1.15 "Full-Time Equivalent"............................................ 6 1.16 "Fully Loaded Manufacturing Cost"................................. 7 1.17 "High Density Probe Array"........................................ 7 1.18 "Joint Collaboration Technology".................................. 8 1.19 "Know-How"........................................................ 8 1.20 "Licensed Diagnostic Assay"....................................... 8 1.21 "Licensed Diagnostic Product"..................................... 9 1.22 "Licensed DNA Probe Array"........................................ 9 1.23 "Licensed Field".................................................. 9 1.24 "Major Market Country"............................................ 9 1.25 "Manufacturing Agreement"......................................... 9 1.26 "Net Sales"....................................................... 10 1.27 "Other Licensed Diagnostic Product"............................... 11 1.28 "Party"........................................................... 11 1.29 "Patents" or "Patent Rights"...................................... 11 1.30 "Probes".......................................................... 12 1.31 "Project Director"................................................ 12 1.32 "Related Funded Activities"....................................... 12 1.33 "Valid Patent Claim".............................................. 12 1.34 "Workplan"........................................................ 12 ARTICLE II. THE COLLABORATION............................................ 12 2.1 Purpose........................................................... 12 2.2 Committee......................................................... 13 2.3 Facilities........................................................ 14 2.4 Commitment........................................................ 14 2.5 Agreed Budgets and Workplan....................................... 15 2.6 Reports........................................................... 16 2.7 Staffing.......................................................... 16 2.8 Inspection........................................................ 18 2.9 Patent Assignment and Confidentiality Agreements.................. 19 2.10 Resolution of Impasse............................................. 19 ARTICLE III. FUNDING...................................................... 20 3.1 Collaboration Funding............................................. 20 3.2 Direct Expenses and Capital Funding for Equipment................. 21 -i- [ * ] Confidential Treatment Requested by Affymetrix, Inc. TABLE OF CONTENTS (continued) Page ---- 3.3 Related Activities................................................ 22 3.4 Other Expenditures................................................ 23 3.5 Milestone Payments................................................ 23 ARTICLE IV. DEVELOPMENT OBLIGATIONS....................................... 25 4.1 General Obligations............................................... 25 4.2 Supply of DNA Probe Arrays........................................ 26 4.3 Transition from Development to Manufacture........................ 28 4.4 BMX Supply........................................................ 28 4.5 Viral Agent Election.............................................. 29 ARTICLE V. OWNERSHIP; TECHNOLOGY RIGHTS................................... 29 5.1 Ownership of Collaboration Developments........................... 30 5.3 Option for Non-exclusive Licenses in the [ * ] and [ * ] Fields... 37 5.4 Industrial Testing and Other Fields............................... 38 5.5 Exclusivity of License............................................ 39 5.6 Limitations of License............................................ 39 5.7 Terms and Conditions of Exclusivity............................... 39 5.9 Assays Subject to Third Party Rights.............................. 44 5.10 Other Assays...................................................... 45 5.11 Loss of Right to Introduce New Assays and Other Products.......... 47 5.12 Entry by AFFX..................................................... 50 5.13 Patent Marking, License Legend and Trademarks..................... 50 ARTICLE VI. ROYALTIES..................................................... 51 6.1 Royalties Payable to AFFX in Respect of Sale of AFFX High Density Probe Arrays...................................................... 51 6.2 Royalty Term...................................................... 52 6.3 Reports and Payment............................................... 53 6.4 Taxes............................................................. 54 6.5 Records........................................................... 54 6.6 Special Arrangement as to Certain Third Party Royalties........... 55 ARTICLE VII. PATENT PROSECUTION AND INFRINGEMENT RIGHTS................... 55 7.1 Responsibility for Patenting of Technology........................ 55 7.2 Infringement...................................................... 56 7.3 Claimed Infringement.............................................. 61 ARTICLE VIII. CONFIDENTIAL INFORMATION ................................... 61 8.1 Treatment of Confidential Information............................. 61 8.2 Release from Restrictions......................................... 62 8.3 Publications...................................................... 63 ARTICLE IX. TERMINATION................................................... 64 9.1 Term of Agreement................................................. 64 9.2 Termination of Collaboration...................................... 64 9.3 Termination by BMX................................................ 65 9.4 Termination of Agreement for Breach............................... 66 -ii- TABLE OF CONTENTS (continued) Page ---- 9.5 Survival of Obligations: Return of Confidential Information...... 67 ARTICLE X. INDEMNIFICATION AND LIABILITY LIMITATIONS...................... 68 10.1 Product Liability Indemnification................................. 68 10.2 Indemnification of BMX............................................ 70 10.3 Procedure for Indemnification..................................... 71 ARTICLE XI. EXPORT........................................................ 71 11.1 Acknowledgment.................................................... 71 11.2 Written Assurance................................................. 72 ARTICLE XII. REPRESENTATIONS AND WARRANTIES............................... 73 12.1 Representations and Warranties of AFFX............................ 73 12.2 Representations and Warranties of BMX............................. 73 ARTICLE XIII. MISCELLANEOUS............................................... 75 13.1 Publicity........................................................ 75 13.2 Assignment....................................................... 75 13.3 Governing Law.................................................... 75 13.4 Force Majeure.................................................... 75 13.5 Waiver........................................................... 76 13.6 Notices.......................................................... 76 13.7 Calendar and Business Days....................................... 77 13.8 No Agency........................................................ 77 13.9 Entire Agreement................................................. 77 13.10 Headings......................................................... 78 13.11 Severability..................................................... 78 13.12 Successors and Assigns........................................... 78 13.13 Third Parties.................................................... 78 13.14 Counterparts..................................................... 78 ARTICLE XIV. ARBITRATION.................................................. 79 14.1 Arbitration....................................................... 79 -iii- EX-10.26 3 EXHIBIT 10.26 [ * ] Confidential Treatment Requested by Affymetrix, Inc. MANUFACTURING AGREEMENT between BIOMERIEUX VITEK, INC. and AFFYMETRIX, INC. Confidential MANUFACTURING AGREEMENT effective as of September 1, 1996 ("Effective Date") between AFFYMETRIX, INC., a California corporation having its principal place of business at 3380 Central Expressway, Santa Clara, California 95051 (hereinafter referred to as "AFFX") and BIOMERIEUX VITEK, INC., a Missouri corporation, having its principal place of business at 595 Anglum Drive, Hazelwood, Missouri 63042-2395 (hereinafter referred to as "BMX"). RECITALS WHEREAS, pursuant to a Collaboration Agreement of even date herewith (the "Collaboration Agreement") between AFFX and BMX, AFFX and BMX have agreed with respect to certain terms of a collaboration for the purpose of developing DNA probe array based products that will, among other things, assist BMX in the development of DNA probe based diagnostic systems to detect the presence, identity and/or susceptibility of bacterial, fungal and certain viral microorganisms for use in the clinical diagnosis of human disease and such other uses as the parties may agree; and WHEREAS, in connection with and following upon such Collaboration (such term, and all other capitalized terms not otherwise defined herein having the meanings ascribed to them in the Collaboration Agreement), AFFX has agreed to supply and BMX has agreed to purchase BMX's requirements of certain DNA Probe Arrays to be manufactured by AFFX on the terms and conditions set -1- [ * ] Confidential Treatment Requested by Affymetrix, Inc. forth herein and to be used by BMX only as permitted pursuant to the licenses granted in the Collaboration Agreement; NOW, THEREFORE, in consideration of the mutual covenants and promises contained in this Manufacturing Agreement and other good and valuable consideration, AFFX and BMX hereby agree as follows: ARTICLE 1 DEFINITIONS As used in this Manufacturing Agreement, the following terms shall have the following meanings, and additional capitalized terms shall have the meanings set out in the Collaboration Agreement: 1.1 "Base Technical Specifications" shall have the meaning set forth in Section 2.1(a). 1.2 "Chip Product(s)" means the Licensed DNA Probe Arrays for which there are Specifications. 1.3 "Event of Force Majeure" means an act of nature, acts of the public enemy, freight embargoes, quarantine restrictions, labor strife or strikes, insurrection, riot or other such event or events beyond the control of AFFX or BMX. 1.4 "FCA Place of Manufacture" means that term as defined in INCOTERMS (1990) with delivery to the carrier being made by AFFX at its manufacturing facility for the Chip Product. 1.5 "Firm Order" shall have the meaning set forth in Section 4.2. 1.6 "Fully-Loaded Manufacturing Cost" means (a) costs [ * ] -2- [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ]including, but not limited to [ * ] on account of the manufacture of product to the extent that [ * ] plus [ * ] including but not [ * ] being determined in accordance with United States generally accepted cost accounting practices, and shall additionally include amounts [ * ] of the Collaboration Agreement if the Parties so elect. AFFX's [ * ] but shall be separately billed on each invoice as applicable. 1.7 "Good Manufacturing Practices" means current Good Manufacturing Practices as defined in 21 CFR Section 210 et seq. as amended from time to time. -3- [ * ] Confidential Treatment Requested by Affymetrix, Inc. 1.8 "Governmental Entity" means any federal, state, local, executive, judicial, legislative, administrative or other governmental or public agency, board, body or authority, as applicable. 1.9 "Governmental Rules" means all federal, state or local statutes, regulations, ordinances, rules, guidelines, orders, actions, or policies, whether now in effect or enacted after the date of this Manufacturing Agreement. 1.10 "Lead-time" means the time elapsed from the date of issuance of BMX's P.O. through the Ship Date. 1.11 "Manufacturing Agreement" means this agreement, together with all of the terms and conditions hereof and attachments and exhibit(s) annexed hereto, as the same may be modified, amended or supplemented from time to time. 1.12 "On-time" means on, or no more than [ * ] days prior to or later than, Ship Date. 1.13 "Parties" means the two parties (BMX and AFFX) named in the heading of this Manufacturing Agreement. 1.14 "Purchase Order" ("P.O.") means the written notification from BMX to AFFX to the effect that BMX shall buy from AFFX a specified amount of Chip Products. 1.15 "Price" means the Price BMX shall pay for certain Chip Product(s) as set forth in Section 5.1 hereof. 1.16 "Process Know-How" means with respect to any party to this Manufacturing Agreement, all Know-How used by such party pursuant to performance of its obligations under this Manufacturing Agreement, and all other commercial and technical information, including but not limited to techniques, formulae, -4- trade secrets, processes, patent rights, and procedures, developed or used by such-party in connection with the performance of its obligation under this Manufacturing Agreement. 1.17 "Ship Date" means the bill of lading date or the airway bill date for the purchased Chip Product(s). 1.18 "Specification(s)" means those acceptance and performance specifications for a Chip Product, including probe selection layout and other material characteristics, inspection standards and procedures therefor, based upon or derived from the Base Technical Specifications established pursuant to Section 2.2. 1.19 "Standards" means the applicable standards as detailed in the Technical Information, applicable government and regulatory agency requirements (such as FDA, CSA, CLIA, TUV, VDE), and other such Standards that apply to the design, manufacture, and sale of the Chip Products. 1.20 "Standard Manufacturing Process" ("SMP") means with respect to a Chip Product, characteristics of such Chip Product, as documented and recorded pursuant to Section 3.4. 1.21 "Technical Information" means all technical knowledge, information, data, trade secrets, manufacturing and test data, and technical information involving or relating to the manufacture, production, maintenance and operation of the Chip Products as have heretofore been or may hereafter be disclosed to AFFX. 1.22 "Term" means the period commencing on the date of this Manufacturing Agreement during which the Parties continue to be bound hereby. -5- ARTICLE 2 MANUFACTURE AND TECHNICAL INFORMATION 2.1 DELIVERY OF TECHNICAL INFORMATION AND DOCUMENTATION. (a) Based on DNA Probe Arrays or prototypes developed in the Collaboration, BMX and AFFX, following consultation with the Development Coordinating Committee, and in full consideration of the results of the research work performed during the course of the Collaboration (the applicable results of which shall have been disclosed in a timely manner and in full by AFFX to BMX and by BMX to AFFX to the extent each is responsible for such work), shall establish certain technical specifications in accordance with the terms of this paragraph, which specifications are intended to set forth the entire range of specifications foreseeably applicable to the DNA Probe Arrays to be manufactured pursuant to this Agreement (the "Base Technical Specifications"). The Base Technical Specifications shall be proposed by BMX in consultation with AFFX, and shall be subject to the written approval of AFFX, which approval shall not be unreasonably withheld. The Base Technical Specifications shall state, for each such foreseeably relevant specification, a range of potential variations of such specifications (which could include, for example, references to the physical characteristics of the Licensed DNA Probe Array, the configuration of the Licensed DNA Probe Array, or any other characteristic of the Licensed DNA Probe Array deemed relevant to the manufacture or use of the Licensed DNA Probe Array). The Base Technical Specifications will include minimum and maximum chip sizes and feature sizes for -6- [ * ] Confidential Treatment Requested by Affymetrix, Inc. the DNA Probe Arrays. The currently anticipated specifications for the DNA Probe Arrays are set forth in Exhibit 1. (b) The Base Technical Specifications shall be reviewed, periodically as necessary but no less than annually after their establishment in accordance with the preceding paragraph, and may be revised by mutual, written agreement of the Parties to the extent the Parties deem it necessary to do so, based upon the then-current results of work in the Collaboration and/or any other relevant factors. It is recognized that from time to time the Base Specifications will need to be revised to improve performance, increase information content, and improve reliability of BMX's products. Such changes may be proposed by either Party at an annual review, and will be reasonably considered by the other Party. In the event that a mutually agreed upon change of Base Technical Specifications or any agreed upon future revision thereof results in the need for changes to instrumentation associated with the DNA Probe Arrays (i) AFFX shall continue to manufacture DNA Probe Arrays of earlier designs during a reasonable instrument phase-out program by BMX or until DNA Probe Arrays in accordance with the revised Specifications are fully available, whichever is later, and (ii) AFFX shall adapt its facilities, equipment and processes for manufacture of DNA Probe Arrays in accordance with the revised specifications in a commercially reasonable timeframe, and (iii) BMX shall adapt its instrumentation within a commercially reasonable timeframe. (c) In the event that (i) AFFX has proposed changes to the specifications for the DNA Probe Arrays after [ * ] and is prepared to commit as to a material reduction in -7- [ * ] Confidential Treatment Requested by Affymetrix, Inc. manufacturing cost and transfer price as a result of such changes, (ii) such specifications are met by other DNA Probe Arrays manufactured by AFFX in quantity for use in similar applications as those of BMX and of similar quality, and are able to be read on instrumentation of similar cost having technical characteristics reasonably available to BMX pursuant to refitting or substitution of instrumentation the cost of which would be commercially reasonable, and (iii) BMX elects not to modify the specifications for such DNA Probe Arrays, the "Cost Ratio" of the DNA Probe Arrays utilized in calculations of royalties in Section 6.1 of the Collaboration Agreement commencing six (6) months after such election shall [ * ] 2.2 DETAILED SPECIFICATIONS FOR LICENSED DNA PROBE ARRAYS. At least six (6) months prior to the expected submission of the first P.O. for the Chip Product(s), the Parties shall agree in writing on the Specifications for the Chip Product(s) to be manufactured hereunder. AFFX will not unreasonably withhold approval for such Specifications. The detailed Specifications shall be consistent with the Base Technical Specifications. Thereafter BMX in consultation with AFFX shall from time to time submit changes in the detailed Specifications for existing Chip -8- Products, as may be required, together with detailed Specifications for new Chip Products. All such Specifications shall be subject to consent of AFFX as to technical characteristics and mode of manufacture. Such consent shall not be unreasonably withheld and if withheld the reasons therefor shall be given with suggested technical modifications as appropriate to enable BMX to modify the Specifications to permit manufacture and supply to the extent reasonably feasible of any Chip Products within the Licensed Field. BMX recognizes that such changes may impact AFFX' previously forecast cost of goods sold. ARTICLE 3 MANUFACTURE AND PURCHASE OF CHIP PRODUCTS 3.1 MANUFACTURE AND PURCHASE OBLIGATIONS OF AFFX AND BMX. AFFX shall manufacture, supply and deliver to BMX, and BMX shall purchase from AFFX, Chip Products as are required to be so manufactured, supplied, delivered and purchased as provided in this Article 3, and such other products referred to in Section 3.3 for which valid P.O.s are submitted by BMX to, and accepted by, AFFX. AFFX's obligation hereunder shall include an obligation to make use as BMX may require of any third-party technology which AFFX has licensed to BMX under the Collaboration Agreement or to which BMX may obtain a license for the purposes hereof. Any cost of use of such third-party technology shall be included in Fully-Loaded Manufacturing Cost as appropriate unless directly borne by BMX. -9- 3.2 REQUIREMENTS. Subject to BMX's defined and limited right to manufacture and have manufactured Chip Products as set forth in Section 3.5(b) - (f) below, BMX shall be obligated to purchase from AFFX and AFFX shall be obligated to supply BMX's Requirements for all High Density Probe Arrays in the Licensed Field. For the purposes hereof, "Requirements" shall mean all High Density Probe Arrays to be used or sold by BMX in the Licensed Field. In the event that AFFX is unable to manufacture any portion of BMX Requirements whether due to technical obstacles, difficulty of compliance with proposed specifications, impediments created by third-party patent rights or other causes, each Party shall use reasonable commercial efforts to seek to overcome such inability, in such manner as to assure supply to BMX. 3.3 OTHER DISCRETIONARY P.O.s. In addition to the P.O.s relating to purchased products as described in Section 3.2, BMX may, from time to time, submit P.O.s for products not otherwise required to be purchased from AFFX, or initiate the solicitation of a bid from AFFX with respect to such products. In such case AFFX may, in its discretion, accept such P.O. and render performance in connection therewith, or submit a bid with respect to such product. 3.4 PREPARATION FOR MANUFACTURE OF CHIP PRODUCTS. The following terms and conditions shall apply to the Chip Product manufacturing process development and shall be in addition to the terms and conditions set forth in the Collaboration Agreement with respect to such manufacturing process development. (a) BMX's Obligations. -10- (i) BMX Know-How. To the extent BMX deems necessary, BMX may provide AFFX with any BMX Know-How relating to the BMX Collaboration Technology and any other information concerning the processes, quality control standards, methods and apparatus for manufacturing Chip Products which may be reasonably necessary in order for AFFX to manufacture the Chip Products pursuant to this Manufacturing Agreement. (ii)Testing of Chip Products. BMX and AFFX shall, respectively, develop processes for evaluation and testing of Chip Products, and shall share such information for use in testing of the Chip Products. Such information may from time to time be reflected or incorporated in applicable specifications. (b) AFFX's Obligations. (i) AFFX Know-How. AFFX shall provide BMX in a timely manner with all of AFFX's Know-How reasonably necessary or appropriate in order for BMX and AFFX to establish the Specifications for each Chip Product. In so doing, AFFX shall draw upon the full range as relevant of the AFFX Licensed Core Technology and AFFX Collaboration Technology, including, without limitation, manufacturing procedures for manufacture of the Chip Products and all other information necessary or appropriate for the manufacture of the Chip Products. All such information shall be documented and recorded by AFFX in the SMP of the applicable Chip Product. (ii) Standard Manufacturing Process Procedures; Capital Modifications. AFFX shall develop the SMP for each Chip Product and the procedural process improvements, and shall scale-up its facilities as may be reasonably necessary for manufacture -11- of the Chip Products in the quantities required under this Manufacturing Agreement. AFFX shall provide all reasonable assistance reasonably requested by BMX in implementing process improvements based upon AFFX's general production experience and/or as recommended by BMX. In addition and subject to the limits set forth in this Manufacturing Agreement and other obligations of AFFX to third parties presently existing and as shall have been revealed to BMX in connection with due diligence inquiries or assumed in the future and reasonably consistent with its burdens and obligations hereunder, AFFX shall use reasonable commercial efforts to make such additional capital modifications to its facilities as are reasonably necessary or appropriate to effect the process improvements, reduce manufacturing costs, increase production capacity and implement Process Know-How; provided, however, that, to the extent commercially reasonable and consistent with its obligation to manufacture hereunder, AFFX may avoid any changes to its facilities that would have a material negative impact on AFFX's processes or would materially increase existing costs associated with products that AFFX is manufacturing for itself or third parties. BMX may consult with AFFX in connection with development of the SMP and may revise and suggest changes to the SMP which shall be duly considered. The SMP (and any modifications thereto) promulgated by AFFX shall be consistent with the Chip Product Specifications, and shall enable AFFX to manufacture and deliver the Chip Products in the quantities and with the quality standards required under this Manufacturing Agreement including, as applicable for a particular product, GMP and ISO-9000 requirements. -12- [ * ] Confidential Treatment Requested by Affymetrix, Inc. (iii) Confirmation of Intent and Ability to Manufacture. Within a reasonable time after achievement of the Milestones referred in Section 3.5(e) of the Collaboration Agreement and in any event prior to [ * ] BMX may elect to have AFFX and BMX carry out a consultation process in order to confirm AFFX's ability to supply BMX Requirements as contemplated in the Manufacturing Agreement. Such process shall be conducted at BMX' expense. In this connection, it is understood and agreed that the Chip Products are unique and not available from other manufacturing sources and that BMX will be dependent for the success of its business on supply of Chip Products by AFFX. As part of the consultation process, BMX, assisted by such consultants as it may reasonably appoint and subject to such reasonable assurances of confidentiality as AFFX may request, shall carry out an audit of AFFX's ability to manufacture, including determination of remaining problems to be resolved and additional steps taken to assure timely achievement of AFFX ability to manufacture on a regular and reliable basis. AFFX shall confer with BMX as to such audit and shall prepare a report of the results thereof and in consideration of such report AFFX shall state in writing how it will resolve or deal with any material issues or problems raised in the audit and shall affirmatively represent to BMX that it shall be prepared to manufacture and supply the Requirements of BMX on a timely basis. The Parties will use best efforts on an ongoing basis to resolve any difficulties raised in the audit. (iv) Low-Cost Production. In consideration of BMX's reasonable commercial efforts to manufacture and market -13- Licensed Diagnostic Assays, AFFX shall exert reasonable commercial efforts to produce Chip Products as efficiently and at as low a cost as practicable consistent with AFFX's internal quality standards, the maintenance of the quality requirements for the Chip Product, and AFFX's presently existing obligations to third parties and such future obligations of AFFX which AFFX may undertake which are reasonably consistent with its burdens and obligations hereunder, and the SMPs shall be developed by AFFX in accordance with this objective. For each calendar year during the term of this Agreement, AFFX shall provide BMX with its standard Fully Loaded Manufacturing Cost for the Chip Product at the beginning of each calendar year and at mid-year based on reasonable commercial efforts to forecast such Cost. (v) Disposal of Materials. AFFX shall be responsible for the proper disposal of all materials resulting from the manufacturing process and not constituting the Chip Product and shall effect such disposal in accordance with all applicable Governmental Rules. (vi) Regulatory Compliance. AFFX shall be responsible for all process and equipment validation required by any applicable Governmental Entity and shall take all steps necessary to pass inspection by such Governmental Entity. All Chip Products shall be manufactured by AFFX in accordance with Good Manufacturing Practices. At BMX's expense, AFFX shall also reasonably assist BMX in preparing and updating any submission or other document required by a Governmental Entity for approval of the Chip Product. -14- [ * ] Confidential Treatment Requested by Affymetrix, Inc. (c) Joint Obligations. The Parties recognize that from time-to-time changes to the Chip Product may be desirable. AFFX and BMX agree to work cooperatively and expeditiously to change Chip Products and the SMP for such Chip Products in ways that will reduce total costs and/or improve Chip Product performance. Notwithstanding the foregoing, AFFX, shall not be obligated to the extent commercially reasonable and consistent with its obligations to manufacture hereunder to make changes to its processes or equipment that would negatively, materially impact AFFX's manufacturing processes and costs of manufacture of products for third parties, and any changes to the SMPs shall be at the sole discretion of AFFX, provided that AFFX shall make available SMPs as advantageous as those applicable to AFFX's best customers. 3.5 MANUFACTURING RIGHTS OF BMX. BMX shall have the right to manufacture or have others manufacture the Chip Products only as provided below in this Section 3.5: (a) Manufacture of Probe Arrays. BMX has the right to manufacture or have manufactured DNA probe arrays having a Probe density of [ * ] Probes/cm(2) or less and may cause the same to be form-factor compatible with High Density Probe Arrays manufactured by AFFX and sold by BMX pursuant to this Agreement. Subject to the terms and conditions of this Agreement, BMX shall have the right to manufacture or have manufactured High Density Probe Arrays in the circumstances described in Section 3.5(b) - (f) below. (b) Failure to Meet Supply Obligations. -15- [ * ] Confidential Treatment Requested by Affymetrix, Inc. (i) The Parties shall consult regularly as to the manner of performance hereunder, and to assure reliability and continuity of supply of Chip Product. If at any time either Party is of the view that AFFX may not be able to meet future binding orders from BMX for Chip Product, such Party shall notify the other Party in writing, and the Parties shall in good faith cooperate and endeavor to make appropriate arrangements for a continuous and adequate supply of Chip Product to BMX. In the event that AFFX becomes aware of any occurrences or developments that could reasonably be anticipated to create problems or impediments to supply of BMX Requirements, or to delay or interrupt supply of such Requirements, AFFX shall give BMX reasonable advance notice thereof and the Parties shall consult as to the resolution of the matter. If AFFX has reason to believe the situation will result in an Initial Supply Failure or a Further Supply Failure, as hereinafter defined, pursuant to which BMX would be entitled to make other arrangements to manufacture any Deficiency (as hereinafter defined) of Chip Products, then AFFX shall make reasonable efforts to so notify BMX and, to mitigate loss. AFFX may elect to offer to BMX early access to the manufacturing rights as referred to under Section 3.5 (b) (c) and (d), subject to negotiation of any such proposal on a basis mutually agreeable to the Parties. (ii)If during the term of this Manufacturing Agreement AFFX fails to supply on an "On-Time" basis and in accordance with applicable rejection standards at least [ * ] of the units of Chip Products that are subject to Firm Orders received from BMX for any quarter ("Initial Supply -16- [ * ] Confidential Treatment Requested by Affymetrix, Inc. Failure"), then BMX shall give written notice, referring to the procedures of this Section ("Section 3.5 Notice"), and the Parties shall meet promptly to discuss the reasons for such failure to supply and attempt to arrive at an appropriate remedy. (Firm Orders shall be taken into consideration for the purposes of determining any Initial Supply Failure and any Further Supply Failure (as hereinafter defined) only to the extent that such Firm Orders do not exceed the limits based on prior forecasting as set forth in clauses (a) and (b) set forth in the last paragraph of Section 4.2.(iii). If AFFX continues in its failure to supply BMX's Requirements with respect to the period referred to below which is consecutive to the quarter in which the Initial Supply Failure occurred, a Further Supply Failure (as hereinafter defined) shall occur, then BMX shall have the rights, subject to obligations and limitations, as set forth below. Any of the following shall constitute a Further Supply Failure if occurring in an applicable period consecutive to a quarter in which an Initial Supply Failure has occurred and BMX has timely given the Section 3.5 Notice: Supply on an "On-Time" basis and in accordance with applicable rejection standards of: (a) less than [ * ] of total units of Chip Product subject to Firm Orders for the three months comprising the next consecutive quarter; (b) less than [ * ] of units of Chip Product subject to Firm Orders for the first forty-five (45) days of the next consecutive quarter; (c) less than [ * ] of units of Chip Product subject to Firm Orders for the first of the three (3) months comprising such quarter. In the event an Initial Supply Failure is followed in the next consecutive -17- [ * ] Confidential Treatment Requested by Affymetrix, Inc. applicable period, as above, by a Further Supply Failure then, at any time within the [ * ] days after the close of such subsequent period BMX may upon written notice to AFFX ("Manufacturing Assumption Effective Date") elect to be relieved of its obligation to purchase a portion of its future Requirements of units of Chip Product from AFFX, measured as follows. The difference between the number of units of Chip Products subject to Firm Orders for the quarter in which the Initial Supply Failure occurred and the number of such units in fact Supplied for such quarter shall be determined and such difference shall be added to the difference between the number of units of Chip Products subject to Firm Orders for the period as to which the Further Supply Failure occurred (six months, one and one-half months, or one month) and the number of such units in fact Supplied for such period and the sum of the two differences shall be divided by the number of months (whole or fractional) included in the applicable periods, the resulting monthly average being hereinafter referred to as the "Deficiency." In manufacturing any Chip Products as to which an Initial or Further Supply Failure shall have occurred BMX shall follow applicable Specifications previously submitted to AFFX (so long as AFFX is continuing manufacturing operations hereunder), subject to normal evolution and adaptation of such specifications for commercial or technical reasons unrelated to any difficulties of manufacture which had a causative role in the supply failure. BMX shall be required to make royalty payments pursuant to Section 3.5(e)(ii) hereof, and BMX may manufacture or have manufactured such number of units of Chip Products (including Chip Products for internal -18- testing and maintenance of supply) as will permit availability for use in Licensed Diagnostic Assays of no more than 12 times such Deficiency in any year. AFFX shall provide all reasonable assistance to enable BMX or its third party manufacturer to manufacture the Chip Products permitted to be manufactured by BMX hereunder. At such time as AFFX can give assurance of future performance reasonably satisfactory to BMX that it is able to supply all of BMX's Requirements of Chip Product, AFFX shall give notice thereof to BMX, and BMX shall give reasonable consideration to allowing AFFX to resume supplying the portion of its Purchase Orders consisting of the Deficiency; provided, however, that BMX may (within the above limitations) take such commercial steps as it deems reasonably necessary to assure an ongoing source of supply for such Deficiency in or regarding future periods, and in the event it has made significant investment or undertaken significant obligations hereunder in such manufacturing operation shall be under no obligation to discontinue the same. (c) Know-How Transfer. Promptly after the Manufacturing Assumption Effective Date, AFFX will deliver to BMX, at BMX's request and expense, the following "manufacturing assistance items" (all subject to the confidentiality restrictions herein): SMPs for the Chip Product(s), specifications of all tools, fixtures and equipment which were designed and built expressly for the manufacture and testing of the purchased Chip Products, and all engineering drawings, manufacturing documents or instructions and such other written materials (including lists of AFFX's suppliers and their -19- addresses and AFFX's consent, where required, to the sale of such supplies to BMX) which are used by AFFX and are necessary or useful to enable BMX to make or have made Chip Products. In addition, AFFX shall, from and after the Manufacturing Assumption Effective Date, upon BMX's request and expense, provide technical assistance and other information as may be reasonably requested to enable BMX to make or have made the Chip Products. (d) BMX's Right to Manufacture. Pursuant to licenses granted to BMX herein and in the Collaboration Agreement, after the Manufacturing Assumption Effective Date and only up to the amount of the Deficiency that BMX is permitted to manufacture pursuant to Section 3.5(b), BMX shall have the right under the AFFX Licensed Core Technology and AFFX Collaboration Technology to make or have others make Chip Products but only for the licensed uses permitted under the Collaboration Agreement. In such case, BMX shall have sole responsibility and obligation for the performance criteria, SMP, product characteristics, quality control and other similar matters in respect of the Chip Products manufactured by it. AFFX will be entitled to reasonably review all such products before introduction to ensure that they will be sold in the appropriate field. (e) Applicable Royalty After Manufacturing Assumption Effective Date. (i) Upon assumption by BMX of its limited right to manufacture Chip Products, AFFX's failure to supply any units of Chip Product which are not subject to a Firm Order by BMX but are manufactured by BMX shall not be deemed to constitute a breach of this Agreement. Except for such limited right of -20- manufacture, this Agreement shall continue in full force and effect (including minimum royalty provisions which would otherwise be applicable) and BMX and AFFX shall respectively be obligated to purchase and to supply all units of Chip Products subject to future Firm Orders. (ii) BMX shall continue to make royalty payments to AFFX pursuant to Article VI of the Collaboration Agreement after the Manufacturing Assumption Effective Date. The royalty rate for assays using Licensed DNA Probe Arrays manufactured by BMX shall be the royalty rate as of the close of the quarter preceding the Manufacturing Assumption Effective Date. In the event of successive Manufacturing Assumption Effective Dates relating to successive Deficiencies, a pro rata application as to applicable royalty rates shall be made. ARTICLE 4 FORECASTS AND PURCHASE ORDERS 4.1 BMX'S PURCHASE OBLIGATIONS. Nothing contained in this Manufacturing Agreement shall require BMX to purchase any specified amount of Licensed DNA Probe Arrays; it being understood that BMX's obligation to buy is limited to its Requirements of Chip Product, if any, which is required by BMX. 4.2 ROLLING PURCHASE FORECAST AND PVP SCHEDULE. At least six (6) months prior to BMX's first need for manufactured Chip Products, BMX shall deliver to AFFX its preliminary purchase forecast, showing BMX's projected requirements for Chip Products, by type of Chip Product and quantity thereof, for each of the -21- first twelve (12) months of manufacturing ("Preliminary Forecast Period"), including reference to the Specifications for each type of Chip Product. Within thirty (30) days after AFFX's receipt of the preliminary forecast, AFFX shall deliver to BMX a detailed proposed price/volume/production schedule for the Chip Products ("PVP Schedule") for the Preliminary Forecast Period, reflecting the requirements of BMX as indicated in its forecast and AFFX's reasonable estimation of its ability to satisfy those requirements (and in such regard AFFX shall use its best reasonable efforts to assure that supply is sufficient to permit BMX to attain applicable milestones related to the exclusivity of its licenses as provided in the Collaboration Agreement). In response thereto, and ninety (90) days or more before commencement of the first month when Chip Products shall be required, BMX shall deliver to AFFX a forecast of its projected purchases of Chip Product during the first twelve (12) months. (i) Projected purchases during the first three (3) months of such forecast will constitute firm orders ("Firm Orders"). (ii) Projected purchases for the following three (3) months will permit AFFX to purchase required materials, for which AFFX may request reimbursement if BMX does not purchase the corresponding Chip Products within a reasonable time. (iii) The forecast for the remaining six (6) months shall be made in good faith but shall be for planning purposes only. Thereafter, ninety (90) days or more before the first day of each succeeding month, BMX shall deliver to AFFX a -22- [ * ] Confidential Treatment Requested by Affymetrix, Inc. forecast of its projected purchases of Chip Product during the following twelve (12) months (forecast for the "Rolling Year"). When the forecast for a new Rolling Year is delivered, the purchases projected for the third month thereof shall become a Firm Order, but in no case (without the consent of AFFX, which shall not be unreasonably withheld): shall the Firm Order for Chip Products to be purchased in such month having the same Base Technical Specifications, apply to a number of units of Chip Product which, when combined with all units of Chip Products having the same Base Technical Specification which were the subject of Firm Orders for the two (2) previous months, would constitute (a) more than [ * ] or less than [ * ] of the units of such Chip Products having such Specifications as were projected to be purchased in the same three-month period in the forecast for the Rolling Year that commenced three (3) months prior to commencement of such new Rolling Year (such months then constituting the fourth, fifth and sixth months of such Rolling Year); or (b) more than [ * ] or less than [ * ] of the units of Chip Product having such Specifications as were projected to be purchased in the same three-month period in the forecast for the Rolling Year that commenced six (6) months prior to commencement of the new Rolling Year (such months then constituting the seventh, eighth and ninth months of such Rolling Year). In the event that any purchases projected for such third month exceed the applicable maximum and AFFX elects to withhold its consent to inclusion of such excess in the Firm Order it shall so notify BMX within thirty (30) days of receipt of such forecast but no later -23- than ten (10) days after specific written inquiry by BMX. In the event of a deficiency in the amount of units subject to Firm Order for such month and AFFX withholds its consent hereto as permitted hereby, it shall so notify BMX within ten (10) days after specific written inquiry by BMX and, absent contrary instruction by BMX, shall supply such deficiency by reference to units of Chip Product as previously forecast by BMX for such month. 4.3 PURCHASE ORDERS. This Manufacturing Agreement is not a P.O. and does not authorize delivery of or payment for any Chip Products and/or services as described herein, except pursuant to implementation of the specific provisions herein. Such authority or order shall be evidenced by P.O.s issued by BMX pursuant to this Manufacturing Agreement. (a) Form and Content of P.O. BMX's rolling purchase forecasts shall be accompanied by P.O.s for the third month of each such forecast, stating: BMX's P.O. number(s), BMX's and AFFX's part numbers, quantity ordered, requested Ship Date and desired carrier for shipping to the destination specified by BMX. In addition, each P.O. will reference this Manufacturing Agreement. Terms and conditions printed on the face or reverse side of BMX's P.O. form and/or AFFX's acknowledgment form shall not be part of this Manufacturing Agreement or add to or modify the terms of this Manufacturing Agreement unless both Parties hereto expressly agree in writing to include any such terms or conditions. (b) Issuance of P.O. and Acceptance by AFFX. Subject to the last sentence of subsection (a) above, AFFX agrees to -24- accept any P.O. that is in compliance with the terms and conditions of this Manufacturing Agreement. For expediency purposes, BMX may issue P.O.s by facsimile or electronic mail. (c) Verification of Active P.O.s. BMX may periodically request AFFX to verify all active P.O. delivery commitment quantities and schedules. AFFX shall respond to such request within five (5) working days after receipt of request by BMX. (d) Preferential Treatment of BMX. AFFX shall consider BMX a preferred customer, such that BMX shall be accorded treatment at least equal to that accorded AFFX's other most favored customers. For example, if the case arises whereby AFFX's production capacity, Events of Force Majeure, or other limiting factors require that AFFX determine an allocation of material and/or resources, BMX's preferential status will assure BMX that AFFX will fulfill its obligations to BMX with priority at least equal to that accorded AFFX's other best customers. In addition, AFFX shall take reasonable steps to ensure continuity of supply to BMX and shall from time-to-time if requested by BMX report as to available stock of Chip Products. (e) Cancellation of P.O. Should resale market conditions occur which both Parties agree are justifiable reasons for the cancellation of any P.O.s, the Parties shall endeavor to negotiate a just and equitable solution, including cancellation terms for such P.O.s. (f) Special Orders. Special orders shall be accepted by AFFX for Additional DNA Probe Arrays required for purposes of the Collaboration, Licensed DNA Probe Arrays for purposes of -25- [ * ] Confidential Treatment Requested by Affymetrix, Inc. clinical trials (both as provided in Section 4.2 of the Collaboration Agreement) and Licensed DNA Probe Arrays required after product introduction for marketing promotion and other applications for which BMX does not receive any revenue, only for use in or with Licensed Diagnostic Assays in the Licensed Field. To the extent applicable, such orders will be processed in the manner provided with respect to other orders hereunder, except that the Parties will consult informally as to a reasonable schedule for production and delivery. ARTICLE 5 PRICING AND PAYMENT 5.1 PRICING. (a) Price. The Price for the Chip Products, including those for clinical trials, (except the Chip Products for which a different price is negotiated pursuant to the terms hereof and the DNA Probe Arrays supplied pursuant to Section 4.2 of the Collaboration Agreement) shall be equal to [ * ] The price for Additional DNA Probe Arrays shall be [ * ]. The Price for orders of DNA Probe Arrays required for clinical trials shall be capped at [ * ] each. The Price for special orders of DNA Probe Arrays purchased after market launch for marketing promotions and other applications for which BMX receives no revenue shall be capped at [ * ] each. (b) Terms of Shipment. Unless otherwise specified, all shipments shall be F.C.A. Place of Manufacture and the -26- [ * ] Confidential Treatment Requested by Affymetrix, Inc. invoice accompanying shipment shall separately state the Price and the cost of shipment and insurance applicable to such shipment, if purchased by AFFX on BMX's behalf. In the event AFFX purchases insurance or pays any shipment costs on BMX's behalf, BMX shall reimburse AFFX for such expenditures at the time of its payment of the invoices for the Chip Product in question. (c) Calculation. As Price is [ * ], AFFX agrees to update its calculation of such cost on a regular basis (not more than twice per year) and to provide BMX with a new PVP Schedule and updated pricing for future P.O.s. 5.2 TERMS OF PAYMENT. BMX agrees to pay all invoices within sixty (60) days after the later of (a) the date of receipt of the applicable invoice or (b) the date of delivery of the Chip Product. All payments to AFFX shall be made by check or bank draft to AFFX's address as provided in Section 13.6 of the Collaboration Agreement and shall indicate to which invoice(s) the payment applies. Late payments shall bear interest at the rate of [ * ] per month on the unpaid balance. 5.3 AUDIT RIGHTS. (a) Procedures. BMX shall have the right, upon thirty (30) days notice and at its own expense, to appoint an independent auditor, reasonably acceptable to AFFX, to examine and audit AFFX's books and records relating to costs (including Fully Loaded Manufacturing Costs) with respect to Chip Products under this Manufacturing Agreement. Such right shall include the -27- [ * ] Confidential Treatment Requested by Affymetrix, Inc. right to make copies or extracts of such books and records as may be reasonably necessary for such audit. The audit shall not be used as a channel for transmission of manufacturing information except as may be strictly relevant to the audit itself. The auditor shall inform BMX and AFFX whether the costs and payments made have been in compliance with this Agreement or not, or the extent of any adjustment that in its opinion is required. Such audit shall occur during regular business hours no more frequently than once a year. (b) Adjustments. In the event that such examination or audit indicates an adjustment to payments made hereunder is necessary, then appropriate payments shall be made to the Party entitled thereto within thirty (30) days after such Party receives written demand therefor from the other Party. In the event such examination discloses an overstatement of fully loaded manufacturing cost of [ * ] or more, the cost of such examination shall be borne by AFFX and the overpaid amount (accounting for all necessary adjustments to the transfer price and royalty calculations) shall be offset against amounts otherwise due to AFFX or otherwise be refunded to BMX with payment of interest at an annual rate of two percentage points above the prime interest rate quoted by Bank of America on the date of such reporting, for the period from the date of excess payment to the date of refund. (c) Confidential Information. Any information furnished or acquired pursuant to this Section 5.3 shall be deemed Confidential Information to be treated in accordance with Article VIII of the Collaboration Agreement. -28- ARTICLE 6 SHIPPING AND DELIVERY 6.1 AUTHORIZED MEANS OF TRANSPORTATION. BMX reserves the right to designate a freight forwarder or carrier reasonably satisfactory to AFFX for the shipment of Chip Products. 6.2 ON-TIME DELIVERY. AFFX shall use reasonable commercial efforts to ship Chip Products to BMX On-time. In the event Chip Products are not expected to be shipped on the agreed Ship Date, and the delay is the fault of AFFX, AFFX shall immediately notify BMX, and AFFX shall bear the difference between shipping cost via normal transit and expedited transit, including air freight. 6.3 PACKAGING OF CHIP PRODUCTS. AFFX shall provide Licensed DNA Probe Arrays in diced form, left on plastic sheets or in the form of undiced wafers, as BMX may direct on reasonable advance notice to AFFX. In the event AFFX is to carry out dicing of the wafers, it shall consult with BMX as to cost and shall give BMX the benefit of the most cost efficient methods available to it. The Parties will consult on the best means for packaging for ease of handling and to ensure maximum protection of the Chip Products from damage due to rough handling and any other hazard which might occur in transit. 6.4 FCA PLACE OF MANUFACTURE. AFFX shall deliver the Chip Products FCA Place of Manufacture and BMX shall include the destination for delivery in the P.O.s. Title and liability for loss and damage shall pass to BMX upon delivery to the common carrier specified by BMX. BMX shall be responsible for the cost -29- of obtaining any export control or other clearance required for export outside the U.S. BMX will provide reasonable assistance in obtaining any export clearances required to ship outside of the U.S. 6.5 RESCHEDULING. On reasonable notice, AFFX shall endeavor to accommodate BMX's request to reschedule deliveries. Furthermore, BMX reserves the right to reschedule without charge if the Chip Products do not meet Specifications therefor upon quality testing at AFFX's facility. 6.6 COMPLIANCE WITH GOVERNMENTAL RULES. In the event of export of any Chip Product supplied hereunder, the Parties shall comply with all applicable Governmental Rules and AFFX shall supply all documentation which may be required under applicable Governmental Rules, which costs shall be included in Fully Loaded Manufacturing Costs for the Chip Product. ARTICLE 7 QUALITY 7.1 COMPLIANCE WITH SMP SPECIFICATIONS; TESTING BY AFFX. BMX expects and AFFX agrees to use all commercially reasonable efforts to supply one hundred percent (100%) of the Chip Products purchased herein meeting the Specifications therefor. AFFX shall be in material compliance with the manufacturing processes, quality control procedures and specifications set forth in the relevant SMP applicable to such Chip Product, and shall conform to all applicable Good Manufacturing Practices and other relevant Governmental Rules, -30- including all such rules and standards compliance with which may be reasonable and necessary to permit maximization of sales in all markets served by BMX. Such compliance shall include but is not limited to the performance of quality control and quality assurance testing on the Chip Product to be delivered to BMX. BMX and AFFX shall mutually agree on who will serialize Chip Products to track them. Serialization costs above AFFX normal production processes shall be borne by BMX 7.2 FACILITY ACCESS. BMX shall, upon reasonable advance notice to AFFX, have access during normal business hours to AFFX's facilities where the Chip Product is being manufactured, tested, inspected, packaged and/or stored in order to observe and inspect the manufacturing, quality control and testing processes for, and the records of all production and quality assurance data related to, the Chip Product. Any persons conducting such inspection shall be required to enter into a confidentiality agreement with AFFX in form and content reasonably satisfactory to AFFX and BMX. 7.3 TESTING AND STANDARDS OF REJECTION. (a) Incoming and Source Inspection. BMX reserves the right to process incoming Chip Product dock-to-stock with no incoming inspection. BMX shall, however, retain the right to conduct, at BMX's expense, incoming inspection of Chip Products at the designated destination in accordance with the inspection standards and procedures set forth in the Specifications. Alternatively, upon prior written notice, BMX shall have the right to conduct, at BMX's expense, source inspection at AFFX's site, in accordance with the inspection standards and procedures -31- [ * ] Confidential Treatment Requested by Affymetrix, Inc. set forth in the Specifications. Any shipment of Chip Product delivered to BMX hereunder shall be deemed accepted if not rejected by BMX within [ * ] days of receipt thereof. (b) Standards of Rejection. BMX shall use a commercially reasonable standard for the industry in determining whether to reject the Chip Products based on the failure to meet Specifications therefor. ARTICLE 8 REPRESENTATIONS AND WARRANTIES 8.1 REPRESENTATIONS AND WARRANTIES OF AFFX. AFFX represents and warrants to BMX as follows: (a) Power and Authority. The execution and delivery of this Manufacturing Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate corporate action, and AFFX has all requisite power and authority to enter into this Manufacturing Agreement and to perform its obligations hereunder, and this Manufacturing Agreement constitutes a valid and binding obligation of AFFX, enforceable in accordance with its terms. (b) No Breach. The performance by AFFX of any of the terms and conditions of this Manufacturing Agreement on its part to be performed does not and will not constitute a breach of any other agreement or understanding, whether written or oral, to which it or any of its affiliates is a party. (c) Product Warranty. All Chip Products delivered to BMX pursuant to this Manufacturing Agreement shall conform in all -32- material respects to the Specifications and the applicable SMP and Good Manufacturing Practices, excluding any warranty for defects in Chip Products solely related to the Specifications as provided by BMX, or due to user abuse or misapplication. (d) Title to Chip Products. All right, title and interest in and to the Chip Products will pass directly to BMX under this Manufacturing Agreement free and clear of any and all liens and encumbrances. 8.2 REPRESENTATIONS AND WARRANTIES OF BMX. (a) Power and Authority. The execution and delivery of this Manufacturing Agreement and the performance of the transactions contemplated hereby have been duly authorized by all appropriate corporate action, and BMX has all requisite power and authority to enter into this Manufacturing Agreement and to perform its obligations hereunder, and this Manufacturing Agreement constitutes a valid and binding obligation of BMX, enforceable in accordance with its terms. (b) No Breach. The performance by BMX of any of the terms and conditions of this Manufacturing Agreement on its part to be performed does not and will not constitute a breach of any other agreement or understanding, whether written or oral, to which it or any of its affiliates is a party. ARTICLE 9 REMEDIES FOR NON-CONFORMANCE WITH WARRANTY If Chip Products are found not in conformity with the warranty provided in Section 8.1(d), determined in accordance -33- [ * ] Confidential Treatment Requested by Affymetrix, Inc. with a commercially reasonable standard in the industry, the following exclusive remedies shall be available to BMX: 9.1 INCOMING INSPECTION. In case of Chip Product rejection at BMX's incoming inspection, at AFFX's election, one of the following corrective actions shall be made: [ * ] All returns of defective Chip Products will be at AFFX's expense. Notwithstanding the foregoing, [ * ] 9.2 SOURCE INSPECTION. In case of Chip Product rejection during source inspection, AFFX shall promptly perform a failure analysis, screening, rework and re-submission of the failed Chip Products to a mutually agreed schedule. 9.3 FAILURE ANALYSIS. If a sufficient quantity of Chip Products fail to meet Specifications such that BMX has rejected more than [ * ] of the DNA Probe Arrays in any calendar year, upon request by BMX, AFFX shall perform a failure analysis of a reasonable number of such defective Chip Products and shall deliver to BMX, in writing, detailed results of the failure analysis and proposed corrective actions to prevent recurrence. -34- Such analysis shall be provided no later than thirty (30) working days after receipt of any defective Chip Product by AFFX. 9.4 DEFECTIVE PRODUCTS INCORPORATED IN ASSAYS. If BMX includes a Chip Product in a Licensed Diagnostic Assay, responsibility for performance of the final product rests with BMX, subject to the Chip Product warranty as provided in Section 8.1(d). Notwithstanding the foregoing, if BMX demonstrates to AFFX's reasonable satisfaction that any failure of a Licensed Diagnostic Assay was caused solely by a Chip Product manufactured by AFFX within the aforesaid warranty, and not caused by BMX's handling or packaging, AFFX agrees to cooperate with BMX to review all relevant materials and procedures used to manufacture such Chip Product and to use its best efforts to determine the cause and to implement corrective action to prevent recurrence. ARTICLE 10 INTELLECTUAL PROPERTY Nothing contained in this Manufacturing Agreement shall be construed as granting or implying any rights by license, estoppel or otherwise, to BMX's or AFFX's ideas, inventions, or patents that are issued now or in the future, copyrights, trademarks, trade secrets, or any other intellectual property, either with respect to Chip Products manufactured for BMX under this Manufacturing Agreement or with respect to any other of BMX's or AFFX's products, services, technologies or background technologies, respectively, not covered by this Manufacturing Agreement. -35- [ * ] Confidential Treatment Requested by Affymetrix, Inc. ARTICLE 11 INDEMNIFICATION 11.1 AFFX'S INDEMNITY. AFFX agrees to indemnify, defend and hold harmless BMX, [ * ] provided, however, that: (i) in no event shall the foregoing indemnity include or apply to [ * ] and (ii) in no event shall the foregoing indemnity include or apply to [ * ] and -36- [ * ] Confidential Treatment Requested by Affymetrix, Inc. (iii) the aggregate liability of AFFX under the foregoing indemnity for Claims and Losses relating to the matters referred to above [ * ] 11.2 BMX'S INDEMNITY. BMX agrees to indemnify, defend and to hold harmless AFFX, [ * ] provided, however, that in no event shall the foregoing indemnity include or apply to any Claims and Losses relating solely to the matters referred to in Section 11.1 above. BMX shall, at its costs and expense, obtain -37- and maintain appropriate product liability insurance covering the Licensed Diagnostic Products with limits of not less than US$20 million covering all markets where the Licensed Diagnostic Products are sold or used. 11.3 OTHER LIMITATIONS OF LIABILITY. NOTWITHSTANDING ANYTHING WHICH MAY BE CONTAINED IN THIS MANUFACTURING AGREEMENT TO THE CONTRARY, IN NO EVENT WILL THE INDEMNITY OBLIGATIONS OF AFFX OR BMX UNDER SECTIONS 11.1 AND 11.2 ABOVE INCLUDE (AND IN NO EVENT SHALL EITHER PARTY OTHERWISE BE LIABLE TO THE OTHER FOR) ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECULATIVE DAMAGES, WHETHER SUCH ALLEGED DAMAGES ARE LABELED IN TORT, CONTRACT, OR INDEMNITY. ARTICLE 12 TERMINATION 12.1 TERMINATION OF AGREEMENT FOR BREACH. Each Party shall be entitled (but not required) to terminate this Manufacturing Agreement by written notice to the other Party in the event that the other Party shall be in default of any of its material obligations hereunder or of the Collaboration Agreement, and shall fail to remedy any such default within thirty (30) days after notice thereof by the non-breaching Party; provided, however, that in the event of any dispute as to the existence of a default or the adequacy of remedy thereof, the Party charged with breach or failure to remedy may require that the right to terminate be determined in arbitration pursuant to Section 14.1 of the Collaboration Agreement and in the event the arbitrator(s) -38- determine there were reasonable grounds for the Party so charged to dispute termination and that such Party acted in good faith, the arbitrator(s) may afford reasonable opportunity to cure upon such terms as they may direct. Any notice by a Party of termination pursuant to this section shall specifically state that the non-breaching Party intends to terminate this Manufacturing Agreement in the event that the breaching Party shall fail to remedy the default. Notwithstanding the foregoing, BMX may not terminate this Manufacturing Agreement by reason of any inability of AFFX to supply Chip Products hereunder other than a failure to supply substantially all BMX's Requirements of Chip Product continuing over a period in excess of six (6) months. As to any such inability or defaults, BMX may have recourse to any other remedies authorized by law or made available hereunder, including such rights as are provided in Section 3.5. 12.2 TERMINATION FOR OTHER CAUSES. Either Party may also (but shall not be required to) terminate this Manufacturing Agreement in the event of (a) the insolvency of the other Party (however such insolvency may be evidenced, including the inability of such Party to meet its debts as they mature); (b) the complete or partial liquidation or suspension of the business of the other Party; (c) the filing by or against the other Party of a voluntary or involuntary petition pursuant to any present or future bankruptcy law or law for the protection of debtors; (d) the institution of any proceeding by or against the other Party for any relief under law relating to the relief of debtors, adjustment of indebtedness, reorganizations, -39- arrangements, compositions or extensions; (e) the dissolution thereof; or (f) the termination of the Collaboration Agreement due to breach by the other Party or expiration of applicable licenses under the Collaboration Agreement, or, after the expiration of the licenses granted pursuant to Section 5.2(a)(I) of the Collaboration Agreement, in the event that there is a substantial elimination of Requirements hereunder such that continued production is no longer economical. 12.3 EFFECT OF TERMINATION ON P.O.S. In the event of termination of this Manufacturing Agreement pursuant to Sections 12.1 or 12.2 above the terminating Party may at its sole discretion cancel by prompt notice any P.O.s for the Chip Products which are unshipped at the date of such cancellation. 12.4 RETURN OF DOCUMENTS. Upon the termination of this Manufacturing Agreement pursuant to Sections 12.1 or 12.2 above, each Party shall promptly return to the other Party all documents, letters, records, notebooks, papers, writings, designs, drawings, models, blueprints and all other materials and all copies thereof embodying or showing any of the Technical Information provided by a Party to the other Party or any Confidential Information disclosed by the other Party, then in the Party's possession or under its control, by whomever prepared, and all other tooling or property owned by the Party shall be returned. 12.5 EFFECT OF TERMINATION ON DUTIES AND OBLIGATIONS. Unless otherwise expressly provided in this Manufacturing Agreement or in any exhibit hereto, upon the termination of this Manufacturing Agreement pursuant to Sections 12.1 or 12.2 above, -40- neither AFFX nor BMX shall have any further duties or obligations under this Manufacturing Agreement; provided, however, that no such termination shall relieve either Party hereto from any liability which it is otherwise responsible for under this Manufacturing Agreement (including liabilities under Article 11 hereof) with respect to any event, act, transaction or failure to act which occurred prior to the date of such termination or with respect to any Claims and Losses relating to Chip Products or Licensed Diagnostic Products made or shipped prior to the date of such termination. ARTICLE 13 AFFX'S EMPLOYEES NOT DEEMED EMPLOYEES OF BMX Except as otherwise expressly provided in the Collaboration Agreement, both Parties agree that AFFX is retained as an independent contractor and in no event will employees or agents hired by AFFX be or be considered employees of BMX. Matters governing the terms and conditions of employment of AFFX's employees are entirely within the control of AFFX. BMX will have no right to control any of the actions of the employees of AFFX. AFFX's matters such as work schedules, wage rates, withholding income taxes, disability benefits or the manner and means through which the work under this Manufacturing Agreement will be accomplished are entirely within the discretion of AFFX. ARTICLE 14 -41- ORDER OF PRECEDENCE In the event of an inconsistency in the various documents which govern the Parties, performance under this Manufacturing Agreement, the order of precedence will be: (A) this Manufacturing Agreement; (B) the face side of the P.O. attached hereto; and (C) the reverse side of the P.O. attached hereto. ARTICLE 15 MISCELLANEOUS/ARBITRATION 15.1 FURTHER ASSISTANCE. From time to time, each Party shall execute and deliver such instruments of transfer or other documents, and take such other actions, as may be reasonably requested by the other Party in order to carry out the purposes and intent of this Manufacturing Agreement and consummate the transactions contemplated hereunder. 15.2 REMEDIES CUMULATIVE. Except as expressly provided for herein, all of the rights and remedies permitted or available to either Party under this Manufacturing Agreement or at law or equity shall be cumulative and not alternative, and invocation of any such right or remedy shall not constitute a waiver or election of remedies with respect to any other permitted or available right or remedy. 15.3 ADDITIONAL PROVISIONS. The following numbered and captioned provisions of the Collaboration Agreement shall be deemed to be incorporated and restated herein as if set out in full and shall constitute a part of this Manufacturing Agreement: -42- Section 13.1 Publicity Section 13.2 Assignment Section 13.3 Governing Law Section 13.4 Force Majeure Section 13.5 Waiver Section 13.6 Notices Section 13.7 Calendar and Business Day Section 13.8 No Agency Section 13.9 Entire Agreement Section 13.10 Headings Section 13.11 Severability Section 13.12 Successors and Assigns Section 13.13 Third Parties Section 13.14 Counterparts Section 14.1 Arbitration -43- IN WITNESS WHEREOF, this Manufacturing Agreement has been executed and delivered as of the date first above written. BIOMERIEUX VITEK, INC. By: /s/ Philippe Archinard ------------------------------------------- Name: Philippe Archinard ------------------------------------ Title: President ----------------------------------- AFFYMETRIX, INC. By: /s/ Stephen P.A. Fodor ------------------------------------------- Name: Stephen P.A. Fodor ------------------------------------ Title: President ----------------------------------- -44- [ * ] Confidential Treatment Requested by Affymetrix, Inc. EXHIBIT 1 PRELIMINARY DNA PROBE ARRAY SPECIFICATIONS Minimum Maximum Wafer Size [ * ] [ * ] Wafer Thickness [ * ] [ * ] Wafer Material [ * ] [ * ] Die Size Goal: [ * ] [ * ] Probe Number [ * ] [ * ] Probe Length [ * ] [ * ] Probe Density [ * ] [ * ] Dicing Ring [ * ] [ * ] Die per Wafer [ * ] [ * ] -45- TABLE OF CONTENTS PAGE ---- ARTICLE 1 DEFINITIONS............................................... 2 ARTICLE 2 MANUFACTURE AND TECHNICAL INFORMATION..................... 6 2.1 Delivery of Technical Information and Documentation....... 6 2.2 Detailed Specifications for Licensed DNA Probe Arrays..... 9 ARTICLE 3 MANUFACTURE AND PURCHASE OF CHIP PRODUCTS................. 9 3.1 Manufacture and Purchase Obligations of AFFX and BMX...... 9 3.2 Requirements.............................................. 10 3.3 Other Discretionary P.O.s................................. 10 3.4 Preparation for Manufacture of Chip Products.............. 11 3.5 Manufacturing Rights of BMX............................... 16 ARTICLE 4 FORECASTS AND PURCHASE ORDERS............................. 22 4.1 BMX's Purchase Obligations................................ 22 4.2 Rolling Purchase Forecast and PVP Schedule................ 22 4.3 Purchase Orders........................................... 25 ARTICLE 5 PRICING AND PAYMENT....................................... 27 5.1 Pricing................................................... 27 5.2 Terms of Payment.......................................... 28 5.3 Audit Rights.............................................. 28 ARTICLE 6 SHIPPING AND DELIVERY..................................... 30 6.1 Authorized Means of Transportation........................ 30 6.2 On-time Delivery.......................................... 30 6.3 Packaging of Chip Products................................ 30 6.4 FCA Place of Manufacture.................................. 31 6.5 Rescheduling.............................................. 31 6.6 Compliance with Governmental Rules........................ 31 ARTICLE 7 QUALITY................................................... 31 7.1 Compliance with SMP Specifications; Testing By AFFX....... 31 7.2 Facility Access........................................... 32 7.3 Testing and Standards of Rejection........................ 32 ARTICLE 8 REPRESENTATIONS AND WARRANTIES............................ 33 8.1 Representations and Warranties of AFFX.................... 33 8.2 Representations and Warranties of BMX..................... 34 ARTICLE 9 REMEDIES FOR NON-CONFORMANCE WITH WARRANTY................ 35 9.1 Incoming Inspection....................................... 35 9.2 Source Inspection......................................... 36 -i- TABLE OF CONTENTS (Continued) PAGE ---- 9.3 Failure Analysis.......................................... 36 9.4 Defective Products Incorporated in Assays................. 36 ARTICLE 10 INTELLECTUAL PROPERTY..................................... 37 ARTICLE 11 INDEMNIFICATION........................................... 37 11.1 AFFX's Indemnity.......................................... 37 11.2 BMX's Indemnity........................................... 38 11.3 Other Limitations of Liability........................... 39 ARTICLE 12 TERMINATION............................................... 40 12.1 Termination of Agreement for Breach...................... 40 12.2 Termination for Other Causes............................. 41 12.3 Effect of Termination on P.O.s........................... 42 12.4 Return of Documents..................................... 42 12.5 Effect of Termination on Duties and Obligations.......... 42 ARTICLE 13 AFFX'S EMPLOYEES NOT DEEMED EMPLOYEES OF BMX.............. 43 ARTICLE 14 ORDER OF PRECEDENCE....................................... 43 ARTICLE 15 MISCELLANEOUS/ARBITRATION................................. 44 15.1 Further Assistance....................................... 44 15.2 Remedies Cumulative...................................... 44 15.3 Additional Provisions.................................... 44 EXHIBIT 1............................................................... 47 -ii- EX-10.27 4 EXHIBIT 10.27 Confidential Treatment Requested by Affymetrix, Inc. COLLABORATION AGREEMENT INCYTE PHARMACEUTICALS, INC. and AFFYMETRIX, INC. Page 1 CONFIDENTIAL COLLABORATION AGREEMENT THIS AGREEMENT is made as of the 11th day of November, 1996 (the "Effective Date") by and between Affymetrix, Inc. ("AFFX"), a California corporation having its principal place of business at 3380 Central Expressway, Santa Clara, California 95051, and Incyte Pharmaceuticals, Inc. ("INCYTE"), a Delaware corporation having its principal place of business 3174 Porter Drive, Palo Alto, California 94304. WHEREAS, AFFX has research, development, and manufacturing capabilities and facilities, and has developed and has certain rights to DNA probe array based technology and inventions, know-how and materials concerning computer analysis technology, and software for the measurement of expression of genes, the analysis of genotypes and phenotypes, the compilation of information relating to the field of genomics, and the resulting compiled information; WHEREAS, INCYTE has performed research and developed inventions, know-how, and materials concerning its proprietary high-throughput automated cDNA sequencing, computer analysis technology and software development for the discovery of genes, the analysis of genotypes, and the analysis of the expression profile of gene transcripts present in a given cell or tissue type, and has compiled and is compiling and owns certain information pertaining to the field of genomics in proprietary databases made available on a commercial basis; WHEREAS INCYTE and AFFX desire to enter into an agreement whereby 1) AFFX will supply DNA probe arrays containing INCYTE's proprietary gene sequence and/or gene expression information which may be provided on a commercial basis to third parties, for generation of genomic information, and 2) the Parties will generate databases containing such information to be provided on a commercial basis to third parties; WHEREAS, AFFX and INCYTE have agreed that AFFX will make its GeneChip-TM- Technology available and that INCYTE will make its gene sequences and bioinformatics capabilities available for generation of such DNA probe arrays and databases of information, commercialized for the mutual benefit of both AFFX and INCYTE; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein, INCYTE and AFFX do hereby agree as follows: Page 2 CONFIDENTIAL 1.0 DEFINITIONS 1.1 "AFFILIATE": shall mean any corporation, firm, partnership, or other legal entity, which is, as of the Effective Date, directly or indirectly owned or under common ownership by a Party to the extent of which the common stock or other equity ownership thereof is one hundred percent (100%) owned by a Party; provided however, that where local laws require a minimum percentage of local ownership, the status of the Affiliate will be established if a Party directly or indirectly owns or controls one hundred percent (100%) of the maximum ownership percentage that may, under such local laws, be owned or controlled by foreign interests. 1.2 "AFFX TECHNOLOGY": shall mean all Technology of AFFX relating to AFFX probe array technology, including but not limited to DNA probe arrays which is proprietary to AFFX at the time provided to INCYTE and which, on the Effective Date of this Agreement or at any time during the term of this Agreement, AFFX owns or has a right to grant license; provided, however, that AFFX Technology shall exclude LifeChip Inventions and software developed by INCYTE. 1.3 "ANNOTATION INFORMATION": shall mean information associated with individual cDNAs in each and/or all of the Incyte Database Product(s) as applicable, including, but not limited to, Gene Expression Profiles, homology information, and gene cluster identifiers which are developed outside of the performance of this Agreement. 1.4 "CONFIDENTIAL INFORMATION": shall mean technical and business information belonging to the disclosing party including, where appropriate and without limitation, any information, business, financial and scientific data, transcript and nucleic acid sequence data, gene associations, patent disclosures, patent applications, structures, models, techniques, processes, compositions, compounds, hardware configurations, apparatus and the like, and software in various stages of development or any software product (source code, object code or otherwise), including its audiovisual components (menus, screens, structure and organization) and any human or machine readable form of the program, and any writing or medium in which the program or information therein is stored, written or described, including, without limitation, diagrams, flow charts, designs, drawings, specifications, models, data, bug reports and customer information and the like, disclosed in written form and identified as confidential, or disclosed in or oral form and confirmed in writing within 30 days of oral disclosure. 1.5 "DNA SEQUENCE(S)": shall mean the nucleotide sequences provided by INCYTE to AFFX and shall not include sequences which are not part of Incyte Database Product(s), except with permission of AFFX. Page 3 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. 1.6 "DNA SEQUENCE SET(S)": shall mean a set of DNA Sequences selected by INCYTE using INCYTE Database Information which includes gene sequences and/or associations of genes which are not in the public domain at the time that the LifeChip is designed and are provided by INCYTE to AFFX for LifeChip Project(s), including any minimally relevant subset thereof which is not in the public domain at the time the LifeChip is designed. DNA Sequence Set(s) constitute proprietary INCYTE Materials. DNA Sequence Set(s) specifically excludes other sets of DNA sequences which are supplied to AFFX by third parties without knowledge of DNA Sequence Set(s), and which independent supply of such information can be documented by AFFX. 1.7 "EFFECTIVE DATE": shall mean the date first written above. 1.8 "GENE EXPRESSION PROFILE(S)": shall mean a listing of cDNAs by name with each cDNA assessed by a homology score to be: [ * ] This profile, resulting from a given RNA transcript image analysis in the Incyte Database, includes transcript abundance and certain annotation information regarding such cDNA derived from Incyte and public databases, but does not include any DNA sequence information. 1.9 "GENECHIP-TM- READER": shall mean a current Molecular Dynamics GeneChip Scanner fluorescent reader supplied by AFFX to INCYTE pursuant to this Agreement for use with and only with GeneChips, including associated software for use with such instruments. Incyte may update such reader to an HP reader when available commercially under standard terms and conditions at AFFX' cost. 1.10 "INCYTE DATABASE PRODUCT(S)": shall mean any or all of INCYTE's products including but not limited to gene expression, mapping, microbial, and nucleotide sequence databases and related software and documentation which are developed outside of the LifeChip Projects or LifeChip Products. 1.11 "INCYTE DATABASE INFORMATION": shall mean all or any part of the Annotation Information, Gene Expression Profiles, DNA Sequence Sets and DNA Sequence information in each and/or all of the Incyte Database Product(s). Page 4 CONFIDENTIAL 1.12 "INCYTE MATERIALS": shall mean all materials developed by INCYTE, including but not limited to: cDNA templates, partial cDNAs and their corresponding full length cDNAs, and gene products and proteins encoded therefrom. 1.13 "INCYTE TECHNOLOGY": shall mean all Technology of INCYTE including Database Information and Incyte Database Products, software developed by INCYTE for analysis and storage of data generated using LifeChip Products and not charged as Operating Expenses, DNA sequence information, DNA Sequence(s), DNA Sequence Set(s), Annotation Information, information relating to gene products and/or proteins relating thereto and INCYTE applications thereof, and INCYTE information relating thereto, and INCYTE's high throughput DNA sequencing or analysis technology, including transcript imaging technologies, proprietary to INCYTE at the time provided to AFFX which, on the Effective Date of this Agreement or at any time during the term of this Agreement, INCYTE owns or has a right to grant license; provided, however, that INCYTE Technology shall exclude LifeChip Inventions. 1.14 "INVENTION": shall mean any patentable discovery or invention conceived of or reduced to practice in the course of a LifeChip Program, including but not limited to novel processes, methods, formulas and techniques. 1.15 "LIFECHIP(S)": shall mean DNA probe arrays generated pursuant to this Agreement and utilizing any INCYTE Technology and/or proprietary Incyte Materials along with probe array technology provided by AFFX. 1.16 "LIFECHIPDB(S)": is defined in Section 2.1 of this Agreement 1.17 "LIFECHIP INVENTION": shall mean all Inventions first conceived or first reduced to practice by a Party or the Parties during and under a LifeChip Project, including: 1) those Inventions arising from novel processes, methods, formulas and techniques which may be used in conjunction with nucleic acid based array technology, including but not limited to sample preparation techniques, hybridization solutions, and detection methods and probe array production techniques ("Technology Inventions"), and 2) all other Inventions, including but not limited to those inventions comprising novel genetic sequences, alleles, polymorphisms, and mutations identified with LifeChips, gene expression data generated using LifeChips, software analysis techniques, therapeutic compounds identified utilizing data generated with LifeChips, and novel therapeutic uses of known compounds identified through use of LifeChips ("Gene Inventions"). For purposes of clarity, inventions conceived and reduced to practice other than as described above shall not be LifeChip Inventions. 1.18 "LIFECHIP MANAGEMENT COMMITTEE": is defined in Section 2.3 of this Agreement. Page 5 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. 1.19 "LIFECHIP PROJECTS": shall mean the design and construction of LifeChips, generation of LifeChipDbs, and provision of LifeChip Services. 1.20 "LIFECHIP PROJECT TEAM": shall mean employees of a Party assigned by that Party to perform work under LifeChip Projects. Such work includes the design and production of LifeChips, generation of data for LifeChipDbs, and performance of Lifechip Services. The kind and number of personnel on the LifeChip Project Team will be determined by the LifeChip Project Management Committee. All members of the LifeChip Project Team shall be aware of and agree to the terms and conditions of this Agreement regarding confidentiality. 1.21 "LIFECHIP PRODUCT(S)": shall mean any or all of LifeChip(s) (if agreed at a future date by the Parties), LifeChipDb(s), and/or LifeChip Services. 1.22 "LIFECHIPDB(S)": is defined in Section 2.1 of this Agreement. 1.23 "LIFECHIP SERVICE(s)": is defined in Section 2.1 of this Agreement. 1.24 "OPERATING EXPENSES": shall mean direct expenses incurred by AFFX and INCYTE solely in the generation, marketing and distribution of LifeChip Products as specified below. Direct expenses will be determined based on actual costs consisting of: actual salaries, benefits, related payroll taxes, reagents, chemicals, lab supplies and any other LifeChip Product-related expenses accounted for on a Generally Accepted Accounting Principles ("GAAP") basis. Expenses will be approved by the Project Management Committee quarterly in advance. Operating Expenses for LifeChips shall mean [ * ] charged by AFFX per LifeChip or less as provided in Section 2.6(b). Operating Expenses for LifeChip Database(s) and LifeChip Service(s) shall mean expenses incurred by INCYTE or AFFX solely in the generation, marketing and distribution of LifeChip Databases and LifeChip Services. Direct expenses will be determined based on actual costs consisting of: actual salaries, benefits, related payroll taxes, reagents, chemicals, lab supplies and any other LifeChip Product-related expenses accounted for on a Generally Accepted Accounting Principles ("GAAP") basis. Operating Expenses for LifeChip Inventions shall mean AFFX and INCYTE patent costs associated with the filing, maintenance, licensing and litigation of patents under LifeChip Inventions. All significant (above $500) patent costs Page 6 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. for LifeChip Inventions must be approved first by the LifeChip GeneChip Project Management Committee prior to being incurred. 1.25 "PARTY": shall mean AFFX or INCYTE and, when used in the plural, shall mean AFFX and INCYTE. 1.26 "TECHNOLOGY": shall mean (i) all trade secrets, whether or not patentable, copyrightable or trademarkable; (ii) all rights in and to any and all patents, patent applications, continuations, continuations-in-part, divisionals, reissue applications, and any equivalent of such applications; (iiii) all copyrighted or copyrightable material; (iv) all trademarked or trademarkable material. Technology shall include, without limitation, all data, documents, substances, processes, materials, formulas, algorithms, tools, source code, software and hardware configurations, drawings, specifications, engineering and laboratory notebooks, devices, equipment, prototypes, models, methods, procedures, and any other tangible manifestation of said proprietary rights and technical information which now exist or come into control or proprietary possession of the party. 2.0 LIFECHIP PROGRAM 2.1 PURPOSE: To create LifeChip(s) which 1) will be made available upon mutual agreement on a commercial basis to third parties, and 2) will be utilized by INCYTE to provide research services on a commercial basis to third parties ("LifeChip Services"), and 3) will be used by INCYTE to create commercial databases of genomic information to be provided on a commercial basis to third parties ("LifeChipDb(s)"). 2.2 LIFECHIP PROJECTS: INCYTE and AFFX will mutually agree upon a minimum of [ * ] LifeChip Projects to be undertaken during and under this Agreement. The [ * ] initially planned LifeChip Projects and the initial chip specification for all projects are set forth in Attachment A of this Agreement. The workplan for the LifeChip Projects is set forth in Attachment B of this Agreement. The Parties expect to cooperate in at least [ * ] LifeChip Projects during the first six months of this Agreement. 2.3 LIFECHIP MANAGEMENT COMMITTEE: The LifeChip Projects will be managed by a Project Management Committee which shall be responsible for planning and overseeing the LifeChip Projects. The Management Committee shall be composed of three representatives from each of AFFX and INCYTE. Page 7 CONFIDENTIAL 2.4 EXPENSES: Unless otherwise agreed or as provided herein, INCYTE and AFFX will each be responsible for their own expenses hereunder. 2.5 INCYTE CONTRIBUTIONS: (a) GENE SEQUENCES: INCYTE will 1) in cooperation with AFFX, identify and define LifeChip Projects, and 2) provide DNA Sequence Sets from its Incyte Database Product(s) for such identified LifeChip Projects at no cost to AFFX on a non-exclusive basis for use in generating LifeChips for LifeChip Projects. INCYTE and AFFX will, in cooperation, utilize such sequences provided by INCYTE to design probe arrays for LifeChip Projects. (b) During the term of this Agreement, INCYTE will, after AFFX designs probes for a particular LifeChip design, allow the use of all genes represented on such chips in LifeChip Products . (c) STAFFING AND OTHER RESOURCES: INCYTE will designate scientists to work on the LifeChip Projects under the Workplan, and shall designate a Project Director to conduct the activities allocated to INCYTE under the Workplan. INCYTE will use reasonably diligent efforts to identify and procure tissue and cell samples to generate data for LifeChip Projects. (d) MARKETING: INCYTE will 1) market the LifeChipDbs and LifeChip Services to third parties in cooperation with AFFX, and 2) if mutually agreeable to both Parties, cooperate with AFFX for AFFX to market the LifeChips to third parties, each according to a marketing plan to be agreed by the LifeChip Management Committee. Subject to approval of INCYTE, consistent with Section 3.5 of this Agreement, AFFX and INCYTE agree to develop a plan to provide LifeChip Products to third parties other than Incyte Database subscribers. 2.6 AFFX CONTRIBUTION: (a) TECHNOLOGY ACCESS: During the term of this Agreement, AFFX will provide access to AFFX Technology relevant to the LifeChip Projects to INCYTE for LifeChip Projects at no cost to INCYTE. (b) LIFECHIPS: During the term of this Agreement, AFFX will provide LifeChips to INCYTE for LifeChip Projects in numbers and within a timeframe consistent with that which AFFX provides GeneChips to other customers. Such LifeChips will be for single use only and will be charged against Page 8 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. [ * ] AFFX warrants that no material profit will be derived from the LifeChips provided to INCYTE under this Agreement. If there is a significant reduction in AFFX cost which would result in such a profit, then AFFX will reduce the price of the LifeChips provided to INCYTE under this Agreement accordingly. (c) During the term of this Agreement, AFFX will, after designing probes for a particular LifeChip design, 1) continue to manufacture such LifeChips for LifeChip Projects, and 2) allow INCYTE to include all data from such LifeChip(s) in LifeChip Products. (d) GENECHIP READERS: AFFX will provide INCYTE with at least one (1) GeneChip Reader within thirty (30) days of the Effective Date for analysis of LifeChips at INCYTE's facilities for use in conjunction with LifeChip Projects. AFFX will provide INCYTE with at least one (1) additional GeneChip Reader upon delivery of the first probe arrays delivered to INCYTE pursuant to this Agreement. Such GeneChip Readers shall be provided by AFFX under AFFX's normal terms and conditions, charged as Operating Expenses under this Agreement at no greater than the amount charged to other third parties for a similar instrument. AFFX will provide product support for GeneChip Readers at INCYTE consistent with the level of support provided to any other third party customer. Upgrades will be provided at AFFX cost during the term of this Agreement. GeneChip Readers shall be available to LifeChip customers under terms and conditions which are at least as favorable as those terms and conditions provided by AFFX for GeneChip Readers to third parties under conditions which, taken as a whole, are similar to those herein. 3.0 COMMERCIALIZATION OF LIFECHIP PRODUCTS 3.1 PROFITS:: "Operating Profits" shall be calculated quarterly in arrears by subtracting Operating Expenses for the period, as defined herein, from revenues from LifeChip Products for the same period. For revenue from LifeChip Products, excluding GeneChip-TM-Readers, INCYTE and AFFX will share Operating Profits equally after reimbursing both parties pro rata for expenses incurred from the Effective Date until the date such Operating Profits are recorded. 3.2. RECORDS AND ACCOUNTING: The Parties agree to keep relevant accounting records of net revenues and operating expenses for a period of at least three years after Page 9 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. revenues are recognized or expenses incurred, sufficient in detail to enable the verification of revenues and Operating Expenses calculated hereunder. Both Parties will provide accounting for revenues and Operating Expenses from LifeChip Projects no later than seven days after the end of each calendar year quarter to enable both Parties to account for this collaboration in their quarterly financial statements. Once a year a nationally recognized, independent certified public accountant mutually acceptable to AFFX and INCYTE, will audit these records solely to the extent necessary to verify such calculations, and satisfy both Parties' need to undergo an annual audit of their respective financial statements as required by the Securities and Exchange commission, provided that such accountant has entered into a confidentiality agreement limiting the use and disclosure of such information to purposes germane to this Section 3.0. Audit results of any such examinations shall be made available to both AFFX and INCYTE. The expense of such examination will be shared equally, unless such examination reveals a discrepancy of [ * ] or greater in either Party's favor, then the expenses shall be paid by the Party that has overcharged collaborative expenses. 3.3 DETAILED ACCOUNTING PROCEDURE: Detailed accounting procedures will be mutually agreed upon by the Parties within six months of the Effective Date and no later than the receipt of the first revenues. 3.4 PRICING STRUCTURES FOR LIFECHIP PRODUCTS: Pricing structures for LifeChip Products sold by either Party to third parties will be determined by the LifeChip Project Management Committee prior to manufacture of any LifeChips. Prices of the LifeChip Products to third parties shall be consistent with prices of other AFFX product offerings. Pricing structures for LifeChip Products sold by either Party to third parties may be changed during this Agreement by mutual consent of the Parties. Pricing of the LifeChipDbs shall be based on an independently attributable value of the Database. Attachment C provides an overall pricing structure for the LifeChip Products. 3.5 DISTRIBUTION: INCYTE and AFFX will agree to designate third parties which may receive LifeChip Products. INCYTE shall perform all LifeChip Services at INCYTE or INCYTE Affiliates' facilities, and INCYTE shall generate and provide access to all LifeChipDbs. To ensure adequate customer service for hardware, AFFX will retain the right to sell LifeChips (and associated instruments) to designated third parties, if any, through a marketing system to be agreed upon by the LifeChip Management Committee, which will ensure that Incyte approves in advance all LifeChip orders, and AFFX can effectively provide and service LifeChips to customers. All LifeChip Products will bear the trademarks of both parties. The LifeChip trademark will be co-owned, and will be used only for LifeChip Products Page 10 CONFIDENTIAL unless agreed in writing by the Parties. The sale of LifeChips to third parties shall be pursuant to AFFX standard genomics terms and conditions of sale. All use of trademarks of the others will allow for reasonable quality control and trademark use approval of the other to ensure for trademark protection of the Parties. 3.6 LIFECHIP ACCESS: Initially, AFFX and INCYTE agree to offer LifeChip Products solely to Incyte Database subscribers. At such time as any LifeChip Product is offered to a non-Incyte Database subscriber, INCYTE shall have the sole right to determine 1) reasonable access of such non-Incyte Database subscriber to INCYTE Materials, and 2) reasonable payment terms and conditions for commercial access to any INCYTE Materials to non-Incyte Database subscribers. 3.7 INCYTE acknowledges that AFFX may provide AFFX Technology to any third party for any purpose, except that which would prevent AFFX from fulfilling its obligations under this Agreement), and that such third party customers and collaborators may use AFFX Technology for any purpose. Nothing in this Agreement prevents AFFX from independently providing AFFX Technology to third parties including Incyte Database subscribers. However, it is explicitly understood that 1) provision of any and all LifeChip Products by AFFX shall occur solely during and under this Agreement, and 2) that AFFX may not provide any INCYTE Technology or any INCYTE Materials to any third party except as LifeChips to LifeChip customers under this Agreement, except AFFX may provide probe arrays using DNA sequences and/or DNA sequence sets (which may also be included in INCYTE Materials and/or INCYTE Technology) when AFFX can demonstrate that the INCYTE Materials and/or INCYTE Technology: (a) was in its possession prior to receipt; or (b) was in the public domain at the time of receipt; or (c) becomes part of the public domain through no fault of the AFFX; or (d) is lawfully received by AFFX from a third party having a right to disclose it to AFFX; or (e) is independently discovered or developed without use of of INCYTE Materials or INCYTE Technology, as can be documented by written records created at the time of such independent discovery or development. 3.8 AFFX acknowledges that Incyte may provide INCYTE Materials and/or INCYTE Technology, including DNA Sequence Sets, to any third party for any purpose, except that which would prevent INCYTE from fulfilling its obligations under this Agreement, and that such third party customers and collaborators may use Incyte Materials for any purpose. Nothing in this Agreement prevents INCYTE from independently providing INCYTE Technology to third parties including LifeChip Page 11 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. customers. However, it is explicitly understood that INCYTE may not provide any AFFX Technology to any third party except as LifeChip Products except INCYTE may provide any technology to third parties when INCYTE can demonstrate that such technology: (a) was in its possession prior to receipt; or (b) was in the public domain at the time of receipt; or (c) becomes part of the public domain through no fault of the AFFX; or (d) is lawfully received by INCYTE from a third party having a right to disclose it to INCYTE; or (e) is independently discovered or developed without use of of AFFX Materials or INCYTE Technology, as can be documented by written records created at the time of such independent discovery or development. 4.0 INTELLECTUAL PROPERTY 4.1 Each Party shall promptly report to the other Party all LifeChip Inventions. 4.2 The Parties undertake that they shall do all things which are reasonably necessary or desirable to establish, maintain and assert any rights or interest of the Parties, including the execution of all documents necessary or desirable so that title or other rights can be established and maintained and so that any patent filings permitted hereunder can be made, prosecuted and maintained. 4.3 TECHNOLOGY INVENTIONS: All Technology Inventions shall be co-owned by the Parties. AFFX shall have primary responsibility for filing, prosecution and maintenance of Technology Inventions. AFFX shall bear all costs incurred in acquiring patent rights for Technology Inventions AFFX shall have the primary responsibility for licensing Technology Inventions to third parties. All patent decisions and all licensing terms and conditions will be mutually agreed by the Parties. All patents arising from Technology Inventions will be licensed in separately from other AFFX patents, i.e. not a package license, [ * ] 4.4 GENE INVENTIONS: All Gene Inventions shall be co-owned by the Parties. INCYTE shall have primary responsibility for filing, prosecution and maintenance of Gene Inventions. INCYTE shall bear all costs incurred in acquiring patent rights for Gene Inventions. INCYTE shall have the primary responsibility for licensing Gene Inventions to third parties. All patent decisions and all licensing terms and conditions will be mutually agreed by the Parties. All patents arising from Gene Inventions will Page 12 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. be licensed in separately from other INCYTE patents, i.e. not a package license, [ * ] 4.5 Except as otherwise provided under the terms of this Agreement, AFFX and INCYTE will each retain all proprietary rights to their respective AFFX Technology and INCYTE Technology. Nothing in this Agreement grants either Party any rights to patents, patent applications, copyrights, trade secrets, or other proprietary rights of the other Party, except as expressly provided herein, even if background patents are required to practice any patents arising from Inventions developed hereunder. INCYTE acknowledges that AFFX may hold patents and pending patent applications which cover compositions, methods and uses of the AFFX Technology. Except as provided herein, AFFX retains all rights to AFFX Technology. AFFX acknowledges that INCYTE may hold patents and pending patent applications which cover compositions, methods and uses of the INCYTE Technology. Except as provided herein, INCYTE retains all rights to INCYTE Technology. 4.6 INCYTE reserves the right under the Incyte Technology to access for its own benefit, and to grant access to third parties to the Incyte Database Product(s), including without limitation the Annotation Information and the DNA Sequence Information including, but not limited to any DNA sequence which may be in a DNA Sequence Set, provided that this right shall not include the right to use AFFX Technology except as provided herein. 4.7 AFFX reserves the right under AFFX Technology to access for its own benefit, and to grant access and licenses to third parties to the GeneChip-TM-Technology, provided that this right shall not include the right to use proprietary INCYTE Materials and/or INCYTE Technology except as provided herein. 5.0 CONFIDENTIALITY 5.1 The Parties acknowledge that during the course of this Agreement they will each receive from the other Confidential Information, including the specific terms of this Agreement, which is proprietary to the disclosing Party. Except as otherwise contemplated by this Agreement, or unless by mutual written agreement, the Parties agree, for the term of this Agreement and for ten (10) years thereafter, to hold in confidence and not disclose, use (except pursuant and in pursuit of this Agreement), or deliver to any person, firm, corporation or entity, Confidential Information which a Party receives from the other Party, except for that which such Party can demonstrate: Page 13 CONFIDENTIAL (a) was in its possession prior to receipt; or (b) was in the public domain at the time of receipt; or (c) becomes part of the public domain through no fault of the recipient; or (d) is lawfully received by the recipient from a third party having a right to disclose it to the recipient; or (e) is independently discovered or developed without use of Materials or Technology received from the other Party, as can be documented by written records created at the time of such independent discovery or development or; (f) is required to be disclosed in a judicial or administrative proceeding or to an administrative agency after all reasonable legal remedies or steps for maintaining such information in confidence have been utilized, in which case, the disclosing Party will notify the other Party of disclosure. 5.2 All Incyte Database Information is confirmed to be INCYTE Confidential Information and shall not be subject to the 10 year limitation above. 5.3 INCYTE will not reverse engineer any of the LifeChips or GeneChip Readers or associated hardware or software. AFFX will provide INCYTE with machine executable code software for the generation of gene expression data in a defined file format. INCYTE may use this information and software for LifeChip Projects only. Any resulting software developed by INCYTE shall be owned by INCYTE and be provided to AFFX and AFFX customers under a separate licensing agreement on a non-exclusive basis. Such software will be available to AFFX, if it is commercially available any third party, under terms and conditions which are consistent with other INCYTE product offerings. AFFX may make additional software or data structures available to INCYTE that is useful in data processing upstream to the generation of gene expression data. All software created by INCYTE based on or using such AFFX software or data structures for the purposes of such upstream data processing will be owned by INCYTE and will be made available on a non-exclusive basis to AFFX and its customers royalty free. 5.4 PUBLICATION: Publications are expected to be generated as part of this project and form an important component of the project for both Parties. Publication of any data arising from LifeChip Projects shall require the consent of both Parties. Confidential Information or Materials of the other Party shall not be included in any publication without first obtaining written approval from the Party to include such Confidential Information or Materials. The Parties agree to acknowledge contributions, as scientifically appropriate, of each Party. 6.0 REPRESENTATIONS AND WARRANTIES; COVENANTS Page 14 CONFIDENTIAL 6.1 REPRESENTATIONS AND WARRANTIES: Each Party represents and warrants to the other Party that: (a) it has the corporate power and authority and the legal right to enter into this Agreement and to perform its obligations hereunder; (b) the execution and delivery of this Agreement and the performance of the transactions contemplated hereby have been duly authorized by all necessary corporate action of such Party; (c) the execution and delivery of this Agreement and the performance by such Party of any of its obligations under this Agreement do not and will not (i) conflict with, or constitute a breach or violation of, any other contractual obligation to which it is a party, any judgment of any court or governmental body applicable to such Party or its properties or, to such Party's knowledge, any statute, decree, order, rule or regulation of any court or governmental agency or body applicable to such Party or its properties, and (ii) with respect to the execution and delivery of this Agreement, require any consent or approval of any governmental authority or other person; (d) each Party shall to the best of its knowledge without undertaking a special investigation, disclose to the other Party any material adverse proceedings, claims or action that arise, relating to their Technology which would materially interfere with that Party's performance of its obligations under this Agreement; (e) each Party's employees have executed or will execute agreements whereby all right, title and interest in any technology and invention(s) will be assigned to their respective employers. 6.2 COMPLIANCE WITH LAW: AFFX and INCYTE each represent and warrant that it shall comply with all applicable laws, regulations and guidelines in connection with that Party's performance of its obligations and rights pursuant to this Agreement. Without limiting the generality of the foregoing, each Party shall be responsible for compliance with all applicable product safety, product testing, product labeling, package marking, and product advertising laws and regulations with respect to its own activities and products. Further, AFFX and INCYTE shall each comply with the regulations of the United States and any other relevant nation concerning any export or other transfer of technology, services, or products. INCYTE and AFFX shall comply with all safety and environmental rules of the other Party when at the facilities of the other Party. Page 15 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. 6.3 DISCLAIMERS: (a) EXCEPT AS EXPLICITLY STATED HEREIN, THE PARTIES MAKE NO REPRESENTATIONS OR WARRANTIES OF ANY KIND WITH RESPECT TO THEIR RESPECTIVE AFFX TECHNOLOGY, INCYTE TECHNOLOGY, OR LIFECHIP INVENTIONS, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, WARRANTIES OR VALIDITY, ENFORCEABILITY, SCOPE, AND MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS EXPLICITLY STATED HEREIN, ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, NOVELTY OR FITNESS OF GENE PRODUCTS, LIFESEQ DATABASE INFORMATION OR GENECHIPS FOR ANY PARTICULAR PURPOSE, ARE EXCLUDED. LIFECHIPS ARE PROVIDED BY AFFX AS-IS. INCYTE MAKES NO WARRANTY THAT THE DATABASE INFORMATION DOES NOT CONTAIN ERRORS. (b) EXCEPT AS EXPLICITLY STATED HEREIN NEITHER PARTY WILL BE LIABLE FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES OF ANY NATURE ARISING FROM SUCH PARTY'S ACTIVITIES UNDER THIS AGREEMENT; PROVIDED, HOWEVER, THAT THIS LIMITATION SHALL NOT LIMIT THE INDEMNIFICATION OBLIGATION OF SUCH PARTY UNDER SECTION 8.2 BELOW FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES RECOVERED BY A THIRD PARTY. 7.0 TERM AND TERMINATION 7.1 Either Party may terminate this Agreement after one year upon 30 days written notice to the other Party. 7.2 Upon termination of this Agreement, INCYTE may purchase its GeneChip Readers from AFFX for no greater than [ * ] unless termination is for breach by INCYTE. 7.3 After termination of this Agreement, AFFX will return all LifeChips to INCYTE for sole use in generating and selling LifeChip Products. [ * ] In the event of termination for breach of INCYTE, AFFX may destroy all LifeChips. Page 16 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. 7.4 During this Agreement and for a period of 5 years thereafter, AFFX Technology will be made available to INCYTE under reasonable commercial terms to be negotiated unless a) AFFX Technology is no longer available on a non-exclusive basis to third parties, or b) INCYTE has infringed on the intellectual property rights of AFFX, and such infringement can be documented by AFFX. During this Agreement and for a period of 5 years thereafter the LifeSeq Database will be made available to AFFX under reasonable commercial terms to be negotiated unless a) the LifeSeq Database is no longer available on a non-exclusive basis to third parties, or b) AFFX has infringed on the intellectual property rights of INCYTE, and such infringement can be documented by INCYTE. 7.5 Relevant provisions of this Agreement regarding confidentiality, intellectual property, representations and warranties (Sections 4, 5, and 6) shall survive termination of this Agreement. 8.0 INDEMNITY 8.1 INDEMNITY: [ * ] AFFX acknowledges and agrees that with respect to the nature of INCYTE's Technology, there can be no adequate remedy at law for any breach of INCYTE's obligations with regard to the confidentiality and distribution of INCYTE Materials and INCYTE Technology, and that any such breach may result in irreparable harm to INCYTE, and therefore, that upon any such breach INCYTE shall be entitled to appropriate equitable relief in addition to whatever remedies it might have at law, including injunctive relief, specific performance or such other relief as Incyte may request to enjoin or otherwise restrain any act prohibited hereby, [ * ] INCYTE acknowledges and agrees that with respect to the nature of AFFX' Page 17 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. Technology, there can be no adequate remedy at law for any breach of AFFX obligations with regard to the confidentiality and distribution of AFFX Technology, and that any such breach may result in irreparable harm to AFFX, and therefore, that upon any such breach AFFX shall be entitled to appropriate equitable relief in addition to whatever remedies it might have at law, including injunctive relief, specific performance or such other relief as Incyte may request to enjoin or otherwise restrain any act prohibited hereby, [ * ] 8.2 PROCEDURE: A Party (the "Indemnitee") that intends to claim indemnification under this Section 8 shall promptly notify the other Party (the "Indemnitor") of any loss, liability, damage, expense, claim, demand, action or other proceeding in respect of which the Indemnitee or any of its affiliates intend to claim such indemnification, and the Indemnitor shall have the right to participate in, and, to the extent the Indemnitor so desires, jointly with any other Indemnitor similarly noticed, to assume the defense thereof with counsel selected by the Indemnitor and reasonably satisfactory to the Indemnitee; provided, however, that an Indemnitee shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnitee, if representation of such Indemnitee by the counsel retained by the Indemnitor would be inappropriate due to actual or potential differing interests between such Indemnitee and any other party represented by such counsel in such proceedings. The indemnity agreement in this Section 8 shall not apply to amounts paid in settlement of any loss, liability, damage, expense, claim, demand, action or other proceeding if such settlement is effected without the consent of the Indemnitor, which consent shall not be withheld unreasonably. The failure to deliver notice to the Indemnitor within a reasonable time after the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such Indemnitor of any liability to the Indemnitee under this Section 8, but the omission so to deliver notice to the Indemnitor will not relieve it of any liability that it may have to any Indemnitee otherwise than under this Section 8. The Indemnitor may not settle the action or otherwise consent to an adverse judgment in action or other proceeding that materially diminishes the rights or interests of the Indemnitee without the express written consent of the Indemnitee. The Indemnitee under this Section 8 and its employees and agents, shall cooperate fully with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this indemnification. Page 18 CONFIDENTIAL 9.0 MISCELLANEOUS PROVISIONS 9.1 PRE-ARBITRATION: No arbitration with reference to this Agreement shall arise until the following procedures have been satisfied. In the event of any dispute with respect to the interpretation of any provision of this Agreement or with respect to the performance of either party under this Agreement, written notice shall be provided, specifying the terms of disagreement in reasonable detail, and referring to this Paragraph of this Agreement. Upon receipt of such notice, the chief executive officers of INCYTE and AFFX shall enter into good faith negotiations for the purpose of resolving such disagreement. If mutual agreement is not reached within sixty (60) days after receipt of such written notice, then the parties agree to submit to arbitration. 9.2 ARBITRATION: Any controversy arising under or related to this Agreement, or any disputed claim by either Party against the other under this Agreement, excluding any dispute relating to patent validity or infringement arising under this Agreement, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Upon request of either Party, arbitration will be by a) a third party arbitrator mutually agreed upon in writing by AFFX and INCYTE within thirty (30) days of such arbitration request; or b) an appointed member of the American Arbitration Association. The Parties shall be entitled to discovery in like manner as if the arbitration were a civil suit in the California Federal court. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. If the claim is filed by a Party, the venue for arbitration shall be Palo Alto, CA. Each Party shall pay its own expenses in connection with the arbitration proceeding, while the expenses and fees of the arbitrator shall be shared equally by AFFX and INCYTE. 9.3 COMPLIANCE: INCYTE and AFFX agree that their respective activities under this Agreement will be carried out in compliance with all applicable laws, regulations and guidelines. 9.4 RELATIONSHIP BETWEEN THE PARTIES: INCYTE and AFFX recognize and agree that each is operating as an independent contractor and not as an agent of the other. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency, distributorship, employer-employee or joint venture relationship between the Parties. No Party shall incur any debts or make any commitments for the other, except to the extent, if at all, specifically provided herein. 9.5 PUBLIC ANNOUNCEMENTS: Except as may otherwise be required by law or regulation, or in connection with a registration of securities, neither party shall make any public Page 19 CONFIDENTIAL announcement concerning this Agreement or the subject matter hereof without first submitting a copy of the proposed announcement to the other Party for review. The other party shall have seven (7) business days to review such announcement and provide its comments and suggestions and to provide its consent to the publication of such announcement, such consent not to be unreasonably withheld or delayed. PUBLICITY: (a) INCYTE shall not use the names likenesses, or logos of AFFX or any AFFX products in any press releases, general publications, advertising, marketing, promotional or sales literature without prior written consent from an officer of AFFX. (b) AFFX shall not use the names likenesses, or logos of INCYTE or any INCYTE products, including the Incyte Database, in any press releases, general publications, advertising, marketing, promotional or sales literature without prior written consent from an officer of INCYTE. 9.6 SEVERABILITY: In the event any one or more of the provisions of this Agreement should for any reason be held by any court or authority having jurisdiction over this Agreement or either of the Parties to be invalid, illegal or unenforceable, such provision or provisions shall be validly reformed to as nearly as possible approximate the intent of the Parties and, if unenforceable, shall be divisible and deleted in such jurisdiction; elsewhere, this Agreement shall not be affected so long as the Parties are still able to realize the principal benefits bargained for in this Agreement. 9.7 ENTIRE AGREEMENT: This Agreement constitutes and contains the entire understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether verbal or written, between the Parties respecting the subject matter hereof. No waiver, modification or amendment of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each of the Parties. 9.8 NOTICES: All notices and other communications to be given hereunder shall be given in writing by registered or certified mail, postage prepaid, return receipt requested, or by overnight courier, mail-gram, telex or facsimile to the respective parties at the following addresses, unless such addresses are changed and the other Party is notified of the change in writing: Affymetrix, Inc. Page 20 CONFIDENTIAL 3380 Central Expressway Santa Clara, CA 95051 FAX: 408-481-0422 Attention: Stephen P.A. Fodor, Ph.D., President and COO Incyte Pharmaceuticals, Inc. 3174 Porter Drive Palo Alto, CA 94304 FAX: 415-845-4500 Attention: Roy A. Whitfield, President and CEO 9.9 APPLICABLE LAW: This Agreement shall be construed, interpreted, and applied with the laws of the State of California. 9.10 NO ASSIGNMENT: Neither Party shall have the right to assign or transfer, directly or indirectly, in whole or in part, this Agreement or its rights or obligations hereunder, whether voluntarily, by operation of law, change in control or otherwise, without the prior express written consent of the other Party which may be withheld for any reason whatsoever. For purposes of this Section 9.10, a "change in control" of a party shall mean the change in the beneficial ownership of fifty (50%) or more of the outstanding voting securities of such Party, whether in one or a series of transactions. Any assignment not in accordance with the above shall be void. 9.11 ATTORNEY'S FEES: In any litigation or arbitration relating to or arising out of this Agreement, the prevailing Party shall be entitled to its reasonable attorneys' fees, including expert witness costs, and all costs of proceedings incurred in such litigation, in addition to any other relief it may be awarded. 9.12 ENVIRONMENTAL AND SAFETY: Each Party agrees to abide by and become familiar with the safety and environmental rules of the other when performing its obligations pursuant to this Agreement at the facilities of the other Party. 9.12 FORCE MAJEURE: Force Majeure shall mean an Act of God, flood, fire, explosion, earthquake, strike, lockout, casualty or accident, war, civil commotion, act of public enemies, blockage or embargo, or any injunction, law, order, proclamation, regulation, ordinance, demand or requirement of any government or any subdivision, Page 21 CONFIDENTIAL authority representative thereof, or the inability to procure or use materials, labor, equipment, transportation or energy sufficient to meet manufacturing needs without the necessity of allocation, or any other cause whatsoever, whether similar or dissimilar to those enumerated above, which are beyond the reasonable control of such Party, which the Party affected has used its reasonable best efforts to avoid, and which prevent, restrict or interfere with the performance by a Party of its obligations hereunder. The Party affected by Force Majeure shall give notice to the other Party promptly in writing and whereupon shall be excused from those obligations hereunder, to the extent of such prevention, restriction or interference, provided that the affected party shall use its commercially reasonable efforts to avoid or remove such cause(s) of non-performance and shall continue performance whenever such cause(s) is removed. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement in duplicate originals by their duly authorized officers or representatives. AFFYMETRIX, INC. INCYTE PHARMACEUTICALS, INC. By: /s/ Stephen P.A. Fodor By: /s/ Randal W. Scott ------------------------- ------------------------------ Stephen P. A. Fodor, Ph.D. Randal W. Scott, Ph.D. Title: PRESIDENT & COO Title:EXECUTIVE VICE PRESIDENT & CSO ------------ - ------- --------- ---- --------- - --- Date: November 14, 1996 Date: November 11, 1996 ------------------------ ----------------------------- Page 22 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. ATTACHMENT A ------------ INITIAL LIFECHIP PROJECTS ------------------------- [ * ] Page 23 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. ATTACHMENT B ------------ WORKPLAN -------- [ * ] Page 24 CONFIDENTIAL [ * ] Confidential Treatment Requested by Affymetrix, Inc. ATTACHMENT C ------------ PRICING STRATEGY ---------------- [ * ] Page 25 CONFIDENTIAL EX-11.1 5 EXHIBIT 11.1 EXHIBIT 11.1 AFFYMETRIX, INC. STATEMENT OF COMPUTATION OF NET LOSS PER SHARE (in thousands, except per share amounts)
Year Ended December 31, ----------------------------- 1996 1995 1994 -------- -------- ------- Net loss......................................................... $(12,227) $(10,747) $(9,680) -------- -------- ------- -------- -------- ------- Historical primary and fully diluted number of shares: Weighted average common shares............................... 12,983 409 398 Shares related to SAB Topic 4D: Common shares............................................ 50 201 201 Stock options and warrants............................... 356 1,424 1,424 Preferred shares......................................... 1,445 5,778 5,778 -------- -------- ------- Shares used in computing net loss per share...................... 14,834 7,812 7,801 -------- -------- ------- -------- -------- ------- Net loss per share............................................... $ (0.82) $ (1.38) $ (1.24) -------- -------- ------- -------- -------- ------- Pro forma number of shares: Weighted average common shares............................... 12,983 409 398 Shares related to SAB Topic 4D: Common shares............................................ 50 201 201 Stock options and warrants............................... 356 1,424 1,424 Preferred shares......................................... 1,445 5,778 5,778 Convertible preferred shares, as if converted................ 5,297 9,852 9,852 -------- -------- ------- Shares used in computing pro forma net loss per share............ 20,131 17,664 17,653 -------- -------- ------- -------- -------- ------- Pro forma net loss per share..................................... $ (0.61) $ (0.61) $ (0.55) -------- -------- ------- -------- -------- -------
EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement of Affymetrix, Inc. (Form S-8 File Number 333-11299) of our report dated January 23, 1997, with respect to the financial statements of Affymetrix, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Palo Alto, California March 26, 1997 EX-27 7 EXHIBIT 27
5 This schedule contains summary financial information extracted from Item 8. of Form 10-K for the period ended December 31, 1996 and is qualified in its entirety by reference to such 10-K. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 14,143 94,839 1,888 0 1,901 113,294 8,253 (2,856) 118,860 5,626 0 0 0 158,687 (46,194) 118,860 1,389 11,972 2,178 2,178 18,762 0 0 (12,227) 0 (12,227) 0 0 0 (12,227) (0.82) (0.82)
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