# **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC  20549**

 

# **FORM 10-Q**

 

| **ý**                                                                                                                                                                                | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                      |                                                                                          |
| **For The Quarterly  Period Ended March 31, 2003**                                                                                                                                        |
|                                                                                                                                                                                      |                                                                                          |
| **o**                                                                                                                                                                                     | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                      |                                                                                          |
| **For  The Transition Period From                To            ** |
|                                                                                                                                                                                      |                                                                                          |
| **Commission  File No. 000-30981**                                                                                                                                                        |

 

**GENAISSANCEPHARMACEUTICALS, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                     |   | **06-1338846**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **Five  Science Park, New Haven, Connecticut   06511**      |
| (Address of  principal executive office and zip code)            |
|                                                             |   |                                  |
| **(203)  773-1450**                                              |
| (Registrant’s  telephone number, including area code)       |

 

Indicate by check markwhether the registrant:  (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days:

 

| Yes ý |   | No o |
|------------|--------|------|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in rule 12b-2 of the Exchange Act):

 

| Yes o |   | No ý |
|-------|--------|-----------|

 

The number of shares of the registrant’s outstanding common stock as ofMay 9, 2003 was 23,049,397 shares.

 

 

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**GENAISSANCEPHARMACEUTICALS, INC.**

 

For the quarterended March 31, 2003

**Index**

 
| **PART I – FINANCIAL INFORMATION**                                                                    | 1      |
|------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                       |   |
| Item 1  - Financial Statements (unaudited)                                                                 | 1      |
|                                                                                                       |   |
| Balance Sheet as of March 31, 2003 and  December 31, 2002                                                  | 1      |
|                                                                                                       |   |
| Statements of Operations for  the three months ended March 31, 2003 and 2002                               | 2      |
|                                                                                                       |   |
| Statements of Cash Flows for  the three months ended March 31, 2003 and 2002                               | 3      |
|                                                                                                       |   |
| Notes  to the Unaudited Financial Statements                                                               | 4      |
|                                                                                                       |   |
| Item 2  – Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 7      |
|                                                                                                       |   |
| Item 3  – Quantitative and Qualitative Disclosures about Market Risk                                  | 20     |
|                                                                                                       |   |
| Item 4  – Controls and Procedures                                                                     | 20     |
|                                                                                                       |   |
| **PART II – OTHER INFORMATION**                                                                       | 21     |
|                                                                                                       |   |
| Item  2 – Changes in Securities and Use of Proceeds                                                   | 21     |
|                                                                                                       |   |
| Item 6  – Exhibits and Reports on Form 8-K                                                            | 21     |
|                                                                                                       |   |
| Signature                                                                                                  | 22     |
|                                                                                                       |   |
| Certifications                                                                                             | 23     |

 

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**PARTI****– FinancialInformation**

 

**Item 1****– Financial Statements.**

 

**GENAISSANCE PHARMACEUTICALS, INC.**

Balance Sheets

(Unaudited)

(In thousands,except per share data)

 
|                                                                                                                                                             |   | **March 31,  2003** |   | **December  31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                                                                                                                                             |   |                |   |                    |   |
| **ASSETS**                                                                                                                                                       |   |                |   |                    |   |
| Current  Assets:                                                                                                                                                 |   |                |   |                    |   |
| Cash  and cash equivalents                                                                                                                                       |   | $                   | 15,111 |                    | $      | 16,578 |   |
| Restricted  cash                                                                                                                                                 |   | 2,100               |   | 2,100                   |   |
| Marketable  securities                                                                                                                                           |   | 12,803              |   | 15,472                  |   |
| Accounts  receivable                                                                                                                                             |   | 67                  |   | 448                     |   |
| Other  current assets                                                                                                                                            |   | 441                 |   | 407                     |   |
| Total  current assets                                                                                                                                            |   | 30,522              |   | 35,005                  |   |
|                                                                                                                                                             |   |                |   |                    |   |
| Property  and equipment, net                                                                                                                                     |   | 13,230              |   | 14,554                  |   |
| Other  assets                                                                                                                                                    |   | 1,132               |   | 1,163                   |   |
|                                                                                                                                                             |   |                |   |                    |   |
| Total  assets                                                                                                                                                    |   | $                   | 44,884 |                    | $      | 50,722 |   |
|                                                                                                                                                             |   |                |   |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                    |   |                |   |                    |   |
| Current  Liabilities:                                                                                                                                            |   |                |   |                    |   |
| Current  portion of long-term debt due to a shareholder                                                                                                          |   | $                   | 402    |                    | $      | 397 |   |
| Current  portion of capital lease obligations                                                                                                                    |   | 9,565               |   | 11,187                  |   |
| Accounts  payable                                                                                                                                                |   | 1,080               |   | 838                     |   |
| Accrued  expenses                                                                                                                                                |   | 1,933               |   | 2,037                   |   |
| Accrued  dividends                                                                                                                                               |   | 1,159               |   | 1,159                   |   |
| Current  portion of deferred revenue                                                                                                                             |   | 3,177               |   | 3,026                   |   |
| Total  current liabilities                                                                                                                                       |   | 17,316              |   | 18,644                  |   |
|                                                                                                                                                             |   |                |   |                    |   |
| Long-Term  Liabilities:                                                                                                                                          |   |                |   |                    |   |
| Long-term  debt due to a shareholder, less current portion                                                                                                       |   | 4,432               |   | 4,501                   |   |
| Deferred  revenue, less current portion                                                                                                                          |   | 1,670               |   | 1,722                   |   |
| Total  long-term liabilities                                                                                                                                     |   | 6,102               |   | 6,223                   |   |
|                                                                                                                                                             |   |                |   |                    |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                      |   |                |   |                    |   |
| Common  stock, 58,000 authorized shares, $.001 par value, 23,049 and 22,847 shares  issued and outstanding at March 31, 2003 and December 31, 2002, respectively |   | 23                  |   | 23                      |   |
| Additional  paid-in capital                                                                                                                                      |   | 219,767             |   | 219,413                 |   |
| Accumulated  deficit                                                                                                                                             |   | (198,328            | )      | (193,602                | )      |
| Accumulated  other comprehensive income                                                                                                                          |   | 4                   |   | 21                      |   |
| Total  stockholders’ equity                                                                                                                                 |   | 21,466              |   | 25,855                  |   |
|                                                                                                                                                             |   |                |   |                    |   |
| Total  liabilities and stockholders’ equity                                                                                                                 |   | $                   | 44,884 |                    | $      | 50,722 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

1

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**GENAISSANCE PHARMACEUTICALS, INC.**

 

Statements of Operations

(Unaudited)

(In thousands,except per share data)

 
|                                                                 |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                 |   | **2003**                           |   | **2002** |   |
|                                                                 |   |                               |   |   |   |
| License  and service revenue                                         |   | $                                  | 2,139  |   | $ | 1,851 |   |
|                                                                 |   |                               |   |   |   |
| Operating  Expenses:                                                 |   |                               |   |   |   |
| Research  and development                                            |   | 4,739                              |   | 8,282 |   |
| General  and administrative                                          |   | 2,059                              |   | 2,457 |   |
|                                                                 |   |                               |   |   |   |
| Total  operating expenses                                            |   | 6,798                              |   | 10,739 |   |
|                                                                 |   |                               |   |   |   |
| Loss  from operations                                                |   | (4,659                             | )      | (8,888 | ) |
|                                                                 |   |                               |   |   |   |
| Interest  income                                                     |   | 134                                |   | 354 |   |
| Interest  expense                                                    |   | (201                               | )      | (526 | ) |
|                                                                 |   |                               |   |   |   |
| Net  loss attributable to common stockholders                        |   | $                                  | (4,726 | ) | $ | (9,060 | ) |
|                                                                 |   |                               |   |   |   |
| Net  loss per common share, basic and diluted                        |   | $                                  | (.21   | ) | $ | (.40 | ) |
|                                                                 |   |                               |   |   |   |
| Weighted average shares used in computing net  loss per common share |   | 22,865                             |   | 22,786 |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

2

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**GENAISSANCE PHARMACEUTICALS, INC.**

 

Statements of Cash Flows

(Unaudited)

(In thousands)

 
|                                                                        |   | **Three Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                        |   | **2003**                          |       | **2002** |   |
|                                                                        |   |                              | ** ** |   | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                   |   |                              | ** ** |   | ** ** |
| Net loss                                                                    |   | $                                 | (4,726     | ) | $ | (9,060 | ) |
| Adjustment to reconcile net loss to net cash used in  operating activities: |   |                              |       |   |   |
| Depreciation and amortization                                               |   | 1,765                             |       | 2,297 |   |
| Stock based compensation                                                    |   | 59                                |       | 110 |   |
| Changes in assets and liabilities -                                         |   |                              |       |   |   |
| Accounts receivable                                                         |   | 381                               |       | 165 |   |
| Other current assets                                                        |   | (34                               | )          | 402 |   |
| Other assets                                                                |   | —                            |       | (4 | ) |
| Accounts payable                                                            |   | 242                               |       | (1,001 | ) |
| Accrued expenses                                                            |   | 191                               |       | (831 | ) |
| Deferred revenue                                                            |   | 99                                |       | 263 |   |
|                                                                        |   |                              |       |   |   |
| Net cash used in operating activities                                       |   | (2,023                            | )          | (7,659 | ) |
|                                                                        |   |                              |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                   |   |                              |       |   |   |
| Purchases of property and equipment                                         |   | (410                              | )          | (40 | ) |
| Investments in marketable securities                                        |   | (4,583                            | )          | — |   |
| Proceeds from sale of marketable securities                                 |   | 7,235                             |       | 4,376 |   |
|                                                                        |   |                              |       |   |   |
| Net cash provided by investing activities                                   |   | 2,242                             |       | 4,336 |   |
|                                                                        |   |                              |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                   |   |                              | ** ** |   | ** ** |
| Repayment of long-term debt due to related parties,  net                    |   | (64                               | )          | (18 | ) |
| Repayment of long-term debt, net                                            |   | —                            |       | (203 | ) |
| Repayment of capital lease obligations                                      |   | (1,622                            | )          | (1,590 | ) |
|                                                                        |   |                              |       |   |   |
| Net cash used in financing activities                                       |   | (1,686                            | )          | (1,811 | ) |
|                                                                        |   |                              |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |   | (1,467                            | )          | (5,134 | ) |
|                                                                        |   |                              |       |   |   |
| CASH AND CASH EQUIVALENTS, beginning of period                              |   | 16,578                            |       | 25,204 |   |
|                                                                        |   |                              |       |   |   |
| CASH AND CASH EQUIVALENTS, end of period                                    |   | $                                 | 15,111     |   | $ | 20,070 |   |
|                                                                        |   |                              |       |   |   |
| **SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:**                         |   |                              | ** ** |   | ** ** |
| Interest paid                                                               |   | 175                               |       | 526 |   |
| Issuance  of restricted shares                                              |   | 296                               |       | — |   |

 

*Theaccompanying notes are an integral part of these financial statements.*

 

3

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**GENAISSANCE PHARMACEUTICALS, INC**.

 

# **Notes** to Unaudited Financial Statements

For the QuarterEnded March 31, 2003

(In thousands)

 

**(1)****                     BASISOF PRESENTATION**

 

GenaissancePharmaceuticals, Inc. is seeking to create personalized medicines through theintegration of pharmacogenomics into drug development and marketing. TheCompany discovers inherited differences, or genomic markers, that exist inhuman genes. The Company uses its technological capabilities and methods aswell as its clinical genetic development skills to identify the genomic markersthat appear to define a patient population that responds best to a medicationand has a superior safety profile.  TheCompany markets its technology and its predictive genomic markers to thepharmaceutical and biotechnology industries as a means to improve thedevelopment, marketing and prescribing of drugs.

 

The Company hasprepared the accompanying financial statements without audit, pursuant to therules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to such rulesand regulations. These financial statements should be read in conjunction withthe Company’s audited financial statements and related footnotes for the yearended December 31, 2002, included in our Annual Report on Form 10-K, as amended(File No. 000-30981).  The unauditedfinancial statements include, in the opinion of management, all adjustments(consisting only of normal recurring adjustments) necessary to present fairlyour financial position as of March 31, 2003, and the results of our operationsfor the three month periods ended March 31, 2003 and 2002. The results ofoperations for such interim periods are not necessarily indicative of theresults to be achieved for the full year.

 

**(2)****                     EARNINGSPER SHARE**

 

The Companycomputes and presents net loss per share in accordance with SFAS No. 128, *Earnings PerShare*.  For the three monthsended March 31, 2003 and 2002, there is no difference in basic and diluted netloss per common share as the effect of stock options and warrants would beanti-dilutive for all periods presented. The outstanding stock options and warrants (prior to application of thetreasury stock method) would entitle holders to acquire 4,241 and 3,770 sharesof common stock at March 31, 2003 and 2002, respectively.

 

**(3)****                     REVENUERECOGNITION**

 

The Company earns its revenue primarily through the licensing of its *HAP*TM Technology and byproviding *HAP*TM Typingservices. The Company has also entered into agreements which provide for futuremilestones and royalty payments.  TheCompany recognizes revenue in accordance with Staff Accounting Bulletin No. 101,*Revenue Recognition in Financial Statements*(SAB 101), and in accordance with Statement of Position 97-2, *Software Revenue Recognition* (SOP 97-2),as amended by Statement of Position 98-9 (SOP 98-9).  In accordance therewith, the Company recognizes annual licenseand subscription fees over the term of the agreement and service fees as theservices are performed.  Futuremilestones and royalty payments, if any, will be recognized when receivedprovided that the milestone is substantive and a culmination of the earningsprocess has occurred.  Amounts receivedin advance of revenue recognition are recorded as deferred revenue.

 

4

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**(4)****                     ACCOUNTINGFOR STOCK BASED COMPENSATION**

 

InDecember 2002, the FASB issued Statement of Financial Standards No. 148, *Accounting for Stock-Based Compensation - Transitionand Disclosure - an amendment of FAS 123*(FAS 148). FAS 148 providesadditional transition guidance for those entities that elect to voluntarilyadopt the accounting provisions of FAS 123, *Accountingfor Stock-Based Compensation*. FAS 148 also mandates certain newdisclosures that are incremental to those required by FAS 123. The provisionsof FAS 148 are effective for fiscal years ending after December 15, 2002, andfor interim periods beginning after December 15, 2002. The Company adopted thedisclosure provisions of FAS 148 during the fourth quarter of 2002.

 

At March 31, 2003, we hadone stock-based compensation plan. We account for the plan under the recognitionand measurement principles of Accounting Principles Board (“APB”) Opinion No.25, *Accounting for Stock Issued toEmployees,* and related Interpretations. The Company has not issuedstock options or made modifications to existing stock options where the exerciseprice is less than the market value of our common stock on the date of grant ormodification.

 

The following tableillustrates the effect on net income and earnings per share if the Company hadapplied the fair value recognition provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation*,to stock-based employee compensation. For the quarters ended March 31, 2003 and2002:

 

(In thousands,except per share data)

 
|                                                                                                              |   | **For the  Three Months Ended** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                                                              |   | **2003**                        |   | **2002** |   |
|                                                                                                              |   |                            |   |   |   |
| Net loss, as reported                                                                                             |   | $                               | (4,726 | ) | $ | (9,060 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss                                     |   | 58                              |   | 66 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards |   | (408                            | )      | (647 | ) |
| Pro forma net  loss                                                                                               |   | $                               | (5,076 | ) | $ | (9,641 | ) |
|                                                                                                              |   |                            |   |   |   |
| Net loss per  share:                                                                                              |   |                            |   |   |   |
| Basic and  diluted - as reported                                                                                  |   | $                               | (0.21  | ) | $ | (0.40 | ) |
|                                                                                                              |   |                            |   |   |   |
| Basic and  diluted - pro forma                                                                                    |   | $                               | (0.22  | ) | $ | (0.42 | ) |

 

**(5)**                     **SIGNIFICANT CUSTOMERS**

 

For the three monthsended March 31, 2003 and March 31, 2002, customer A accounted for 35% and 46%of the Company’s reported revenue, respectively.  Customers B and C accounted for 24% and 14% of revenue for thethree months ended March 31, 2003, respectively.  Customer D accounted for 27% of revenue for the three monthsended March 31, 2002.  The collaborationagreement with Customer A expires in the fourth quarter of 2003 and thecollaboration agreement with customer D expired in the fourth quarter of 2002.

 

**(6)**                     **CAPITAL LEASES**

 

InDecember 2002, the Companyannounced it had received a notice from General Electric Capital Corporation(GE) claiming that an event of default had occurred under the lease agreementas a result of an

 

5

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allegedmaterial adverse change in the Company’s business.  Because of the alleged default, GE declared that all principaland future interest obligations were due and payable immediately.  GE also filed a complaint in the SuperiorCourt of the State of Connecticut, demanding payment of all amounts due underthe lease agreements.  The Company alsoreceived a notice from Finova Capital Credit Corp. (Finova), stating that as aresult of the alleged default claim by GE, there had been a cross-default underthe Company’s agreement with Finova.  Toremedy the cross-default, Finova declared that all principal and futureinterest obligations were due and payable immediately.  In March 2003, the Company settled the claimwith GE and simultaneously amended its lease agreement with GE (GEAmendment).  In connection with the GEAmendment, and as additional security for its payment obligation to GE, theCompany delivered to GE a $2 million irrevocable letter of credit and agreed toadditional covenants in the GE Amendment. The Company may cause the letter of credit to be adjusted on a quarterlybasis commencing on October 1, 2003 based on a decrease in outstanding amountsdue to GE, as defined.  The letter ofcredit is collateralized by cash at 105% of the outstanding letter of credit balance.  In connection with the GE Amendment, GEretroactively rescinded their default claim and both parties have withdrawnfrom any legal action.  The GE Amendmentand letter of credit have been retroactively reflected in the accompanyingfinancial statements as of December 31, 2002. The Company has not entered into a settlement agreement withFinova.  The Company has recorded anadditional charge to interest expense during the fourth quarter of 2002 forfuture interest due under the capital lease agreement with Finova to reflectthe fact that all future interest and principal is currently due and payableunder the Finova capital lease agreement as a result of the default claim.  As of December 31, 2002, and March 31, 2003,the amounts due to GE and Finova have been classified as current obligations.

 

**(7)**                     **COMPREHENSIVE LOSS**

 

The Company reports and presents comprehensiveincome (loss) in accordance with SFAS No. 130, *ReportingComprehensive Income,* which establishes standards for reporting andthe display of comprehensive income (loss) and its components in a full set ofgeneral purpose financial statements. The objective of the statement is toreport a measure of all changes in equity of an enterprise that result fromtransactions and other economic events of the period other than transactionswith owners (comprehensive income (loss)). The Company’s other comprehensiveincome (loss) arises from net unrealized gains (losses) on marketablesecurities. The Company has elected to disclose comprehensive income (loss) asa component of the statements of stockholders’ equity and comprehensive loss.

 

A summary of total comprehensive loss is as follows(in thousands):

 
|                               |   | **Three months ended March 31,** |   |
|------------------------------------|--------|----------------------------------|--------|
|                               |   | **2003**                         |   | **2002** |   |
|                               |   |                             |   |   |   |
| Net loss                           |   | $                                | (4,726 | ) | $ | (9,060 | ) |
| Other comprehensive  income (loss) |   | (17                              | )      | (82 | ) |
| Total  comprehensive loss          |   | $                                | (4,743 | ) | $ | (9,142 | ) |

 

**(8)**                     **SUBSEQUENT EVENT**

 

On May 7, 2003,the United States Bankruptcy Court approved our purchase of substantially allof the assets of DNA Sciences, Inc. (DNA) pursuant to an Asset PurchaseAgreement by and between the Company and DNA dated as of March 28, 2003, asamended.  In addition, we expect toenter into a modification of a license agreement related to certain purchasedassets that will result in a net cost of the purchase of approximately $1.0million, including estimated legal and advisory costs.  We expect to close on this transactionduring the second quarter of 2003.

 

6

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**Item 2****-Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

The following discussion and analysis of our financial condition andthe results of operations should be read in conjunction with the financialstatements and related notes appearing elsewhere in this Quarterly Report onForm 10-Q. This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 21E of the Securities Exchange Act of1934, as amended, that involve risks and uncertainties, including, but notlimited to, statements about management’s expectations as to costs and ourliquidity position. These expectations are based on certain assumptionsregarding our research and development activities, projected expenditures, theability of our technologies to improve the drug development process, success ofour commercialization efforts and significant growth in our revenues and otherfactors relating to our business.  Theseexpectations may not materialize if development efforts are delayed orsuspended or if other assumptions prove incorrect.  These factors are more fully discussed below under the heading“Factors Affecting Future Operating Results” and in our other filings with theSecurities and Exchange Commission. Readers are cautioned not to place unduereliance on these or other forward-looking statements, which reflectmanagement’s analysis, judgment, belief or expectation only as of the date onwhich they are made.  While we may electto update forward-looking statements at some time in the future, wespecifically disclaim any obligation to do so, even if our estimates change.

 

**Overview**

 

Since our inception, we have incurred significant operating losses,and, as of March 31, 2003, we had an accumulated deficit of $198.3million.  The majority of our operatinglosses have resulted from costs we incurred in developing our *HAP*TMTechnology, in our clinical trials and administrative costs associated withoperations.  We expect to dedicate asignificant portion of our resources for the foreseeable future to service our *HAP*TMPartnership program partners, our pharmacogenomic support service customers,our CARING program and to maintain our *HAP*TMTechnology.  To date, our revenue hasbeen primarily from licensing and service fees from our agreements withAstraZeneca UK Limited (AstraZeneca), Biogen, Inc. (Biogen), Gene Logic, Inc.(GLI), Johnson & Johnson Pharmaceutical Research & Development, adivision of Janssen Pharmaceuticals, N.V., (J&J PRD), MillenniumPharmaceuticals, Inc. (Millennium), Pfizer, Inc. and Pharmacia & UpjohnCompany (Pharmacia), as well as a sublicensing agreement with Visible Genetics,Inc. and government grants.

 

During the second quarter of 2002, we recorded a $6.0 million chargefor the impairment of fixed assets. This charge is related to sequencing equipment, computer hardware andsoftware and leasehold improvements in our DNA sequencing facility that wedetermined needed to be reviewed for potential impairment.  As a result of our review, we determinedthat the carrying value of the assets was in excess of discounted future cashflows to be generated by the asset group and we recorded a write down of $6.0million.

 

In August 2002, we announced a restructuring and cost reduction programto revise our business focus and to better align our operating cost structurewith our current and projected partner needs and projected revenues from ourcurrent and projected partners. The cost reduction program included arealignment of management responsibilities, a reduction in our workforce and adecision to seek partners for all internal product development programs. Theworkforce was reduced by 20 percent to 110 employees in the third fiscalquarter, with the majority of the workforce reductions occurring in the DNAsequencing facility and related informatics support.  We incurred a charge for severance and related costs ofapproximately $200,000, which was recorded in operating results in the thirdfiscal quarter of 2002.  All severanceobligations associated with this workforce reduction had been paid by December31, 2002.

 

In December 2002, we announced that wereceived a notice from General Electric Capital Corporation (GE) claiming thatan event of default had occurred under the lease agreement as a result of analleged material adverse change in our business.  Because of the alleged default, GE declared that all principaland future interest obligations were due and payable immediately.  GE also filed a complaint in the Superior Courtof the State of Connecticut, demanding payment of all amounts due under thelease agreements.  In March 2003, we andGE agreed to an amendment to their existing lease agreement.  In connection with this amendment, GE hasrescinded and withdrawn its default claim and both parties have withdrawn fromany legal action.  The GE leaseamendment requires compliance with certain additional covenants as well as a $2million letter of credit, which is collateralized by cash.  We also received a notice

 

7

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from Finova Capital Corporation (Finova),stating that as a result of the alleged default claim by GE, there was across-default under our agreement with Finova. In connection with a cross-default, Finova declared that all principaland future interest obligations were due and payable immediately.  Because of the outstanding claim of defaultby Finova, we recorded an additional charge to interest expense during thefourth quarter of 2002.  This chargerepresents all future interest payments due under the terms of the agreementwith Finova.  As of December 31, 2002,and March 31, 2003, we have classified as current the GE and Finova leaseobligations.  However, we anticipatepaying the obligations under the terms of the original maturity schedules,through February 2005.

 

We continually evaluate opportunities that may provide us with, amongother things, intellectual property, key personnel, capabilities that couldaugment our recurring revenues or technologies that will enhance and complementour *HAP*TM Technology.  From time to time, we intend to pursueacquisitions, which we believe will meet these goals .  For example, on May 7, 2003, the UnitedStates Bankruptcy Court approved our purchase of substantially all of theassets of DNA Sciences, Inc. (DNA) pursuant to an Asset Purchase Agreement byand between the Company and DNA dated as of March 28, 2003, as amended.  In addition, we expect to enter into amodification of a license agreement related to certain purchased assets thatwill result in a net cost of the purchase of approximately $1 million includingthe legal and advisory costs.  We expectto close on this transaction during the second quarter of 2003.

 

**Critical Accounting Policies**

 

The preparation of financial statements in conformity with generallyaccepted accounting principals requires management to make certain estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.

 

Our critical accounting policies are as follows:

•                  Revenuerecognition

•                  Valuationof long-lived assets

•                  Researchand development expenses

 

Revenuerecognition.  We earn our revenues primarily through thelicensing of our *HAP*TMTechnology and by providing *HAP*TMTyping services. We have also entered into agreements which provide for futuremilestones and royalty payments.  Werecognize revenue in accordance with Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements*(SAB 101), and in accordance with Statement of Position 97-2, *Software Revenue Recognition* (SOP 97-2),as amended by Statement of Position 98-9 (SOP 98-9).  In accordance therewith, we recognize annual license andsubscription fees over the term of the agreement and service fees as theservices are performed.  Futuremilestones and royalty payments, if any, will be recognized when receivedprovided that the milestone is substantive and a culmination of the earningsprocess has occurred.  Revenues derivedfrom the achievement of milestones or recognition of related work whenperformed under the terms of a contract, as well as the access period of thelicense agreement, may cause our operating results to vary considerably fromperiod to period.  Deferred revenueresults from cash received or amounts receivable in advance of revenuerecognition.

 

Valuationof long-lived assets. We assess the impairment of long-livedassets whenever events or changes in circumstances indicate that the carryingvalue may not be recoverable. Factors we consider important, which couldtrigger an impairment review, include, among others, the following:

 

•                  asignificant adverse change in the extent or manner in which a long-lived assetis being used;

 

•                  asignificant adverse change in the business climate that could affect the valueof a long-lived asset; and

 

•                  asignificant decrease in the market value of assets.

 

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If we determine that thecarrying value of long-lived assets may not be recoverable, based upon theexistence of one or more of the above indicators of impairment, we compare thecarrying value of the asset group to the undiscounted cash flows expected to begenerated by the group.  If the carryingvalue exceeds the undiscounted cash flows, an impairment charge may beneeded.  To determine the amount of theimpairment charge, we compare the carrying value of the applicable fixed assetgroup to its fair value.  We determinethe fair value of the fixed asset group by discounting expected future cashflow using a discount rate determined by our management to be commensurate withthe risk inherent in our current business. If the fair value is less than the carrying value, such amount isrecognized as an impairment charge.

 

Research and development expenses. We record research and development expenseswhen they are incurred or, in the case of clinical trial expenses, based uponinformation we receive from third party clinical research organizations.  Research and development expenses includethe following major types of costs: salaries and benefits, material and reagentcosts, research license fees, clinical trial expenses, depreciation andamortization of lab equipment and leasehold improvements and building andutility costs related to research space. Vendor contractual costs consist primarily of consulting arrangementsand certain clinical trial expenses.  Weexpense clinical trial costs as incurred based on information we receive fromthird parties and estimates that we make. Our estimates may change as additional information becomes availablewhich could cause results to vary from period to period.

 

**Resultsof Operations**

 

**ThreeMonths Ended March 31, 2003 and 2002**

 

License and service revenue consists primarily of proceeds received inconnection with the licensing of our *HAP*TM Technology. Revenueincreased to approximately $2.1 million in the three months ended March 31,2003 from $1.9 million in the three months ended March 31, 2002. The increasein license revenue is primarily attributable to the commercialization of our *HAP*TM Technology Partnershipprogram and our *HAP*TM Drug-SpecificPartnership program, including agreements entered into with Millennium in 2003,and Pfizer in 2002.  Revenue alsoincludes the amortization, over the remaining life of the sublicensed patent,of upfront payments received in connection with the sublicensing of a patent.

 

Research and development expenses consist primarily of payroll andbenefits for research and development personnel, material and reagent costs,costs incurred in connection with clinical trials, depreciation and maintenancecosts for equipment used for *HAP*TM Marker discovery and *HAP*TMTyping, and facility-related costs. We expense our research and developmentcosts as incurred. Research and development expenses decreased to approximately$4.7 million in the three months ended March 31, 2003 from approximately $8.3million in the three months ended March 31, 2002.  The decrease in expenses is primarily attributable to a decreaseof $800,000 in technology license fees, a decrease of approximately $500,000related to our clinical trials, a decrease of approximately $1.0 million inmaterial and reagent costs and depreciation expense and a decrease ofapproximately $500,000 in payroll and related costs.  The decrease in technology license fees is primarily due to alicense agreement that expired in the fourth quarter of 2002.  The decrease in clinical trials expenses isprimarily due to our STRENGTH Trials which were substantially completed in thefirst quarter of 2002.  The decrease inmaterial and reagent costs and depreciation expense is primarily due to reducedDNA sequencing volumes consistent with the removal of the majority of our DNA analyzers from production and the assetimpairment charge recorded in the quarter ended June 30, 2002. The decrease inpayroll and related costs is primarily due to our work force reductionin connection with our restructuring program that was initiated in the thirdquarter of 2002.

 

General and administrative expenses consist primarilyof payroll and benefits for executive, business development, finance and otheradministrative personnel, as well as facility-related costs and outsideprofessional fees incurred in connection with corporate development and generallegal and financial matters. General and administrative expenses decreased toapproximately $2.0 million in the three months ended March 31, 2003 fromapproximately $2.5 million in the three months ended March 31, 2002.  The decrease is primarily attributable to adecrease in payroll and related costs in connection with our workforcereduction and a general reduction in expenses as part of our cost reductionprogram initiated during the quarter ended September 30, 2002.

 

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Interest income decreased to approximately $134,000 in the three monthsended March 31, 2003 from $354,000 in for the same period in 2002.  The decrease is the result of higher cash,cash equivalent and short-term investment balances in 2002 and lower interestrates on investments during 2003.

 

Interest expense decreased to an expense of approximately $201,000 inthe three months ended March 31, 2003 from expense of approximately $526,000 inthe three months ended March 31, 2002. The decrease is primarily the result ofthe recording of all future interest associated with the Finova capital leasesin the quarter ended December 31, 2002. If, in the future, we enter into a settlement or amend our agreementwith Finova it may result in the reversal, in the period of amendment orsettlement, of the remaining interest expense recognized in the fourth quarterof 2002.

 

**Liquidityand Capital Resources**

 

We have financed our operations primarily through the sale of commonand preferred stock, government research grants, payments under licensingagreements, loans and capital leases. From inception through March 31, 2003, wehave received aggregate gross proceeds of approximately $163.1 million fromissuance of common and preferred stock. In addition, through March 31, 2003, wehave received $4.5 million of government research grants and $19.9 million fromlicense and service fees, royalties and research contracts. We have alsoreceived $26.2 million****from capital lease financing arrangements and$8.2 million from other loans. We have acquired, through March 31, 2003, $42.2million of property and equipment.  Themajority of these assets were financed through capital lease financingarrangements and other loans.

 

We expect to continue to finance our operations in the short-term fromcash we received in 2000 from the sale of our common and preferred stock andrevenue from our *HAP*TM Technology Partnershipprogram and our pharmacogenomic support service customers.  Our business strategy depends on, amongother things, entering into partnership agreements with pharmaceutical andbiotechnology companies.  If we areunsuccessful in entering into our partnership programs, we may not generatesufficient revenues to sustain our operations at planned levels.

 

Cash used in operations for the three months ended March 31, 2003 was$2.0 million compared with $7.7 million for the same period in 2002. The cashused in operations for the three months ended March 31, 2003 resulted primarilyfrom a net loss of $4.7 million, partially offset by $1.8 million of non-cashcharges for depreciation and amortization expense and stock-basedcompensation.  Cash used in operationsfor the three months ended March 31, 2002 resulted primarily from a net loss of$9.1 million and a $1.8 million decrease in accounts payable and accruedliabilities, partially offset by $2.4 million of non-cash charges fordepreciation and amortization expense and stock- based compensation.

 

Cash provided by investing activities for the three months ended March31, 2003 was $2.2 million compared with $4.3 million for the same period in2002.  Net proceeds from the sale ofmarketable securities totaled $2.7 million for the three months ended March 31,2003 compared to $4.4 million for the same period in 2002.  During the three months ended March 31,2003, we used $410,000 of cash for the purchase of property and equipmentcompared to $40,000 for the same period in 2002.

 

Cash used for financing activities for the three months ended March 31,2003 was $1.7 million compared with $1.8 million for the same period in2002.  The primary use of cash fromfinancing activities for the three months ended March 31, 2003 and 2002 was therepayment of long-term debt and capital lease obligations.

 

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Our contractual cash obligations as of March31, 2003, are as follows:

 
| **Contractual********Obligations**                |                                | **Payments Due by Period (2)********(in  thousands)** |            |
|---------------------------------------------------|-------------------------------------|-------------------------------------------------------|-----------------|
|                                              | **Total  Amounts********Committed** |                                                  | **Fiscal 2003** |   | **Fiscal Years  2004 and 2005** |   | **Fiscal Years  2006 and 2007** |   | **Fiscal Year  2008 and later** |   |
| Long-Term Debt, including interest                |                                | $                                                     | 6,355           |   | $ | 587 |   | $ | 1,408 |   | $ | 1,408 |   | $ | 2,952 |   |
| Capital Lease Obligations, including interest (1) |                                | 9,809                                                 |            | 9,809 |   | — |   | — |   | — |   |
| Operating Leases                                  |                                | 8,944                                                 |            | 892 |   | 2,235 |   | 2,025 |   | 3,792 |   |
| Minimum License Obligations                       |                                | 500                                                   |            | 88 |   | 206 |   | 206 |   | — |   |
| Total Contractual Cash Obligations                |                                | $                                                     | 25,608          |   | $ | 11,376 |   | $ | 3,849 |   | $ | 3,639 |   | $ | 6,744 |   |

 

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(1)          Reflects all lease obligations as beingcurrent, however, as a result of the amendment to our lease agreement with GEthat we entered into in March 2003, we anticipate paying the outstanding GElease obligations under the original maturity schedule through February,2005.  Obligations due under theoriginal maturity schedules total $5,638 for fiscal 2003 and $4,171 for fiscal2004 and 2005.  See Management’sDiscussion and Analysis – Overview and Note 6 for additional informationregarding the classification of certain amounts as current obligations.

 

(2)          Payment of our long-term debt and capital leaseobligations could be accelerated and has been accelerated in the past, if wefail to maintain compliance with certain non-financial covenants, includingabsence of material adverse change and other covenants.

 

Long-term debt consists of three financingagreements with Connecticut Innovations Inc. (CII), a stockholder, used tofinance certain leasehold improvements and other costs associated with ourfacility expansion.  Each agreementprovided for interest only with principal payments, based on a 120-monthamortization, beginning April 2001 through October 2002, with final balloonpayments due in March 2009 through June 2011. Borrowings under the agreements bear interest at 6.5% and arecollateralized by the related leasehold improvements.  We are in compliance with all debt covenants as of March 31, 2003and no cross default provisions exist in the agreements.

 

Capital lease obligations, related toequipment, consist principally of arrangements with four equipment leasingcompanies.  The leases have termsranging from two to four years with installments originally scheduled to endbetween August 2003 and February 2005, and which bear interest at rates rangingfrom 8.15% to 12.46%.  Borrowings underthese agreements are secured by the underlying leased equipment.  The majority of the capital leasearrangements allow for the purchase of the related equipment at the completionof the lease term, as defined in the agreements, and certain of the agreementsrequire the purchase of the equipment at the completion of the lease term. Twoof our equipment lessors, GE and Finova, alleged that we were in default of ouragreements with them.  For a furtherdiscussion, see Management’s Discussion and Analysis of Financial Conditions –Overview and Note 6 of the notes to unaudited financial statements.

 

We lease our operating facilities located in New Haven,Connecticut.  The lease agreementscurrently require annual lease payments of approximately $1.1 million per yearover the original term, which expires in 2006. We have two five-year renewal options to extend the lease agreementsbeyond the initial term.  We arerecording the expense associated with the leases on a straight-line basis overthe expected term of the leases through September 2011.  In addition to the operating leaseagreements for our current facility, we also have operating leases for certainof our office equipment.

 

In addition, we periodically enter intoagreements with third parties to obtain exclusive or non-exclusive licenses forcertain technologies.  The terms ofcertain of these agreements require us to make future royalty payments andcertain milestone payments based on product sales or sublicense incomegenerated from applicable technologies, if any and include provisions requiringfuture minimum lease payments, whether or not the technology iscommercialized.  The amount of suchpayments will depend upon successful commercialization of applicabletechnologies, if any.  The futureminimum payments (assuming non-termination of these agreements) are included inthe minimum license obligations above.

 

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Based on our current business plans, capitalexpenditures are not expected to exceed $500,000 to $1 million for each offiscal 2003 and 2004.

 

Our cash requirements will vary depending upon a number of factors,many of which are beyond our control, including:

 

•                  thedemand for our *HAP* TM Technology;

•                  theefforts and success of our *HAP* TM Partnership program;

•                  thecommercialization of intellectual property derived from our associations;

•                  thelevel of competition we face;

•                  ourability to maintain our *HAP*TM Technology; and

•                  ourability to effectively manage our operating expenses.

 

On March 31, 2003, cash, cash equivalents and short-term investmentstotaled $30.0 million compared to approximately $34.2 million at December 31,2002.  Our cash reserves are held ininterest-bearing high-grade corporate bonds and money market accounts.  We believe that our existing cash reserveswill be sufficient to support our expected net losses, debt obligations andcapital expenditures for at least 12 months. To execute our long-term business plan, we will need to grow ourrevenues significantly each year and we may need to seek additional fundingthrough public or private equity offerings, debt financings or commercialpartners.  We cannot assure you that wewill obtain additional partners or capital funding on acceptable terms, if atall.

 

**FactorsAffecting Future Operating Results**

 

*This Quarterly Report on Form 10-Q contains “forward-lookingstatements” within the meaning of Section 21E of the Securities Exchange Act of1934, as amended.  These statements aresubject to risks and uncertainties and are based on the beliefs and assumptionsof our management based on information currently available to ourmanagement.  Use of words, such as**“believes,” “expects,”“anticipates,” “intends,” “plans,” “estimates,” “should,” “likely” or similarexpressions, indicate a forward-looking statement.  Forward-looking statements involve risks, uncertainties andassumptions.  Certain of the informationcontained in this Quarterly Report on Form 10-Q consists of forward-lookingstatements.  Important factors thatcould cause actual results to differ materially from the forward-lookingstatements include the following:*

 

**We are anearly stage company with a history of losses and we expect to incur net lossesfor the foreseeable future such that we may never be profitable**.

 

We have incurredsubstantial operating losses since our inception.  As of March 31, 2003, we have generated only minimal revenue fromour *HAP*TM Partnershipprogram and our pharmacogenomics support services, and we do not expect togenerate significant revenues for several years.  From inception through March 31, 2003, we had an accumulateddeficit of approximately $198.3 million. Our losses to date have resulted principally from costs we incurred inthe development of our *HAP*TMTechnology, in our clinical trials and from general and administrative costsassociated with operations.  We expectto devote substantially all of our resources to service our *HAP*TM Partnership program andSTRENGTH program partners, our pharmacogenomics support services customers, ourCARING program and to maintain our *HAP*TMTechnology.

 

We expect to incuradditional losses this year and in future years, and we may never achieveprofitability.  In addition,pharmaceutical and biotechnology companies are only now beginning to useproducts such as ours in their drug and diagnostic development or marketingefforts and, accordingly, they may not choose to use our *HAP*TM Technology.  We do not expect our losses to besubstantially mitigated by revenues from our *HAP*TMPartnership and STRENGTH programs and our CARING program, if any, or from ourpharmacogenomics support services for a number of years.

 

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**Wecurrently rely on a limited number of licensing and service arrangements forsubstantially all of our revenues.  As aresult, the loss of one major customer or our inability to secure additionalsignificant customers during a given period would have an adverse affect on ourbusiness and operating results.**

 

We are dependent upon alimited number of licensing and service arrangements that represent substantiallyall of our revenues.  In the quarterended March 31, 2003, two of our customers accounted for 59% of our totalrevenues.  The agreements with the twocustomers terminate in the fourth quarter of 2003 and the third quarter of2004.  If we are unable to replace, uponsubstantially similar terms, the agreement that expired in 2002 or if we loseany of the remaining significant customers, it would have a material adverseaffect on our revenues and on our business in general and could causevolatility or a decline in our stock price.

 

**Togenerate significant revenues, we must obtain additional customers for our *HAP*TM Partnership program andour STRENGTH and CARING programs.**

 

Our strategy depends onentering into agreements with pharmaceutical and biotechnology companies forour *HAP*TM Partnershipprogram and our STRENGTH and CARING programs. Wecurrently have a *HAP*TM Partnership programwith five pharmaceutical and biotechnology companies as well as anagreement with a major diagnostic company to commercialize exclusively thediagnostic product rights and non-exclusively the therapeutic productdevelopment rights from our STRENGTH program. Wemay not obtain additional partners for our *HAP*TMPartnership program and our STRENGTH program or obtain any partners for ourCARING program.  If we are unsuccessfulin finding additional partners for our *HAP*TMPartnership program and our STRENGTH program or in finding any partners for ourCARING program, we may never generate sufficient revenues to sustain ouroperations.  In addition, we expect thatsome of our future *HAP*TMPartnership program collaborations, like some of our current *HAP*TM Partnership programcollaborations, will be limited to specific, limited-term projects or that someof these collaborations may not be renewed. Accordingly, we must continually obtain new customers to besuccessful.  To date, the integration ofpharmacogenomics into drug development and marketing has not achievedwidespread market acceptance.

 

**If theestimates we make, and the assumptions on which we rely, in preparing ourfinancial statements prove inaccurate, our actual results may vary from thosereflected in our projections and accruals.**

 

Our financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States of America.  Thepreparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of our assets, liabilities, revenuesand expenses, the amounts of charges accrued by us and related disclosure ofcontingent assets and liabilities.  Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances.  There can be no assurance, however, that ourestimates or the assumptions underlying our estimates will be correct.

 

**We mayrequire additional funding to fund operations and repay debt and we may not beable to obtain any.**

 

We have used substantialamounts of cash to fund our research and development activities.  We will continue to spend funds to serviceour *HAP*TM Partnershipprogram and STRENGTH program partners, our pharmacogenomics support servicescustomers, our CARING program and to maintain our *HAP*TM Technology.  We plan to pay for these activities with funds from:

 

•                  our existing cash and investment securities;and

 

•                  income that we may receive from our *HAP*TM Partnership program andSTRENGTH program partners and pharmacogenomics support services customers.

 

We intend to rely on ourcurrent *HAP*TMPartnership program and STRENGTH program partners and future partners, if any,and our current pharmacogenomics support services customers and futurecustomers, if any, for significant funding in the future to support ourdevelopment efforts.  To execute ourbusiness plans, we will need to grow our revenues significantly each year.  We cannot be certain when we will begin toreceive additional income, if at all, from our *HAP*TMPartnership and STRENGTH programs and our pharmacogenomics support services andincome, if any, from our CARING program. If we do not receive this income or do not receive it as rapidly as weexpect, we would spend our existing cash and investment securities more rapidlythan we currently plan.

 

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We believe that ourexisting cash reserves will be sufficient to support our expected net losses,debt obligations and capital expenditures for at least 12 months.  We cannot assure you that we will be able toobtain new partners or to generate the increased revenues required to meet ourbusiness plan objectives.  In addition,to execute our business plans, we may need to seek additional funding throughpublic or private equity offerings, debt financings or commercialpartners.  We cannot assure you that wewill obtain additional partners or capital funding on acceptable terms, if atall.  If we are unable to generatesufficient revenues or access capital on acceptable terms, we may be requiredto (a) obtain funds on unfavorable terms that may require us to relinquishrights to certain of our technologies or that would significantly dilute ourstockholders and/or (b) significantly scale back current operations.  Either of these two possibilities would havea material adverse effect on our business.

 

**Our *HAP*TM Technology may not allowour partners to develop commercial products or to increase sales of theirmarketed products.**

 

We developed our *HAP*TM Technology on theassumption that information about gene variation and gene variation associatedwith drug response may help drug development professionals better understandthe drug response of particular populations and complex disease processes.  Although the pharmaceutical andbiotechnology industries are increasing their use of genomics in analyzing drugresponse and diseases, we are unaware of any successful drug developmentprogram applying population genomics.

 

We discover *HAP*TM Markers forpharmaceutically relevant genes.  If weare unable to find *HAP*TMMarkers for pharmaceutically relevant genes in a timely manner, our potentialpartners may lose confidence in our *HAP*TMTechnology and our Company, and this loss in confidence could decrease ourability to generate revenues.  Even ifwe are able to discover the *HAP*TMMarkers for pharmaceutically relevant genes, this information may not prove tobe superior to genomic variation information discovered by ourcompetitors.  Furthermore,pharmaceutical and biotechnology companies may not choose our *HAP*TM Technology over competingtechnologies.

 

Our *DecoGen*® Informatics System mayalso be less effective than we expect or may not allow our partners or us todetermine a correlation between drug response and genomic variation.  Furthermore, even if our partners or we aresuccessful in identifying a specific correlation between drug response andgenomic variation based on our *HAP*TMTechnology, our partners may not be able to develop or sell commercially viableproducts nor may our partners be able to increase the sales of their marketedproducts using this correlation.  Accordingly,our *HAP*TM Markers and *HAP*TM Technology may notimprove the development, marketing and prescribing of drugs or the developmentand marketing of diagnostics developed by our *HAP*TMPartnership program and STRENGTH program partners.

 

**If we areunable to obtain intellectual property protection for our *HAP*TM Technology, trade secretsor know how, we may not be able to operate our business profitably.**

 

Our success depends, inpart, on our ability to protect our *HAP*TMTechnology, any associations that we find between clinical outcomes and geneticvariation and any other proprietary software, methods and technologies that wedevelop, either as a trade secret or under the patent and other intellectualproperty laws of the United States and other countries, so that we can preventunauthorized entities from using our inventions and proprietaryinformation.  Because patentapplications that were filed prior to November 29, 2000 in the United Statesare confidential until patents issue, third parties may have filed patentapplications for technology covered by our pending patent applications withoutour being aware of those applications, and our patent applications may not havepriority over any patent applications of others.  We are aware that there are other firms or individuals who havediscovered, or are currently discovering, information similar to theinformation we are discovering, who may have filed, and in the future arelikely to file, patent applications that are similar or identical to our *HAP*TM Technology patentapplications.

 

Our pending patentapplications may not result in issued patents. The patent positions of pharmaceutical and biotechnology companies,including ours, are generally uncertain as a result of the uncertain state ofthe patent law in the biotechnology field. There is no uniform, worldwide policy regarding the subject matter andscope of claims granted or allowable in biotechnology patents, particularlythose involving genomics.  In addition,some interest groups are lobbying for restrictions on patenting of genetictests.

 

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**We may beunable to develop or commercialize our *HAP*TMTechnology if we cannot establish additional collaborative relationships, andwe will depend on our partners to develop or to co-develop products.**

 

We currently have a *HAP*TM Partnership programwith five pharmaceutical and biotechnology companies as well as an agreement with a majordiagnostic company to commercialize exclusively the diagnostic product rightsand non-exclusively the therapeutic product development rights from ourSTRENGTH program.  We do not currentlyhave any partners for our CARING program. Under our current strategy, and for the foreseeable future, we do notexpect to develop or market pharmaceutical or diagnostic products on ourown.  As a result, our current andfuture revenues, in part, will depend on payments from our current *HAP*TM Partnership program andSTRENGTH program partners and our future *HAP*TMPartnership, STRENGTH and CARING program partners, if any, for either the newproducts they may develop, or for increased sales of their existing products,made possible through the use of our *HAP*TMTechnology.  If we are unable to attractnew *HAP*TM Partnershipprogram and STRENGTH program partners or any partners for our CARING program,we may never generate sufficient revenues to sustain our operations.

 

Our partners for our *HAP*TM Partnership program andSTRENGTH program and our partners, if any, for our CARING program, will beresponsible for pre-clinical study and clinical development of therapeutic anddiagnostic products and for regulatory approval, manufacturing and marketing ofany products or enhanced marketing claims that result from the application ofour *HAP*TMTechnology.  Our current agreements, andwe anticipate that our future agreements, with partners for any of our  programs will allow them significantdiscretion in pursuing these activities. We cannot control the amount and timing of resources that any suchcurrent or potential partners will devote to our programs or potentialproducts.  Our program arrangements mayalso have the effect of limiting the areas of research that we may pursueeither alone or with others.  Becausepart of our revenues will be dependent on the successful commercialization ordevelopment of our partners’ products, if, for any reason, a partner delays orabandons its development or commercialization of a product developed using our *HAP*TM Technology, we mayreceive reduced royalty or other payments or no royalty or other payments atall.

 

Although we intend toretain the rights to all *HAP*TMMarkers, which we discover as well as to *HAP*TMMarkers discovered jointly with our *HAP*TMPartnership and STRENGTH program partners and with our CARING program partners,if any, we may not always be able to negotiate the retention of theserights.  Furthermore, disputes may arisein the future over the ownership of rights to *HAP*TMMarkers as well as any other technology we develop with any of our programpartners.  These and other possibledisagreements between  a program partnerand us or between our CARING program partners, if any, and us could lead todelays in the research, development or commercialization of their products.  These disagreements could also result inlitigation or require arbitration to resolve. Any of these events could prevent us from effectively marketing our *HAP*TM Technology.

 

**We investconsiderable amounts of time, effort, and money to license our *HAP*TM Technology; and if we areunable to license our technology, we may not generate sufficient revenue tosustain our operations**.

 

Our ability to obtainpartners for our *HAP*TMPartnership program and our STRENGTH and CARING programs will depend insignificant part upon the pharmaceutical and biotechnology industries’acceptance that our *HAP*TMTechnology can help accelerate or improve their drug and diagnostic developmentand marketing efforts.  To achievemarket acceptance, we must continue to educate the pharmaceutical andbiotechnology industries and the public in general as to the potential benefitsof our *HAP*TMPartnership, STRENGTH and CARING programs. Most importantly, we must convince the research and development,clinical and marketing departments of pharmaceutical and biotechnologycompanies that our *HAP*TMTechnology can accelerate and improve the processes for developing, marketingand prescribing drugs and for developing and marketing diagnostics and that our*HAP*TM Partnership,STRENGTH and CARING programs will be commercially viable.  If we fail to gain this acceptance, we maynever generate sufficient revenues to sustain our operations.  We may expend substantial funds andmanagement effort to market our *HAP*TMPartnership, STRENGTH and CARING programs, without any resulting revenues.

 

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**Ourability to make any acquisitions is dependent on the availability of adequatecash and the attractiveness of our stock price.**

 

We anticipate that anyfuture acquisitions of businesses or technologies will be financed through cashfrom operations, the issuance of shares of our common stock and/or sellerfinancing.  We cannot assure you that wewill have sufficient existing capital resources or that we will be able toraise sufficient additional capital resources on terms satisfactory to us, ifat all, in order to meet our capital requirements for such acquisitions.

 

We also believe that asignificant factor in our ability to close acquisitions will be theattractiveness of our common stock for potential acquisition candidates.  This attractiveness may, in large part, bedependent upon the relative market price and capital appreciation prospects ofour common stock compared to the equity securities of our competitors.  The trading price of common stock on the NasdaqNational Market could in the future materially adversely affect our acquisitionprogram.

 

**Integrationor acquisitions or strategic investments could interrupt our business and ourfinancial condition could be harmed.**

 

From time to time, we mayacquire or make strategic investments in other businesses or technologies.  For example, on May 7, 2003, the UnitedStates Bankruptcy Court approved our purchase of substantially all of the assets of DNA Sciences, Inc. (DNA)pursuant to an Asset Purchase Agreement by and between the Company andDNA.  In addition, we expect to sign amodification to a license agreement related to certain purchased assets.  We expect to close the acquisition andlicense modification in the second quarter of 2003.  The DNA acquisition and any other acquisitions or strategicinvestments we may make in the future may entail numerous risks that includethe following:

 

•                  difficulties integrating acquiredoperations, personnel, technologies or products, if any;

•                  diversion of management’s focus from ourcore business concerns;

•                  entering markets in which we have no orlimited prior experience or knowledge;

•                  exposure to litigation from stockholders orcreditors of, or other parties affiliated with, the target company orcompanies;

•                  dilution to existing stockholders andearnings per share; and

•                  incurrence of substantial debt.

 

Any such difficultiesencountered as a result of merger, acquisitions or strategic investments couldadversely affect our business, operating results and financial condition.

 

**If we areunable to prevent others from unauthorized use of, or are unable to defend ouruse of, our *HAP*TMTechnology, trade secrets or know how, we may not be able to operate ourbusiness profitably.**

 

Despite our efforts to protect our proprietary rights, unauthorizedparties may be able to obtain and use information that we regard asproprietary.  The issuance of a patentdoes not guarantee that it is valid or enforceable; thus, even if we obtainpatents, they may not be valid or enforceable against third parties.

 

We also rely uponunpatented trade secrets and improvements, unpatented know-how and continuingtechnological innovation to develop and maintain our competitive position.  We generally protect this information with reasonablesecurity measures, including confidentiality agreements signed by ouremployees, academic collaborators and consultants that provide that allconfidential information developed or made known to others during the course ofthe employment, consulting or business relationship will be kept confidentialexcept in specified circumstances. Agreements with employees, consultants and collaborators generallyprovide that all inventions conceived by the individual while employed by usare our exclusive property.  If employees,consultants or collaborators do not honor these agreements, we may not haveadequate remedies for breach. Furthermore, our trade secrets may otherwise become known or beindependently discovered by competitors.

 

Further, a patent does notprovide the patent holder with freedom to operate in a way that infringes thepatent rights of others.  A third partymay sue us for infringing on its patent rights.  Likewise, we may need to resort to litigation to enforce a patentissued to us or to determine the scope and validity of third party proprietaryrights.  The cost to us of anylitigation or other proceeding relating to intellectual property rights, evenif resolved in our favor,

 

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could be substantial, and the litigationwould divert our management’s efforts. Some of our competitors may be able to sustain the costs of complexpatent litigation more effectively than we can because they have substantiallygreater resources.  Uncertaintiesresulting from the initiation and continuation of any litigation could limitour ability to continue our operations.

 

If any party shouldsuccessfully claim that the creation or use of our *HAP*TM Technology or *HAP*TM Marker association data infringe upon theirintellectual property rights, in addition to any damages we might have to pay,a court could require us to stop the infringing activity or obtain a license onunfavorable terms.  Moreover, any legalaction against us or any of our program partners claiming damages or seeking toenjoin commercial activities relating to the affected products and processescould, in addition to subjecting us to potential liability for damages, requireus or of our program partners to obtain a license in order to continue tomanufacture or market the affected products and processes.  Any license required under any patent maynot be made available on commercially acceptable terms, if at all.  In addition, some licenses may benon-exclusive, and, therefore, our competitors may have access to the sametechnology licensed to us.  If we failto obtain a required license or are unable to design around a patent, we may beunable to market effectively some of our *HAP*TMTechnology, which could limit our profitability and possibly prevent us fromgenerating revenue sufficient to sustain our operations.

 

**Regulatoryoversight of our *HAP*TMTechnology and public opinion regarding ethical issues surrounding the use ofgenetic information may adversely affect our ability to market our *HAP*TM Technology.**

 

Currently, there is limitedFood and Drug Administration (FDA) regulation of genetic tests.  The Secretary’s Advisory Committee onGenetic Testing, an advisory panel to the Secretary of the U.S. Department ofHealth and Human Services, has recommended that the FDA expand its regulationof genetic testing to require FDA approval for all new genetic tests andlabeling of genetic tests.  If the FDAadopts this recommendation, it may require that we, or our partners, apply forFDA approval as a prerequisite to marketing genetic tests that incorporate our *HAP*TM Technology.  If the FDA were to deny any application ofthis kind, it could adversely affect our business and we may be unable togenerate sufficient revenues to sustain our operations.

 

To date, the FDA has notrequired, in connection with approving any drug, that a physician must havegenomic variation information determined about a patient before the doctorprescribes a drug.  However, the FDA, inone instance, has required that a physician must have gene expressioninformation about a patient before the doctor prescribes the drug.  On January 31, 2003, the FDA announced aninitiative to help make innovative medical technology available sooner,including the use of pharmacogenomics during drug development.  The FDA indicated that within six months theagency would issue guidance on when and how to submit pharmacogenomicinformation to the FDA during the drug development process.  The FDA said that this guidance would facilitatethe exploratory use of pharmacogenomic screening during drug development andwould clarify when such information would be considered part of the evaluationof drug safety.  In addition, the FDAstated that the agency would hold a workshop in 2003 on issues that areinvolved in the co-development of a pharmacogenomic test and a drug and thatwithin 18 months the agency would issue guidance on the regulatory pathway forsuch combinations through the agency’s Center for Drug Evaluation and Researchand the Center for Devices and Radiological Health.  Our success will depend in part on what guidance the FDA issueswith regard to the use of genomic variation analysis as part of the drugapproval process and, accordingly, the validity of our *HAP*TM Technology as a basis foridentifying genomic variation and for correlating drug response with genomicvariation.  Without this acceptance bythe FDA and the pharmaceutical and biotechnology industry, we may be unable tomarket effectively our *HAP*TMTechnology and we may not generate sufficient revenues to sustain ouroperations.

 

Within the field ofpersonalized health and medicine, governmental and other entities may enactpatient privacy and healthcare laws and regulations that may limit the use ofgenomic variation data.  To the extentthat these laws and regulations limit the use of our *HAP*TM Technology or impose additional costs onour partners, we may be unable to market effectively our *HAP*TM Partnership, STRENGTH andCARING programs and we may not generate sufficient revenues to sustain ouroperations.

 

Additionally, publicopinion on ethical issues related to the confidentiality and appropriate use ofgenetic testing results may influence governmental authorities to call forlimits on, or regulation of the use of, genetic testing.

 

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In addition, governmental authorities orother entities may call for limits on, or regulation of the use of, genetictesting or prohibit testing for genetic predisposition to certain conditions,particularly for those that have no known cure.  The occurrence of any of these events could reduce the potentialmarkets for our *HAP*TMTechnology, which could prevent us from generating sufficient revenues tosustain our operations.

 

Furthermore, we may bedirectly subject to regulations as a provider of diagnostic information.  To the extent that these regulationsrestrict the sale of our *HAP*TMTechnology or impose other costs, we may be unable to provide our *HAP*TM Technology to ourcustomers on terms sufficient to recover our expenses.

 

**If ourpartners do not seek, or do not receive, marketing approval for productsdeveloped, if any, using our *HAP*TMTechnology, we may receive delayed royalty or other payments or no royalty orother payments at all.**

 

Any new drug, biologic, ornew drug or biologic indication our partners develop using our *HAP*TM Technology must undergoan extensive regulatory review process in the United States and other countriesbefore a new product or indication of this kind could be marketed.  This regulatory process can take many yearsand require substantial expense. Changes in FDA policies and the policies of similar foreign regulatorybodies can prolong the regulatory review of each new drug or biologic licenseapplication or prevent approval of the application.  We expect similar delays and risks in the regulatory reviewprocess for any diagnostic product developed by our partners, whenever thisregulatory review is required.  Even ifa product obtains marketing clearance, a marketed product and its manufacturerare subject to continuing review.  Amanufacturer may be forced to withdraw a product from the market if apreviously unknown problem with a product becomes apparent.  Because our future revenues will be largelydependent on the successful commercialization or development of products usingour *HAP*TM Technology,any delay of our partners in obtaining, failing to obtain, or failing tomaintain regulatory approval for a product developed using our *HAP*TM Technology may delay ourreceipt of royalty or other payments or prevent us from receiving royalty orother payments sufficient to recover our expenses.

 

**If ourpartners are unable to obtain FDA approval for therapeutic or diagnosticproducts developed using our *HAP*TMTechnology, the lack of regulatory approval will diminish the value of our *HAP*TM Technology.**

 

To date, no one hasdeveloped or commercialized any therapeutic product or commercialized anydiagnostic product using our *HAP*TMTechnology.  We expect to rely on ourprogram partners to file applications for regulatory approval and generallydirect the regulatory review process and obtain FDA acceptance of our *HAP*TM Partnership and STRENGTHprograms and our CARING programs, if any. Our program partners may not submit an application for regulatory review.  Even if they do submit applications, theymay not be able to obtain marketing clearance for any products on a timelybasis, if at all.  If our partners failto obtain required governmental clearances for therapeutic or diagnosticproducts, they will not be able to market these products unless and until theyobtain these clearances.  As a result,we may not receive royalty or other payments from our customers.  The occurrence of any of these events mayprevent us from generating revenues sufficient to sustain our operations.

 

**If we donot successfully distinguish and commercialize our *HAP*TM Technology, we may be unable to competesuccessfully with our competitors or to generate revenue significant to sustainour operations**.

 

Numerous entities areattempting to identify genomic variation predictive of specific diseases anddrug response and to develop products and services based on thesediscoveries.  We face competition inthese areas from pharmaceutical, biotechnology and diagnostic companies,academic and research institutions and government and other publicly-fundedagencies, both in the United States and abroad, most of which havesubstantially greater capital resources, research and development staffs,facilities, manufacturing and marketing experience, distribution channels andhuman resources than we do.

 

These competitors maydiscover, characterize or develop important technologies applying populationgenomics before us or our partners for our *HAP*TMPartnership and STRENGTH programs that are more effective than thosetechnologies which, we develop or which our partners for our *HAP*TM Partnership and STRENGTHprograms develop, or these competitors may obtain regulatory approvals of theirdrugs and diagnostics more rapidly

 

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than our partners for our *HAP*TM Partnership and STRENGTHprograms do, any of which could limit our ability to market effectively our *HAP*TM Technology.

 

Some companies andgovernments are marketing or developing a number of databases and informaticstools to assist participants in the healthcare industry and academicresearchers in the management and analysis of genomic data.  Entities such as Perlegen Sciences, CeleraGenomics Group and the International HapMap Project have developed or plan todevelop databases containing gene sequence, genomic variation or other genomicinformation and are marketing or plan to market their data to pharmaceuticaland biotechnology companies or plan to make freely available their databases.  In addition, numerous pharmaceutical andbiotechnology companies, such as GlaxoSmithKline plc, either alone or inpartnership with our competitors, are developing genomic research programs thatinvolve the use of information that can be found in these databases.  Furthermore, companies, such as deCODEgenetics, Inc., have technologies for using genetic variation in diagnosticsand in the drug development process and already have partnerships withcompanies employing these technologies.

 

Genomic technologies haveundergone, and are expected to continue to undergo, rapid and significantchange.  Our future success will dependin large part on maintaining a competitive position in the genomics field.  Others may rapidly develop new technologiesthat may result in our products or technologies becoming obsolete before werecover the expenses that we incur in connection with the development of theseproducts.  Our *HAP*TM Technology could becomeobsolete if our competitors offer less expensive or more effective drugdiscovery and development technologies, including technologies that may beunrelated to genomics.

 

**If we failto maintain our computer hardware, software and related infrastructure, wecould experience loss of, or delay in, revenues and market acceptance.**

 

Because our businessrequires manipulating and analyzing large amounts of data, we depend on thecontinuous, effective, reliable and secure operation of our computer hardware,software and related infrastructure.  Tothe extent that our hardware or software malfunctions, we will experiencereduced productivity.  We protect ourcomputer hardware through physical and software safeguards.  However, our computer hardware is stillvulnerable to fire, weather, earthquake, or other natural disaster and powerloss, telecommunications failures, physical or software break-ins and similarevents.  In addition, the software andalgorithmic components of our *DecoGen*®Informatics System are complex and sophisticated, and as such, could containdata, design or software errors that could be difficult to detect andcorrect.  Users of our system may findsoftware defects in current or future products.  If we fail to maintain the necessary computer capacity and datato support our computational needs and our customers’ drug and diagnosticdiscovery and development efforts, we could experience a loss in revenues, or adelay in receiving revenues and a delay in obtaining market acceptance for ourtechnology.

 

**Ouroperating results may fluctuate significantly and any failure to meet financialexpectations may disappoint securities analysts or investors and result in adecline in our common stock price.**

 

Our operating results havefluctuated in the past and we expect they will fluctuate in the future. Thesefluctuations could cause our common stock price to decline.  Some of the factors that could cause ouroperating results to fluctuate include:

 

•                  recognition of non-recurring revenues due toreceipt of license fees, achievement of milestones, completion of contracts orother revenues;

 

•                  demand for and market acceptance of our *HAP*TM Partnership, STRENGTH andCARING programs;

 

•                  timing of the execution of agreements on our*HAP*TM Partnership,STRENGTH and CARING programs and other material contracts;

 

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•                  our competitors’ announcements orintroduction of new products, services or technological innovations;

•                  disputes regarding patents or otherintellectual property rights;

•                  securities class actions or otherlitigation;

•                  adverse changes in the level of economicactivity in the United States and other major regions in which we do business;and

•                  general and industry-specific economicconditions, which may affect our partners’ use of our *HAP*TM Technology.

 

Due to volatile andunpredictable revenues and operating expenses, we believe that period-to-periodcomparisons of our results of operations may not be a good indication of ourfuture performance.  It is possible thatour operating results may be below the expectations of securities analysts orinvestors.  In this event, the marketprice of our common stock could fluctuate significantly or decline.

 

**Item 3****–Quantitative and Qualitative Disclosures about Market Risk.**

 

Our exposure tomarket risk is principally confined to our cash equivalents and investments,all of which have maturities of less than one year.  We maintain a non-trading investment portfolio of investmentgrade, liquid debt securities that limit the amount of credit exposure to anyone issue, issuer or type of instrument. The weighted average interest rate on marketable securities at March 31,2003 was approximately 1.72%.  In viewof the nature and mix of our total portfolio, a 10% movement in market interestrates would not have a significant impact on the total value of our investmentportfolio as of March 31, 2003.

 

**Item 4****– Controlsand Procedures.**

 

a)              *Evaluation of disclosurecontrols and procedures*.  Based on their evaluation of the Company’sdisclosure controls and procedures (as defined in Rules 13a –14(c) and15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended(the “Exchange Act”)), as of a date within 90 days of the filing date of thisQuarterly Report on Form 10-Q, the Company’s chief executive officer and chieffinancial officer have concluded that the Company’s disclosure controls andprocedures are designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms and are operating in an effective manner.

 

b)             *Changes in internalcontrols*.  There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of the most recent evaluation.

 

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**PART II****- OtherInformation**

 

**Item 2****– Changesin Securities and Use of Proceeds.**

 

**Changes in Securities**

 

Not applicable.

 

**Use of Proceeds**

 

The proceeds from ourinitial public offering have been invested in interest-bearing high-gradecorporate bonds and money market accounts.

 

From the closing of ourinitial public offering through March 31, 2003, we have used the proceeds forresearch and development activities, capital expenditures, working capital andother general corporate purposes.  Wewill continue to spend funds to service our *HAP*TMTechnology Partnership program and our STRENGTH program partners, ourpharmacogenomics support services customers, our CARING program and to maintainour *HAP*TMTechnology.  As of March 31, 2003, $30.0million of the net proceeds remain available and are primarily invested inshort-term marketable securities.

 

**Item 6****– Exhibitsand Reports on Form 8-K.**

 

(a) Exhibits

 

See Index to Exhibits attached hereto.

 

(b) Reports on Form 8-K

 

No reports on Form 8-Khave been filed during the quarter for which this report is filed.

 

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**GENAISSANCE PHARMACEUTICALS, INC.**

 

**SIGNATURE**

 

Pursuant to therequirements of the Securities Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|               | GENAISSANCE  PHARMACEUTICALS, INC.                 |
|--------------------|----------------------------------------------------|
|               |                                               |
|               |                                               |
| Date: May 15, 2003 | By:                                                |   /s/ Ben  Kaplan |   |
|               | Ben Kaplan                                         |
|               | Senior Vice President  and Chief Financial Officer |
|               | (Principal Financial  and Accounting Officer)      |

 

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CERTIFICATIONS

 

I, Kevin Rakin, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Genaissance Pharmaceuticals, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                       | /s/ Kevin Rakin                       |   |
|----------------------------|---------------------------------------|--------|
| Dated:  May  15, 2003 | Kevin Rakin                           |
|                       | President and Chief Executive Officer |

 

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CERTIFICATIONS

 

I, Ben Kaplan, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Genaissance Pharmaceuticals, Inc.;

 

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)                                     evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)                                      presentedin this quarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of registrant’sboard of directors (or persons performing the equivalent functions):

 

a)                                      allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)                                     anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                       | /s/ Ben Kaplan                                    |   |
|----------------------------|---------------------------------------------------|--------|
| Dated:  May  15, 2003 | Ben Kaplan                                        |
|                       | Senior Vice President and Chief Financial Officer |

 

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**Index toExhibits**

 
| **Exhibit  Number** |   | **Description of Document**                                                                                                                                                                                                             |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                                                    |
| 2.1#                |   | Asset Purchase Agreement between Genaissance  Pharmaceuticals, Inc. and DNA Sciences, Inc., dated March 28, 2003.                                                                                                                       |
| 2.2#                |   | Amendment No. 1, dated May 5, 2003, to Asset  Purchase Agreement between Genaissance Pharmaceuticals, Inc. and DNA  Sciences, Inc., dated March 28, 2003.                                                                               |
| 10.1+               |   | Technology and Database License Agreement between  Genaissance Pharmaceuticals, Inc. and Millennium Pharmaceuticals, Inc., dated  January 7, 2003.                                                                                      |
| 10.2+               |   | Research Collaboration and License Agreement between  Genaissance Pharmaceuticals, Inc., Bayer AG and Bayer Healthcare LLC,  dated January 15, 2003.                                                                               |
| 10.3                |   | Amendment, dated February 6, 2003, to Agreement with  Pfizer, Inc., dated August 29, 2001.                                                                                                                                              |
| 10.4+               |   | Genotyping Services Agreement between Genaissance  Pharmaceuticals, Inc. and Wayne State University, dated March 11, 2003.                                                                                                              |
| 10.5                |   | Amendment, dated March 12, 2003, to Master Equipment  Lease Agreement between Genaissance Pharmaceuticals, Inc. and General  Electric Capital Corporation (successor-in-interest to Oxford Venture  Finance, LLC), dated June 10, 1999. |
| 10.6*               |   | Management Incentive Program Summary.                                                                                                                                                                                                   |
| 99.1                |   | Statement pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                           |
| 99.2                |   | Statement pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                           |

 

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*                       Indicates amanagement contract or compensatory plan.

+                       Confidentialtreatment requested as to certain portions, which portions have been filedseparately with the Commission

#                       Certainschedules to this agreement were omitted by the Registrant.  The Registrant agrees to furnish anyschedule to this agreement supplementally to the Securities and ExchangeCommission upon written request.

 

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