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** **

 

** **

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 
| ** **                                                                                                                                                                   | **x**  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES**

**EXCHANGE ACT OF 1934.** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                         |   |                                                                                                         |
| **FOR THE QUARTERLY PERIOD ENDED  March 31, 2009**                                                                                                                      |
|                                                                                                                                                                         |   |                                                                                                         |
| **OR**                                                                                                                                                                       |
|                                                                                                                                                                         |   |                                                                                                         |
| ** **                                                                                                                                                                   | **o**  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES**

**EXCHANGE ACT**        |
|                                                                                                                                                                         |   |                                                                                                         |
| **FOR  THE TRANSITION PERIOD FROM             TO            ** |

** **

**COMMISSION FILE NUMBER 000-30469**

 

**deCODEgenetics, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Delaware**                     | ** ** | **04-3326704**                        |
|----------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| Incorporation or  Organization)  |       |                                  |

 

**STURLUGATA 8, IS-101 REYKJAVIK,ICELAND**

(Address ofPrincipal Executive Offices)

 

**+354-570-1900**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check whetherthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. x Yes   o No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.05 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  o Yes o No

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                         |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   o Yes   x No

 

The aggregatenumber of shares of the registrant’s common stock outstanding on May 1,2009 was 61,761,805 shares of common stock $.001 par value.

 

 

 

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**deCODEgenetics, Inc.**

 

**INDEX**

** **
| PART I.      | FINANCIAL INFORMATION                                                                                            |   |
|-------------------|------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                             |   |
| Item 1.           | Financial Statements (Unaudited)                                                                                 |   |
|              |                                                                                                             |   |
|              | Condensed  Consolidated Balance Sheets as of March 31, 2009 and December 31,  2008                     |   |
|              |                                                                                                             |   |
|              | Condensed  Consolidated Statements of Operations for the three-month periods ended  March 31, 2009 and 2008 |   |
|              |                                                                                                             |   |
|              | Condensed  Consolidated Statements of Cash Flows for the three-month periods ended  March 31, 2009 and 2008 |   |
|              |                                                                                                             |   |
|              | Notes  to Condensed Consolidated Financial Statements                                                            |   |
|              |                                                                                                             |   |
| Item 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |   |
|              |                                                                                                             |   |
| Item 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                                      |   |
|              |                                                                                                             |   |
| Item 4.           | Controls and  Procedures                                                                                         |   |
|              |                                                                                                             |   |
| PART II.     | OTHER INFORMATION                                                                                                |   |
|              |                                                                                                             |   |
| Item 1.           | Legal proceedings                                                                                                |   |
|              |                                                                                                             |   |
| Item 1A.          | Risk factors                                                                                                     |   |
|              |                                                                                                             |   |
| Item 6.           | Exhibits                                                                                                         |   |
|              |                                                                                                             |   |
|              | (a) Exhibits                                                                                                |   |
|              |                                                                                                             |   |
| Signatures        |                                                                                                             |
|              |                                                                                                             |   |
| Index to Exhibits |                                                                                                             |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

(Unaudited)

 
| ** **                                                                                                                                                                                                                        | ** ** | **March 31,**                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                        | ** ** | **2009**                                   | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                        | ** ** | **(In  thousands, except  share amounts)** | ** ** |
| ASSETS                                                                                                                                                                                                                            |       |                                       |       |                  |       |
| Current assets:                                                                                                                                                                                                                   |       |                                       |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                        |       | $                                          | 6,148      |                  | $          | 3,701 |   |
| Receivables                                                                                                                                                                                                                       |       | 9,293                                      |       | 9,159                 |       |
| Other current  assets                                                                                                                                                                                                             |       | 3,658                                      |       | 4,875                 |       |
| Total current  assets                                                                                                                                                                                                             |       | 19,099                                     |       | 17,735                |       |
| Investments (pledged  at March 31, 2009, see Note 9)                                                                                                                                                                         |       | 12,601                                     |       | 12,721                |       |
| Restricted cash  and cash equivalents                                                                                                                                                                                             |       | 5,230                                      |       | 5,500                 |       |
| Property and  equipment, net                                                                                                                                                                                                      |       | 19,642                                     |       | 20,629                |       |
| Goodwill                                                                                                                                                                                                                          |       | 10,055                                     |       | 10,055                |       |
| Intangible  assets, net                                                                                                                                                                                                           |       | 3,556                                      |       | 3,645                 |       |
| Other long-term  assets                                                                                                                                                                                                           |       | 4,433                                      |       | 4,852                 |       |
| Total assets                                                                                                                                                                                                                      |       | $                                          | 74,616     |                  | $          | 75,137 |   |
| LIABILITIES AND  STOCKHOLDERS’ DEFICIT                                                                                                                                                                                       |       |                                       |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                             |       |                                       |       |                  |       |
| Accounts payable                                                                                                                                                                                                                  |       | $                                          | 9,955      |                  | $          | 12,202 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                   |       | 8,611                                      |       | 7,564                 |       |
| Deferred revenue                                                                                                                                                                                                                  |       | 6,433                                      |       | 5,755                 |       |
| Secured debt  collateralized by auction rate securities (Note 9)                                                                                                                                                                  |       | 11,566                                     |       | —                |       |
| Current portion  of capital lease obligations                                                                                                                                                                                     |       | 1,482                                      |       | 2,202                 |       |
| Current portion  of finance obligation on sale-leaseback                                                                                                                                                                          |       | 670                                        |       | 648                   |       |
| Current portion  of long-term debt                                                                                                                                                                                                |       | 234                                        |       | 249                   |       |
| Total current  liabilities                                                                                                                                                                                                        |       | 38,951                                     |       | 28,620                |       |
| Deferred revenue                                                                                                                                                                                                                  |       | 6,219                                      |       | 6,219                 |       |
| Deferred gain on  sale-leaseback                                                                                                                                                                                                  |       | 21,356                                     |       | 21,840                |       |
| Finance  obligation on sale-leaseback, net of current portion                                                                                                                                                                     |       | 23,323                                     |       | 23,497                |       |
| Long-term debt,  net of current portion                                                                                                                                                                                           |       | 217,316                                    |       | 216,037               |       |
| Commitments and  contingencies                                                                                                                                                                                                    |       |                                       |       |                  |       |
| Stockholders’  deficit:                                                                                                                                                                                                      |       |                                       |       |                  |       |
| Preferred stock,  $0.001 par value; Authorized: 6,716,666 shares; Issued and outstanding: none                                                                                                                                    |       | —                                     |       | —                |       |
| Common stock,  $0.001 par value; Authorized: 150,000,000 shares; Issued and outstanding:  61,882,584 and 61,761,805, respectively, at March 31, 2009 and  61,882,584 and 61,762,805, respectively, at December 31, 2008 |       | 62                                         |       | 62                    |       |
| Additional  paid-in capital                                                                                                                                                                                                       |       | 494,121                                    |       | 493,381               |       |
| Notes receivable                                                                                                                                                                                                                  |       | (1,893                                     | )          | (1,900                | )          |
| Accumulated  deficit                                                                                                                                                                                                              |       | (724,798                                   | )          | (712,161              | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                           |       | 527                                        |       | 103                   |       |
| Treasury stock,  120,779 and 119,779 shares stated at cost at March 31, 2009 and  December 31, 2008, respectively                                                                                                       |       | (568                                       | )          | (561                  | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                 |       | (232,549                                   | )          | (221,076              | )          |
| Total  liabilities and stockholders’ deficit                                                                                                                                                                                 |       | $                                          | 74,616     |                  | $          | 75,137 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

(Unaudited)

 
| ** **                                                     | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2009**                                                          | ** ** | **2008** | ** ** |
| ** **                                                     | ** ** | **(In thousands, except  per share amounts)** | ** ** |
|                                                           |       |                                                              |       |   |   |
| Revenue                                                        |       | $                                                                 | 8,917      |   | $ | 14,978 |   |
| Operating  expenses:                                           |       |                                                              |       |   |   |
| Cost of revenue                                                |       | 8,184                                                             |       | 14,714 |   |
| Research and  development                                      |       | 4,233                                                             |       | 12,653 |   |
| Selling, general  and administrative                           |       | 4,903                                                             |       | 7,211 |   |
| Total operating  expenses                                      |       | 17,320                                                            |       | 34,578 |   |
| Operating loss                                                 |       | (8,403                                                            | )          | (19,600 | ) |
| Interest income                                                |       | 157                                                               |       | 1,037 |   |
| Interest expense                                               |       | (4,626                                                            | )          | (4,025 | ) |
| Other  non-operating income (expense), net                     |       | 235                                                               |       | (4,077 | ) |
| Net loss                                                       |       | $                                                                 | (12,637    | ) | $ | (26,665 | ) |
|                                                           |       |                                                              |       |   |   |
| Basic and  diluted net loss per share                          |       | $                                                                 | (0.21      | ) | $ | (0.44 | ) |
| Shares used in  computing basic and diluted net loss per share |       | 61,489                                                            |       | 61,266 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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** **

**deCODEgenetics, Inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

(Unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | **(In thousands)**                          | ** ** |
| **Cash  flows from operating activities:**                                   |       |                                             |       |   |   |
| Net loss                                                                     |       | $                                                | (12,637    | ) | $ | (26,665 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                               |       | 1,287                                            |       | 1,876 |   |
| Amortization of  deferred gain on sale-leaseback of real estate              |       | (485                                             | )          | (485 | ) |
| Stock-based  compensation                                                    |       | 741                                              |       | 1,052 |   |
| Loss on  investments                                                         |       | 543                                              |       | 4,035 |   |
| Foreign currency  transaction                                                |       | (183                                             | )          | 50 |   |
| Amortization of  debt discount                                               |       | 1,323                                            |       | 1,190 |   |
| Amortization of  deferred financing costs                                    |       | 419                                              |       | 405 |   |
| Changes in  operating assets and liabilities:                                |       |                                             |       |   |   |
| Receivables and  other assets                                                |       | 888                                              |       | (3,987 | ) |
| Accounts  payable, accrued expenses and other current liabilities            |       | (1,200                                           | )          | 1,630 |   |
| Deferred revenue                                                             |       | 678                                              |       | 868 |   |
| Interest related  to secured borrowing                                       |       | 436                                              |       | — |   |
| Net cash used in  operating activities                                       |       | (8,190                                           | )          | (20,031 | ) |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                       |       |                                             |       |   |   |
| Sale of  investments                                                         |       | —                                           |       | 10,000 |   |
| Purchase of  property and equipment                                          |       | (17                                              | )          | (709 | ) |
| Change in  restricted cash                                                   |       | 270                                              |       | — |   |
| Net cash  provided by investing activities                                   |       | 253                                              |       | 9,291 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                       |       |                                             |       |   |   |
| Proceeds from  issuance of common stock                                      |       | —                                           |       | 172 |   |
| Repayment of  notes receivable for common stock                              |       | —                                           |       | 75 |   |
| Proceeds from  secured borrowing                                             |       | 11,314                                           |       | — |   |
| Repayments of  debt and capital lease obligations                            |       | (930                                             | )          | (951 | ) |
| Net cash  provided by (used in) financing activities                         |       | 10,384                                           |       | (704 | ) |
| Net increase  (decrease) in cash and cash equivalents                        |       | 2,447                                            |       | (11,444 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 3,701                                            |       | 54,172 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                                | 6,148      |   | $ | 42,728 |   |
| Supplemental  cash flow information:                                         |       |                                             |       |   |   |
| Cash paid for  interest                                                      |       | $                                                | 388        |   | $ | 462 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

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**deCODEgenetics, Inc.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED)**

(tabular amountsin thousands, except share and per share amounts)

 
| **1.** | ** Organization and Business** |
|--------|-------------------------------------|

 

References in thesefinancial statements to deCODE refer to deCODE genetics, Inc., a Delawarecompany, and its wholly owned subsidiaries, Islensk erfdagreining ehf., anIcelandic company registered in Reykjavik, and its subsidiaries and MediChemLife Sciences, Inc., a Delaware corporation, and its subsidiaries.

 

With its headquarters inReykjavik, Iceland, deCODE is a biopharmaceutical company developing andmarketing products to improve the treatment, diagnosis and prevention of commondiseases. deCODE applies its discoveries in human genetics to bring to marketDA-based reference laboratory tests and consumer genome analysis services toassess individual risk of common diseases and applies its capabilities inchemistry and structural biology to the development of drugs in majortherapeutic areas. deCODE’s customers include major pharmaceutical companies,biotechnology firms, pharmacogenomics companies, government institutions,universities and other research institutions. deCODE’s business is global, withits principal markets in the United States and in Europe.

 

deCODE’s advantage inDNA-based disease risk assessment tests and personal genomics is derived fromits population approach to human genetics and the ability to apply itsdiscoveries directly to the development of DNA-based reference laboratory testsfor common diseases and to its retail genome scans. deCODE has in Icelandcomprehensive population resources and one of the largest genotyping facilitiesin the world, enabling its scientists to effectively identify key variations inthe sequence of the human genome associated with a major impact on individualrisk of common diseases. Well-validated genetic variations conferring risk ofdisease are the basis for DNA-based reference laboratory tests and personalgenome scans that can more accurately assess individual risk of disease. Asvirtually all common diseases have both genetic and environmental risk factors,measuring genetic risk is in deCODE’s view a critical component for therealization of personalized medicine. By providing a more completeunderstanding of individual risk, such tests can empower better prevention inthose conditions in which known lifestyle and environmental risk can be modified,as well as targeted screening and early intervention in diseases such ascancer.

 

The value of deCODE’sdrug discovery and development programs is derived from its integratedcapabilities in structure-based drug design and medicinal chemistry. Throughits structural biology and chemistry units based in the United States, deCODEcan develop new and detailed understanding of the structure and binding sitesof drug targets. This makes it possible to discover compounds that may havesuperior safety and tolerability profiles than existing drugs. deCODE has fullyintegrated capabilities ranging from targeted *in vitro*and model organism biology through cGMP manufacturing for clinical trials.

 

*GoingConcern*: Thefinancial statements have been prepared on a going-concern basis, whichcontemplates the recoverability of assets and the satisfaction of liabilitiesin the normal course of business. deCODE has recorded substantial operating andnet losses. Its negative cash flows from operations have been $8,190,000 and $20,031,000during the three-months ended March 31, 2009 and 2008, respectfully, and$54,779,000 during the year ended December 31, 2008. In addition, theCompany has significant amounts of long-term debt which requires interestpayments of approximately $8,050,000 per annum. At March 31, 2009, deCODEhad liquid funds available for operating activities of $6,148,000 (cash andcash equivalents) as compared to $3,701,000 at December 31, 2008. Toincrease cash currently available, in January 2009 deCODE entered into anagreement with an Icelandic financial institution (NBI hf) pursuant to whichNBI has purchased all auction rate securities (“ARS”) owned by deCODE for anaggregate price of $11,314,000 (accounted for as a secured borrowing, see Note9). In April, 2009, deCODE entered into agreements with Celera Corporation(“Celera”) for non-exclusiveworldwide licenses to deCODE’s genetic markers for increased risk of majorcardiovascular and metabolic diseases, including heart attack, stroke, atrialfibrillation (AF) and type 2 diabetes (T2D). The licensing agreements providedfor an upfront payment to deCODE of $10,000,000 (see Note 12) which deCODEreceived in April. Regardless, deCODE’s planned operations require immediateadditional liquidity substantially in excess of the amounts noted above,raising substantial doubt about deCODE’s ability to continue as a goingconcern.

 

*Management’s Plans:*To address deCODE’simmediate need for funds, management and the Board of Directors are exploringthe possibilities of (i) selling some or all of deCODE’s U.S. subsidiariesand/or its diagnostics and deCODEme businesses based in Iceland, (ii) grantingfurther licenses to specific diagnostic products, (iii) entering into acollaboration for gene sequencing, (iv) selling some or all of deCODE’sclinical and pre-clinical drug discovery programs, (v) restructuringdeCODE’s outstanding convertible notes and (vi) obtaining new equityfinancing. Achieving (v) could result in either a cash settlement ofdeCODE’s convertible note obligation for substantially less than the carrying amountor in a conversion of the convertible notes into equity of deCODE. Receipt ofadditonal equity financing to support operations in the longer term depends inlarge part on the outcomes of actions in (i), (ii), (iii) and (v).Management and the board are having ongoing dialogues and negotiations withthird parties in each of these areas. If deCODE’s Board of Directors concludesthat any of these options can be better implemented in a bankruptcy proceeding,deCODE will commence a proceeding under Chapter 11 of the U.S. Bankruptcy Code.

 

In order to provide more time formanagement to implement the plans as described above, deCODE elected to utilizea 30-day 

 

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grace period for the scheduled April 15 interest payment of $4,025,000on its outstanding 3.5% Senior Convertible Notes due 2011. Fairlure to pay aninstallment payment on interest within 30 days of the due date would constitutean event of default. If an event of default occurs with respect to theinstallment payment on the interest and is continuiing, the trustee or theholders of at least 25% in aggregate principal amount of the notes thenoutstanding may decare the notes due and payable at their principal amounttogether with accrued interest.

 

Whether in a bankruptcyproceeding or otherwise, the consummation of any of these approaches isdependent on successful negotiations with third parties and in many cases theavailability of financing to such third parties. There can be no asssurancethat any potential transactions will be consummated or will result insufficient funding to sustain operations. If deCODE is unable to raise additional capital through one ormore of these options, it may be forced to liquidate its remaining assets anddiscontinue as a business.

 
| **2.** | ** Basis of Presentation** |
|--------|---------------------------------|

 

In the opinion ofdeCODE’s management, the accompanying unaudited condensed consolidatedfinancial statements contain all adjustments (consisting of items of a normaland recurring nature) necessary to present fairly the financial position as of March 31,2009 and the results of operations and cash flows for the three-month periodsended March 31, 2009 and 2008. The results of operations for thethree-month periods ended March 31, 2009 are not necessarily indicative ofthe results to be expected for the full year. These financial statementsshould be read in conjunction with deCODE’s Annual Report on Form 10-K forthe year ended December 31, 2008, which includes consolidated financialstatements and notes thereto for the years ended December 31, 2008, 2007and 2006.

 

As discussed more fullyin Note 1, deCODE does not have adequate cash flows from operations or,currently, access to sufficient available capital to meet its requirements forits 2009 operations. These factors raise significant uncertainty about deCODE’sability to continue as a going concern. The Consolidated Financial Statementsdo not include any adjustments relating to the recoverability or classificationof recorded asset amounts or the amounts or classification of liabilitiesshould deCODE be unable to continue as a going concern.

 
| **3.** | ** Revenue** |
|--------|-------------------|

 

Significant elements ofdeCODE’s revenue are summarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Genomic services                                 |       | $                                                | 1,902      |   | $ | 4,876 |   |
| Research funding  and other service fees         |       | 3,108                                            |       | 4,552 |   |
| Government  research contracts and grant funding |       | 3,397                                            |       | 4,875 |   |
| Milestone  payments and other                    |       | 510                                              |       | 675 |   |
| Total revenue                                    |       | $                                                | 8,917      |   | $ | 14,978 |   |

 

For the three months ended March 31, 2009 and2008, government research contract and grant revenue from divisions of theUnited States National Institutes of Health (NIH) constituted 26% and 24%,respectively, of consolidated revenue and grant revenue from the EuropeanCommunity (EC) constituted, 12% and 8%, respectively, of consolidated revenue.

 

During the three-monthsended March 31, 2008,deCODE performed services totaling $95,000 foremployers of members of deCODE’s Board of Directors.

 
| **4.** | ** Cost of Revenue** |
|--------|---------------------------|

 

deCODE’s cost of revenueconsists of the costs of services provided to customers and collaborators andthe costs of programs under research contracts and grants, including: (i) theentirety of the costs incurred in connection with programs that have beenpartnered and on which deCODE receives research funding; (ii) costsassociated with other service fee revenues; and (iii) the total amount ofthose costs incurred in connection with discovery and development workperformed under research contracts and grants.

 

Significant elements ofdeCODE’s revenue and cost of revenue are summarized as follows:

 

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| ** **                                             | ** ** | **Three Months Ended  March 31, 2009** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                    | ** ** |
| Genomic  services, research funding and other services |       | $                                                          | 5,520      |   | $ | 4,368 |   | $ | 1,152 |   |
| Government  research contracts and grant funding       |       | 3,397                                                      |       | 3,816 |   | (419 | ) |
| Total cost of  revenue                                 |       | $                                                          | 8,917      |   | $ | 8,184 |   | $ | 733 |   |

 
| ** **                                             | ** ** | **Three Months Ended  March 31, 2008** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                    | ** ** |
| Genomic  services, research funding and other services |       | $                                                          | 10,103     |   | $ | 8,127 |   | $ | 1,976 |   |
| Government  research contracts and grant funding       |       | 4,875                                                      |       | 6,587 |   | (1,712 | ) |
| Total cost of  revenue                                 |       | $                                                          | 14,978     |   | $ | 14,714 |   | $ | 264 |   |

 
| **5.** | ** Research and Development** |
|--------|------------------------------------|

 

deCODE’s research anddevelopment expense consist of the costs of its own proprietary programs,comprised of the following:

 

| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Salaries and  other personnel costs              |       | $                                                | 1,935      |   | $ | 4,813 |   |
| Materials and  supplies                          |       | 651                                              |       | 2,882 |   |
| Contractor  services and other third party costs |       | 444                                              |       | 2,324 |   |
| Overhead  expenses                               |       | 495                                              |       | 1,390 |   |
| Depreciation and  amortization                   |       | 496                                              |       | 914 |   |
| Stock-based  compensation                        |       | 212                                              |       | 330 |   |
|                                             |       | $                                                | 4,233      |   | $ | 12,653 |   |

 
| **6.** | **Stock-Based  Compensation** |
|--------|-------------------------------|

 

Stock-based compensationis included in deCODE’s results of operations as follows:

 

| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                           | ** ** | **(In thousands)**                          | ** ** |
| Operating  Expenses:                 |       |                                             |       |   |   |
| Cost of revenue                      |       | $                                                | 108        |   | $ | 135 |   |
| Research and  development            |       | 212                                              |       | 330 |   |
| Selling, general  and administrative |       | 421                                              |       | 587 |   |
| Total                                |       | $                                                | 741        |   | $ | 1,052 |   |

 

As of March 31,2009 there was approximately $4,899,000 of total unrecognized compensationexpense related to nonvested stock options. This expense is expected to berecognized over a weighted-average period of approximately 1.95 years.

 

deCODE calculatedthe fair value of each option award on the date of grant using theBlack-Scholes option pricing model. The following weighted average assumptionswere used for the three-months period ended March 31, 2008: 0%dividendyield, 63.0% expected volatility, 5.3 expected term (in years) and 2.7% riskfree interest rate. There were no option grants during the three-months ended March 31,2009.

 

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deCODE estimatesthe expected term of the options based on historical patterns by employees withrespect to exercise and post vesting employment termination behaviors. deCODE’sexpected volatility is calculated using a weighted average of the volatilityover a period equal to the expected term of the award and the most recent oneyear volatility. deCODE bases the risk-free interest rate used on the impliedrate currently available on the U.S. Treasury zero-coupon issues with acomparable term. As deCODE does not pay dividends, the dividend variable rateis zero.

 

The followingtable summarizes stock option activity for the three-months ended March 31,2009:

 
| ** **                                          | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | ** **                 | ** ** | ** **                             | ** ** | **(In years)**                                 | ** ** | **(In Thousands)**             | ** ** |
| Outstanding at  December 31, 2009              |       | 8,453,355                  |       | $                                      | 5.76       |                                                |       |                                |       |   |
| Granted                                             |       | —                     |       | —                                 |       |                                                |       |                                |       |
| Exercised                                           |       | —                     |       | —                                 |       |                                                |       |                                |       |
| Forfeited/cancelled                                 |       | (534,067                   | )          | 4.35                                   |       |                                                |       |                                |       |
| Outstanding at  March 31, 2009                 |       | 7,919,288                  |       | $                                      | 5.86       |                                                | 6.19       |                                | $          | 0 |   |
| Vested and  expected to vest at March 31, 2009 |       | 7,714,125                  |       | $                                      | 5.91       |                                                | 6.14       |                                | $          | 0 |   |
| Exercisable at  March 31, 2009                 |       | 5,797,169                  |       | $                                      | 6.64       |                                                | 5.5        |                                | $          | 0 |   |

 

deCODE’s EquityIncentive Plans allow for the issuance of restricted stock awards that may notbe sold or otherwise transferred until certain restrictions have lapsed. Theunearned stock-based compensation related to these awards is amortized tocompensation expense over the period the restrictions lapse. The stock-basedcompensation expense for these awards is determined based on the market priceof our stock at the date of the grant applied to the total numbers of sharesthat are anticipated to fully vest and then amortized over the vesting period.At March 31, 2009, deCODE had 0 unvested restricted shares.

 
| **7.** | ** Net Loss Per Share** |
|--------|------------------------------|

 

Basic net loss per share is computed using net lossavailable to common stockholders and the weighted-average number of commonshares outstanding. The weighted-average number of common shares outstandingduring the period is the number of shares determined by relating the portion oftime within a reporting period that common shares have been outstanding to thetotal time in that period.

 

Diluted net loss pershare is computed using the weighted-average number of common sharesoutstanding during the period, plus the dilutive effect of potential commonshares. Diluted net loss per share does not differ from basic net loss pershare in all periods presented as potential common shares are antidilutive forall such periods and are, therefore, excluded from the calculation. Potentialcommon shares excluded from the calculation of diluted net loss per share were:

 
| ** **                                                                                            | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                                            | ** ** | **2009**           | ** ** | **2008**           | ** ** |
| ** **                                                                                            | ** ** | **(Shares)**       | ** ** | **(Shares)**       | ** ** |
| Warrants to  purchase shares of common stock                                                          |       | 111,112            |       | 455,965            |       |
| Options to  purchase shares of common stock                                                           |       | 7,919,288          |       | 8,640,697          |       |
| Restricted  shares subject to vesting or with an associated outstanding non-recourse  promissory note |       | 272,500            |       | 435,500            |       |
| Shares of common  stock issuable upon conversion of 3.5% senior convertible notes                     |       | 16,428,572         |       | 16,428,572         |       |
|                                                                                                  |       | 24,731,472         |       | 25,960,734         |       |

 
| **8.** | ** Comprehensive Income (Loss)** |
|--------|---------------------------------------|

 

Comprehensive income(loss) generally represents all changes in stockholders’ equity except thoseresulting from investments or contributions by stockholders. Amounts reportedin other comprehensive income (loss) include foreign currency translationadjustments and unrealized gains and losses associated with investments. Thefollowing table presents the calculation of comprehensive income (loss):

 

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| ** **                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net loss                                                                                |       | $                                                | (12,637    | ) | $ | (26,665 | ) |
| Other  comprehensive income (loss):                                                     |       |                                             |       |   |   |
| Foreign currency  translation                                                           |       | 1                                                |       | 50 |   |
| Recognition of  unrealized loss on auction rate securities as other-than-temporary loss |       | —                                           |       | 914 |   |
| Unrealized gain  (loss) associated with investments                                     |       | 423                                              |       | (3 | ) |
| Total  comprehensive loss                                                               |       | $                                                | (12,213    | ) | $ | (25,704 | ) |

 
| **9.** | **Secured  Borrowing** |
|--------|------------------------|

 

In January 2009,deCODE entered into an agreement with NBI hf., an Icelandic financialinstitution, pursuant to which NBI has purchased all auction rate securities(“ARS”) owned by deCODE for an aggregate price of ISK 1,375,000,000 (the“Purchase Price”), which represented $11,314,000 at the then current currencyexchange rates. NBI has the put option to require deCODE to repurchase the ARSupon the earlier of (a) the sale of all or a majority of the stock ofdeCODE genetics ehf, deCODE’s Icelandic subsidiary, (“IE”) or a specified partof the operations of IE or (b) December 16, 2009, and deCODE has thecall option to require NBI to sell the ARS to it at any time until January 1,2010. The repurchase price on exercise of the put or call option (the“Repurchase Price”) will be equal to the Purchase Price plus interest from January 16,2009 at a rate of five percent (5%) above the Reykjavik Interbank Offered Rate(REIBOR) at the date of the agreement, through the date payment is made lessthe aggregate amount of interest and principal received by NBI on the ARS. Inaddition, if the aggregate amount of interest and principal received by NBIwith respect to the ARS is higher than the Repurchase Price, upon deCODE’srepurchase of the ARS pursuant to the exercise of the put or call option, NBIwill be required to deliver to deCODE, in addition to the ARS, an amount equalto (A) the aggregate amount of principal and interest that it receivedless (B) the sum of (i) the Repurchase Price and (ii) ISK375,000,000 (approximately $3,039,000 at March 31, 2009).

 

Due to the put and calloptions, the transfer of the ARS to NBI was accounted for as a securedborrowing and as such, the ARS remain on deCODE’s Consolidated Balance Sheet,although they are held by NBI, and continue to be marked to fair value. At March 31,2009, deCODE’s Obligation Under the Auction Rate Securities Repurchase Agreementwas $11,566,000 on the Consolidated Balance Sheet, which represents deCODE’sliability at March 31, 2009  if theput or call right had been exercised to repurchase the ARS. deCODE recognizedinterest expense related to the put rights of $436,000 during the three monthsended March 31, 2009.

 

The pledged investmentsat March 31, 2009 consist of marketable securities, and are as follows:

 
| ** **                                                  | ** ** | **Cost**                | ** ** | **Carrying  Value** | ** ** | **Unrealized  Gains (Losses)  In OCI** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|---------------------|------------|--------------------------------------------------|------------|
| ** **                                                  | ** ** | **(In thousands)** | ** ** |
|                                                        |       |                    |       |                |       |                                             |       |
| March 31,  2009: Auction rate securities (non-current) |       | $                       | 33,500     |                | $          | 12,601                                           |       | $ | 423 |   |
|                                                             |            |                         |            |                     |            |                                                  |            |  |  |  |

 

Gross unrealized holdinggains and gross unrealized holding losses at March 31, 2009 were $423,000and $0, respectively. There were no unrealized holdings gains or losses at December 31,2008. The contractual maturity of investments was as follows:

 

| ** **                    | ** ** | **March 31,  2009** | ** ** |
|-------------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **(In thousand)**   | ** ** |
|                          |       |                     |       |
| Maturing after  10 years      |       | $                        | 10,080     |   |
| No maturity date  (perpetual) |       | 2,521                    |       |
|                          |       | $                        | 12,601     |   |

 

The ARS consist ofprivate placement securities with long-term nominal maturities for which theinterest rates are reset through a Dutch auction process at pre-determinedcalendar intervals, generally each month. This mechanism generally allowsexisting investors to rollover their holdings and continue to own their respectivesecurities or liquidate their holdings by selling their securities at parvalue. deCODE generally invested in these securities for short periods of timeas part of its cash management program. However, uncertainties in the creditmarkets beginning in 2007 have prevented deCODE and other investors fromliquidating holdings of its ARS in recent auctions because the amount ofsecurities submitted for sale has exceeded the amount of purchase ordersresulting in multiple failed auctions.

 

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The estimated market value of deCODE’s investments in ARS at March 31,2009 was $12,601,000, which reflects a $20,899,000 adjustment to the originalprincipal value of $33,500,000. Based on valuation models and an analysis ofother-than-temporary impairment factors, deCODE has recorded an impairmentcharge of $543,000 and $4,035,000 in Other non-operating income (expense), netin the Statements of Operations for the three-months ended March 31, 2009and 2008, respectively, reflecting the portion of ARS holdings that deCODE hasconcluded have an other-than-temporary decline in value. deCODE recognized anunrealized gain of $423,000 in Other Comprehensive Income during thethree-months ended March 31, 2009. During the three-months ended March 31,2008, the $4,035,000 charge included $914,000 related to ARS which deCODE hadpreviously believed to be temporary and accounted for as an unrealized loss at December 31,2007.

 

The credit and capital markets have continued to bevolatile into 2009. If uncertainties in these credit and capital marketscontinue, these markets deteriorate further or deCODE experiences additionaldowngrades on its investments, deCODE may incur additional impairments to itspledged investment portfolio, which could negatively affect our financialcondition, cash flows and reported earnings.

 
| **10.** | ** Litigation** |
|---------|----------------------|

 

Other than claims and legal proceedings that arise from time to time inthe ordinary course of business which are not material, and matters describedbelow, there has been no change in the matters reported in deCODE’s AnnualReport on Form 10-K for the year ended December 31, 2008.

 

On or about April 20, 2002, an amended class action complaint, captioned*In re deCODE genetics, Inc. Initial PublicOffering Securities Litigation*(01 Civ. 11219(SAS)), allegingviolations of federal securities laws in connection with deCODE’s initialpublic offering was filed in the United States District Court for the SouthernDistrict of New York (the “District Court”) on behalf of certain purchasers ofdeCODE common stock. The complaint names deCODE, two individuals who wereexecutive officers of deCODE at the time of its initial public offering (the “IndividualDefendants”), and the two lead underwriters (the “Underwriter Defendants”) forour initial public offering in July 2000 (the “IPO”) as defendants. deCODEis aware that similar allegations have been made in hundreds of other lawsuitsfiled (many by some of the same plaintiff law firms) against numerousunderwriter defendants and issuer companies (and certain of their current andformer officers) in connection with various public offerings conducted inrecent years. All of the lawsuits that have been filed in the Southern Districtof New York have been consolidated for pretrial purposes before United StatesDistrict Judge Shira Scheindlin. Pursuant to the underwriting agreementexecuted in connection with our IPO, deCODE has demanded indemnification fromthe Underwriter Defendants. The Underwriter Defendants have asserted that ourrequest for indemnification is premature.

 

Pursuant to an agreement the Individual Defendants have been dismissedfrom the case without prejudice.

 

On July 31, 2003, our Board of Directors (other than our Chairmanand Chief Executive Officer, who recused himself because he was an IndividualDefendant) approved a proposed partial settlement with the plaintiffs in thismatter, subject to a number of conditions, including the participation of asubstantial number of other issuer defendants in the proposed settlement, theconsent of deCODE’s insurers to the settlement, and the completion ofacceptable final settlement documentation. A settlement fairness hearing washeld on April 24, 2006. On June 25, 2007, the United States DistrictCourt for the Southern District of New York entered an order formally denyingthe motion for final approval of the settlement agreement because thesettlement class could not be certified. On August 14, 2007, the plaintiffsfiled their second consolidated amended class action complaints against the “focuscases” and on September 27, 2007, again moved for class certification. Thefocus cases are a small group of cases that were selected as test cases due tothe large number of nearly identical actions which were consolidated in theInitial Public Offering litigation. The court has indicated that the focuscases are intended to provide strong guidance for the other cases. The caseinvolving deCODE is not a focus case. On November 12, 2007, certain of thedefendants in the focus case moved to dismiss the second consolidated amendedclass action complaints. On March 26, 2008, the District Court denied themotions to dismiss except as to Section 11 claims raised by those plaintiffswho sold their securities for a price in excess of the initial offering priceand those who purchased outside the previously certified class period. Briefingon the class certification motion was completed in May 2008. That motionwas withdrawn without prejudice on October 10, 2008. On February 25,2009, liaison counsel for the plaintiffs informed the district court that asettlement has been agreed to in principle, subject to formal approval by theparties, and preliminary and final approval by the court. On April 2,2009, a stipulation and agreement of settlement among the plaintiffs, issuerdefendants and underwriter defendants was submitted to the Court forpreliminary approval. If the Court grants the motion for preliminary approval,notice will be given to all class members of the settlement, a “fairness”hearing will be held and if the Court determines that the settlement is fair tothe class members, the settlement will be approved. There can be no assurancethat this proposed settlement will be approved and implemented in its currentform, or at all. Due to the inherent uncertainties of litigation and becausethe settlement approval process is at a preliminary stage, the ultimate outcomeof the matter is uncertain.

 

While deCODE’s expenses in this matter to date have been paid primarilyby its insurers, if deCODE were required to pay significant monetary damages asa result of an adverse determination in this matter (or any other lawsuitsalleging similar claims filed against deCODE and deCODE’s directors andofficers in the future), deCODE’s business could be significantly harmed. Evenif such

 

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litigation concludes indeCODE’s favor, deCODE may be required to expend significant funds to defendagainst the allegations. deCODE is unable to estimate the range of possibleloss from this litigation and no amounts have been provided for it in deCODE’sfinancial statements.

 
| **11.** | **Fair  Value Measurement** |
|---------|-----------------------------|

 

SFAS 157 establishes a valuation hierarchy for disclosure of the inputsto valuation used to measure fair value. This hierarchy prioritizes the inputsinto three broad levels as follows. Level 1 inputs are quoted prices(unadjusted) in active markets for identical assets or liabilities. Level 2inputs are quoted prices for similar assets and liabilities in active marketsor inputs that are observable for the asset or liability, either directly orindirectly through market corroboration, for substantially the full term of thefinancial instrument. Level 3 inputs are unobservable inputs based onassumptions used to measure assets and liabilities at fair value. A financialasset or liability’s classification within the hierarchy is determined based onthe lowest level input that is significant to the fair value measurement.

 

The following table provides the assets and liabilities carried at fairvalue measured on a recurring basis as of March 31, 2009:

 
| ** **                                                       | ** ** | ** **                                               | ** ** | **Fair Value Measurements  at March 31, 3009 Using:** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **Total  Carrying  Value at  March 31,  2009** | ** ** | **Quoted  prices in  active  markets  (Level 1)**                         | ** ** | **Significant  other  observable  inputs  (Level 2)** | ** ** | **Significant  unobservable  inputs  (Level 3)** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**                                  | ** ** |
|                                                             |       |                                                     |       |                                                                                |       |   |   |   |   |
| Cash and cash  equivalents — money market securities        |       | $                                                        | 160        |                                                                                | $          | 160 |   | $ | — |   | $ | — |   |
| Restricted cash  and cash equivalents — U.S. Treasury Bills |       | 5,230                                                    |       | 5,230                                                                               |       | — |   | — |   |
| Auction rate  securities (investments non-current)               |       | 12,601                                                   |       | —                                                                              |       | — |   | 12,601 |   |
|                                                                  |            |                                                          |            |                                                                                     |            |  |  |  |  |  |  |  |  |

 

The following table presents deCODE’s assets measured at fair value ona recurring basis using significant unobservable inputs (Level 3) at March 31,2009:

 

| ** **                                               | ** ** | **Auction Rate  Securities  (Pledged  Investments)** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                               | ** ** | **Three Months  Ended  March 31, 2009**    | ** ** |
| ** **                                               | ** ** | **(In thousands)**                                   | ** ** |
| Balance at  beginning of period (December 31, 2008) |       | $                                                         | 12,721     |   |
| Transfers to  Level 3                                    |       | —                                                    |       |
| Total gains  (losses):                                   |       |                                                      |       |
| Included in  earnings                                    |       | (543                                                      | )          |
| Included in  other comprehensive income                  |       | 423                                                       |       |
| Purchase and  settlements (net)                          |       | —                                                    |       |
| Balance at  March 31, 2009                          |       | $                                                         | 12,601     |   |

 

**ValuationTechniques.**deCODE’s investments in auction rate securities at March 31,2009 did not have quoted market prices and are classified within Level 3 of thevaluation hierarchy. The valuation models used to value the ARS include those thatare based on expected cash flow streams and collateral values, includingassessments of counterparty credit quality, default risk underlying thesecurity, discount rates and overall capital market liquidity. The valuation ofdeCODE’s investments in ARS is subject to uncertainties that are difficult topredict. Factors that may impact the valuation include changes in creditratings of the securities or their guarantors, underlying collateral value,discounts rates, counterparty risk and ongoing strength and quality of marketcredit and liquidity.

 
| **12.** | **Subsequent  Event** |
|---------|-----------------------|

 

In April 2009,deCODE signed a non-exclusive worldwide license with Celera for deCODE’sgenetic markers for increased risk of major cardiovascular and metabolicdiseases, including heart attack, stroke, atrial fibrillation (AF) and type 2diabetes (T2D). Under the terms of the agreements, deCODE received an upfrontpayment ($10,000,000) and will receive milestones and royalties on sales ofCelera testing products and services incorporating deCODE genetic markers.

 

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**ITEM 2.****    ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operations as of March 31,2009 and for the three-month periods ended March 31, 2009 and 2008 shouldbe read in conjunction with the unaudited condensed consolidated financialstatements and notes thereto set forth in Item 1 of this report.

 

This quarterly report on Form 10-Qcontains forward-looking statements, including our expectations of futureindustry conditions, strategic plans and forecasts of operational results.Various risks may cause our actual results to differ materially. A descriptionof some of the risks and uncertainties is contained below and in the riskfactors referred to in Part II, Item 1A.

 

**Overview**

 

Headquartered inReykjavik, Iceland, deCODE is a bio-pharmaceutical company developing andmarketing products to improve the treatment, diagnosis and prevention of commondiseases. deCODE applies its discoveries in human genetics to bring to marketDA-based reference laboratory tests and consumer genome analysis services toassess individual risk of common diseases and applies its capabilities inchemistry and structural biology to the development of drugs in majortherapeutic areas.

 

In the context oflimited financial resources the Company’s principal focus continues to be tomaximize near-term value creation, utilizing our success in gene discovery toadvance the commercial opportunities in our diagnostics and deCODEmeTMbusinesses. We are also pursuing partnerships that provide a parallel means of capturingthe commercial potential of the intellectual property coming out of our genediscovery work. In April 2009 we entered into non-exclusive, worldwidelicensing agreements with Celera, Inc., under which Celera can incorporateour genetic markers for risk of certain cardiovascular and metabolic diseasesinto Celera’s risk assessment tests and services, and for which we havereceived an upfront payment and will receive royalties on sales of Celeraproducts utilizing our markers. We have been seeking to continue thedevelopment of our therapeutics programs through partnerships and have advancedselect preclinical programs while employing our drug discovery capabilities togenerate contract service revenue.

 

At March 31,2009, we had liquid funds available for operating activities (cash and cashequivalents) of $6.1 million as compared to $3.7 million at December 31,2008. The net utilization of cash in operating activities for the quarter endedMarch 31, 2009 was $8.2 million as compared to $20.0 million during thequarter ended March 31, 2008 and $54.5 million during the year ended December 31,2008. In January 2009, we transferred our Auction Rate Securities (ARS) toan Icelandic financial institution for an aggregate price of approximately$11.3 million. This transaction has been accounted for as a secured borrowing.In April 2009 we entered into a licensing deal with Celera Corporation (“Celera”)which provided us with a $10.0 million upfront payment. With the collateralizedborrowing and the licensing deal with Celera we believe we have sufficientfunds to sustain our operations only through the second quarter of 2009. deCODE’smanagement and the Board of Directors are exploring a variety of possibilitiesfor obtaining additional funds, including partnerships similar to that recentlyannounced with Celera . However, if deCODE is unable to raise additionalcapital through one or more of these options, it will be able to continueoperations through the second quarter of 2009 and thereafter may be forced todiscontinue its operations and liquidate its remaining assets.

 

*Diagnostics.* We are applying our discoveries andunique expertise in human genetics and genotyping to the development ofreference laboratory DNA-based tests for assessing individual risk of a growingrange of common diseases. Since April 2007 we have launched six referencelaboratory DNA-based diagnostic tests to detect single-letter variations in thehuman genome (called SNPs) that we have linked to increased risk of severalcommon diseases:

 

·                  *deCODE T2*TM- which detects SNPs we discovered to be associated with increased risk of type2 diabetes.

·                  *deCODE AFTM*- which detects SNPSs we discovered to be associated with increased risk ofatrial fibrillation and stroke

·                  *deCODE MITM*- which detects SNPs we discovered to be associated with early-onset heartattack, (myocardial infarction, or MI)

·                  *deCODE ProstateCancerTM* - which detects SNPs we have linked to increased riskof prostate cancer

·                  *deCODE GlaucomaTM* -**which detects SNPs we have linked to increasedrisk of exfoliation glaucoma

·                  *deCODE BreastCancerTM*-**which detectsSNPs we and others have linked to risk of the most common forms of breastcancer

 

Beginning in 2008, deCODE initiated billing tocommercial insurance companies on behalf of physicians ordering these tests andhas received reimbursement from several health insurance companies. All of ourdiagnostic tests are offered by deCODE via direct sales efforts to physiciansin the United States; through marketing collaborations with other organizationsin the U.S. and other countries; as well as through our dedicated diagnosticswebsite, www.decodediagnostics.com. deCODE also has an alliance with Illumina, Inc.to develop DNA-based diagnostic kits utilizing deCODE’s gene discoveries incertain diseases and Illumina’s platform for SNP genotyping.

 

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In April 2009, we entered into non-exclusive,worldwide licensing agreements with Celera, mentioned above, and we areexploring similar opportunities as a pathway to complement our own diagnosticsbusiness, deriving additional commercial value from our intellectual propertyby leveraging third-party marketing and outreach.

 

*deCODEmeTM.* In November 2007, we launched the first consumergenetic analysis service: deCODEmeTM. This service takes advantage of deCODE’sleadership in human genetics and the capabilities of its high-throughputgenotyping laboratory, which is CLIA registered for analytical and clinicalvalidation. Through deCODEmeTM, subscribers can put themselves in the context ofthe latest discoveries in genetics, learning what their own DNA says abouttheir ancestry and certain physical traits, as well as whether they havegenetic variants that have been associated with higher or lower than averagerisk of a range of common diseases. This information is continually updated asnew discoveries are made, and is presented in subscribers’ secure individualweb pages. Recently, we launched two focused disease scans, deCODEme CardioTMfor cardiovascular-related diseases and deCODEme CancerTM for several commontypes of cancer. These scans offer subscribers an opportunity to understandtheir risk of groups of diseases that may be of particular interest withoutordering the full genome scan. deCODEmeTM products are offered through adedicated website, www.decodeme.com.

 

*DrugDiscovery and Development*. The expertise of our chemistry and structural biology units enablesus to discover novel small-molecule therapeutic compounds targeting pathwaysidentified by us or against novel targets identified by us in known pathways,take candidate compounds through pre-clinical testing, and manufacturesufficient quantities for early-stage clinical trials. Our integrated approachto medicinal chemistry and protein crystallography have helped us to discovercompounds that bind selectively to our targets and at sites that may offerbetter safety and tolerability profiles than existing compounds for certainindications. deCODE is actively exploring drug development partnerships andout-licensing opportunities in order to advance the development of itstherapeutics programs.

 

Our lead drug developmentprograms include:

 

·                  *DG041 for the prevention ofarterial thrombosis.*DG041 is our novel, first-in-class antagonist of the EP3 receptor forprostaglandins E2, which we are developing as a next-generation oralanti-platelet therapy aimed at preventing arterial thrombosis withoutincreasing bleeding risk.

 

·                  *DG051 and DG031 for theprevention of heart attack.*We have completed Phase I and Phase IIa clinicalstudies for DG051, our leukotriene A4 hydrolase (LTA4H) inhibitor beingdeveloped for the prevention of heart attack. We successfully completed ourreformulation of DG031, our Phase III 5-lipoxygenase activating protein (FLAP)inhibitor, in-licensed from a third party and which is also being developed forthe prevention of heart attack.

 

·                  *DG071 for Alzheimer’s and othercognitive disorders*.In October 2008 we filed an investigational new drug (IND) application forDG071, a novel small-molecule modulator of phosphodiesterase 4 (PDE4), beingdeveloped for Alzheimer’s and other cognitive disorders.

 

For our most significantresearch and development programs we have cumulatively invested $47.5 million,$24.5 million and $16.0 million in our heart attack (myocardial infarction, orMI), arterial thrombosis and stroke programs, respectively, from the beginningof 2003 to date (March 31, 2009). Inception to-date costs are notavailable as these costs were not historically tracked by program.

 

*Contract genotyping services*

 

At our research facility in Reykjavik, we have one ofthe largest and most advanced genotyping laboratory in the world. We haveextensive expertise in microsatellite genotyping and also conduct genome-widesingle nucleotide polymorphisms (SNP) association analyses. We utilize thesecapabilities both for in-house gene discovery work and contract genotypingservices to fee paying customers. We have in place efficient, automated systemsfor all stages of the genotyping process, from DNA isolation and amplificationto plate preparation and the generation, storage and analysis of volumes ofgenotypic data. Our customers for genotyping services include pharmaceuticalcompanies, research consortia and academic institutions. Our referencelaboratory is Clinical Laboratory Improvement Act of 1998 as amended (CLIA)registered.

 

*D**rugdiscovery and development services*

 

In order to offset the cost of maintaining itsproprietary drug development infrastructure, deCODE utilizes its capabilitiesin chemistry, structural biology and clinical trials to offer contract servicesto fee-paying customers, principally pharmaceutical and biotechnologycompanies.

 

·                  Our chemistry subsidiary, deCODE chemistry, Inc.,based in Woodridge, Illinois, provides a full range of drug discoverytechnology and services using multiple integrated high-throughput technologiesto streamline the drug discovery process.

 

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·                  Our structural biology subsidiary, deCODEbiostructures, Inc., based in Bainbridge Island, near Seattle, determinesthree-dimensional X-ray crystal structures of target proteins forstructure-based drug design and development.

 

·                  Our proteomics tools subsidiary, Emerald BioSystems, Inc.,based in Bainbridge Island, commercializes a series of instruments, consumablesand software products for structural proteomics research.

 

**Results of Operations for the Three-Month PeriodsEnded March 31, 2009 and 2008**

 

Our results of operationshave fluctuated from period to period and may continue to fluctuate in thefuture based upon, among other things, the pace and progress of our proprietaryresearch and clinical development efforts, the timing and composition of fundingunder our various collaborative agreements, and the progress of our ownresearch and development efforts. Results of operations for any period may beunrelated to results of operations for any other period. In addition,historical results should not be viewed as indicative of future operatingresults. We are subject to risks common to companies in our industry and at ourstage of development, including risks inherent in our research and developmentefforts, reliance upon collaborative partners, development by us or ourcompetitors of new technological innovations, ability to market products orservices, dependence on key personnel, dependence on key suppliers, protectionof proprietary technology, ability to obtain additional financing, ability tonegotiate collaborative arrangements, and compliance with governmental andother regulations. In order for a drug to be commercialized based on ourresearch, we and our collaborators must conduct pre-clinical tests and clinicaltrials, demonstrate the efficacy and safety of our product candidates, obtainregulatory approvals or clearances and enter into manufacturing, distributionand marketing arrangements, as well as obtain market acceptance. We do notexpect to receive significant revenues or royalties based on therapeutic ordiagnostic products for a period of years, if at all.

 

Financial highlights asof and for the three-months ended March 31, 2009 include:

 

·     Our planned operations require immediate additionalliquidity which may not be available, raising substantial doubt about ourability to continue as a going concern. We incurred a loss of $12.6 million andused cash of $8.2 million in operating activities during the three months endedMarch 31, 2009. We incurred a loss of $80.9 million and used cash of $54.8million in operating activities in the year ended December 31, 2008. At March 31,2009 we had liquid funds available for operating activities (cash and cashequivalents) of $6.1 million as compared to $3.7 million at December 31,2008. In April, 2009 we entered into a license agreement with Celera whichprovided us with an upfront payment of $10.0 million and we will also receiveroyalties on sales of Celera testing products and services incorporating deCODEgenetic risk markers. The Company believes it has sufficient resources tosustain our operations through the second quarter of 2009 and is engaged innegotiations on sequencing collaborations, the sale of business units andtherapeutic programs, debt restructurings and equity financing.

 

·       Our revenue was $8.9 million for the three-monthsended March 31, 2009 as compared to $15.0 million during the three-monthperiod ended March 31, 2008. As of March 31, 2009, we had $12.7million in deferred revenue that will be recognized over future reportingperiods. The period-on-period decrease is largely on account of our contractgenotyping, part of our genomics services, but then also in our chemistryand structural biology units and work performed under government researchcontracts and grants.

 

·       Our research and development expense was $4.2 millionfor the three-month period ended March 31, 2009 as compared to $12.7million for the three-month period ended March 31, 2008. Our research anddevelopment expense for the quarter reflects deCODE’s current focus of applyingits established capabilities in human genetics to drive its diagnostic anddeCODEme businesses, and the curtailment of investment in clinical trials forits therapeutics programs reflected in the 2008 period.

 

·       Our selling, general and administrative expense was$4.9 million during the three-month period ended March 31, 2009 ascompared to $7.2 million during the three-month period ended March 31,2008. The changes in selling, general and administrative expenseperiod-on-period are primarily due to lower overall headcount in 2009 versus2008 as well as decreased contractor and legal expenses.

 

·       In January 2009 we entered into an agreement withan Icelandic financial institution (NBI hf) pursuant to which NBI has purchasedall auction rate securities (“ARS”) owned by deCODE for an aggregate price of$11.3 million at exchange rates at the date of the transaction. The agreementincludes both call and put rights under certain instances and which expire atthe end of 2009. The transaction was accounted for as a secured borrowing withthe ARS remaining on our balance sheet and as a result we recognized aliability for the borrowing ($11.6 million at March 31, 2009) whichrepresents the amount we would be required to pay should we exercise our callright to repurchase the ARS or should we be required to repurchase the ARS inthe event of a sale of Icelandic assets or if exercised by NBI hf on December 16,2009.

 

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***Revenue***

 

| ** ** | ** ** | **Three Months Ended  March 31,** | ** ** | **2009 as Compared to 2008** | ** ** |
|------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** ** | ** ** | **(In thousands, except %)**      | ** ** |
| Revenue    |       | $                                                | 8,917      |                                             | $          | 14,978 |   | $ | (6,061 | ) | (40 | )% |
|            |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

In 2008 and into 2009 our business strategy has focused on emphasizingour core capabilities in human genetics and leveraging those strengths to buildon opportunities to generate near-term revenue from products that we alreadyhave available; namely our genomic services comprising diagnostics, ourconsumer genetics service deCODEme and genotyping and other scientificservices. At the same time, we seek to advance our early and late stage drugprograms through corporate partnerships, and will generate revenue fromcontract and other service fees. Further, we will continue to leverage ourcapabilities to continue with and pursue funding in the form of researchgrants. In the majority of our programs we are pursuing diagnostic andearly-stage drug development on our own. Depending on the nature of eachprospective business opportunity, the key components of the commercial terms ofthe types of collaborations we seek typically include one or more of thefollowing: research funding; up-front, exclusivity, technology access, andtechnology development fees; fees for particular services; milestone payments;license or commercialization fees; and royalties or profit sharing from thecommercialization of products.

 

Significant elements ofour revenue are summarized as follows:

 
| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Genomic services                                 |       | $                                                | 1,902      |   | $ | 4,876 |   |
| Research funding  and other service fees         |       | 3,108                                            |       | 4,552 |   |
| Government  research contracts and grant funding |       | 3,397                                            |       | 4,875 |   |
| Milestone  payments and other                    |       | 510                                              |       | 675 |   |
|                                             |       | $                                                | 8,917      |   | $ | 14,978 |   |

 

Decreases in our revenuefor the three-months ended March 31, 2009 as compared to the same periodin 2008 are largely on account of (i) the decrease of our genomicsbusiness, principally our contract genotyping services, (ii) decreasedservices provided by our chemistry and structural biology units, and also (iii) adecreased amount of discovery and development work performed under ongoingcontracts and grants with the NIH and EC including new grants. Driving thedecrease of our contract genotyping services and our chemistry and structuralbiology units is our current financial condition and available operatingresources.

 

At March 31, 2009 we had $12.7 million in deferred revenue,compared to $12.0 million at December 31, 2008. Of this deferredrevenue, $6.2 million relates to our agreement with Merck to conductinformation-rich clinical trials in Iceland and, to date, Merck has notselected any compounds for development under the agreement. We expect that ourrevenues will fluctuate from period to period and that such fluctuations may besubstantial especially because progress in our scientific work, includingmilestone payments that are related to progress, can fluctuate between periods.

 

*Government Research Contracts andGrant Funding.*Wehave received various research grants from divisions of the United StatesNational Institutes of Health (NIH), the Commission of the European Communities(EC) and other government agencies and private foundations. Research grants formultiple years are based on approved budgets with budgeted amounts subject toapproval on an annual basis. NIH grants generally provide for 100%reimbursement of allowable expenditures while grants under the EC generallyprovides for fifty percent reimbursement of allowable research and development related expenditures. Our mostsignificant research contract is with the National Institutes of Allergy andInfectious Diseases (NIAID) dating to September 2004, where we wereawarded a five-year $23.9 million contract by the NIAID. Under the contract, weare applying our population approach and resources to discover genetic factorsassociated with susceptibility to certain infectious diseases and withresponsiveness to vaccines targeting such diseases. We may receive $3.9 millionin additional research funding over the remaining term of the agreement.

 
| ***Cost of Revenue*** |
|-----------------------|

 

| ** **      | ** ** | **Three Months Ended  March 31,** | ** ** | **2009 as Compared to 2008** | ** ** |
|-----------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **      | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **      | ** ** | **(In thousands, except %)**      | ** ** |
| Cost of revenue |       | $                                                | 8,184      |                                             | $          | 14,714 |   | $ | (6,530 | ) | (44 | )% |
|                 |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

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Our cost of revenueconsists of the costs of services provided to customers and collaborators andthe costs of programs under research contracts and grants, including: (i) theentirety of the costs incurred in connection with programs that have beenpartnered and on which we receive research funding; (ii) costs associatedwith other service fee revenues; and (iii) the total amount of those costsincurred in connection with discovery and development work performed underresearch contracts and grants. At times, we invest in addition to costs coveredby research funding received in such collaborative programs and in addition tomonies received under research contracts and grants.

 

Significant elements of deCODE’s revenue and cost ofrevenue are summarized as follows:

 
| ** **                                             | ** ** | **Three Months Ended  March 31, 2009** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                    | ** ** |
| Genomic  services, research funding and other services |       | $                                                          | 5,520      |   | $ | 4,368 |   | $ | 1,152 |   |
| Government  research contracts and grant funding       |       | 3,397                                                      |       | 3,816 |   | (419 | ) |
| Total cost of  revenue                                 |       | $                                                          | 8,917      |   | $ | 8,184 |   | $ | 733 |   |

 
| ** **                                             | ** ** | **Three Months Ended  March 31, 2008** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Revenue**                                                | ** ** | **Cost of  Revenue** | ** ** | **Net** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                    | ** ** |
| Genomic  services, research funding and other services |       | $                                                          | 10,103     |   | $ | 8,127 |   | $ | 1,976 |   |
| Government  research contracts and grant funding       |       | 4,875                                                      |       | 6,587 |   | (1,712 | ) |
| Total cost of  revenue                                 |       | $                                                          | 14,978     |   | $ | 14,714 |   | $ | 264 |   |

 

Decreases in our cost ofrevenue for the three-months ended March 31, 2009 as compared to the sameperiod in 2008 are largely on account of overall decreased revenue,specifically (i) the decrease of our genomics business, principally thedecrease of contract genotyping services, (ii) services provided by ourchemistry and structural biology units, and also (iii) a decreased amountof discovery and development work performed under ongoing contracts and grantswith the NIH and EC. Our cost of revenue in the three-month period ended March 31,2009 as compared to the same period in 2008 increased chiefly with regard toour usage of chemicals and consumables ($3.3million) and also decreasedsalaries ($1.9 million) due to lower headcount and decreased contractorservices ($0.6 million).

 
| ***Research and Development*** |
|--------------------------------|

 

| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** | **2009 as Compared to 2008** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                | ** ** | **(In thousands, except %)**      | ** ** |
| Research and  development |       | $                                                | 4,233      |                                             | $          | 12,653 |   | $ | (8,420 | ) | (67 | )% |
|                           |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

Our research anddevelopment expense consist of the following:

 

| ** **                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                       | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                       | ** ** | **(In thousands)**                          | ** ** |
| Salaries and  other personnel costs              |       | $                                                | 1,935      |   | $ | 4,813 |   |
| Materials and  supplies                          |       | 651                                              |       | 2,882 |   |
| Contractor  services and other third party costs |       | 444                                              |       | 2,324 |   |
| Overhead  expenses                               |       | 495                                              |       | 1,390 |   |
| Depreciation and  amortization                   |       | 496                                              |       | 914 |   |
| Stock-based  compensation                        |       | 212                                              |       | 330 |   |
|                                             |       | $                                                | 4,233      |   | $ | 12,653 |   |

 

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Our research anddevelopment expense for 2009 and 2008 reflects the advancement of our drug anddiagnostic programs, including costs related to the development and launch ofour latest DNA-based diagnostic tests for gauging individual risk of a growingnumber of common disease and ongoing gene discovery work that is feeding ourdiagnostic pipeline and our deCODEme service offerings. We also continued topursue our PDE4 modulator program across several indications and filed an INDfor DG071 in October 2008. With near-term value creation in mind, our corefocus in 2008 and into 2009 has been towards building our diagnostics anddeCODEme businesses and our genomic services broadly. With that focus in mindand continued decreased clinical trial work in 2009, we experienced decreasedoverall expense in 2009.

 

***Selling, General and Administrative Expense***

 

| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** | **2009 as Compared to 2008** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                    | ** ** | **(In thousands, except %)**      | ** ** |
| Selling,  general, and administrative expense |       | $                                                | 4,903      |                                             | $          | 7,211 |   | $ | (2,308 | ) | (32 | )% |
|                                               |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

The decrease inour selling, general and administrative expense for the three-month periodended March 31, 2009 compared to the three-month period ended March 31,2008 is principally attributable to decreased salary and stock-basedcompensation ($0.5 million) due to lower head-count, decreased legal fees ($0.6million) and lower overhead and travel costs ($0.9 million) .

 

***Interest Expense***

 

| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** | **2009 as Compared to 2008** | ** ** |
|------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **       | ** ** | **(In thousands, except %)**      | ** ** |
| Interest expense |       | $                                                | 4,626      |                                             | $          | 4,025 |   | $ | 601 |   | 15 | % |
|                  |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

Our interestexpense is primarily attributable to interest on our 3.5% Senior ConvertibleNotes due in 2011 for which our cash interest payments are approximately $8.1million on an annual basis. In order to provide more time for the completion ofour strategic business review and the execution of alternatives including thesale of assets, we elected to utilize a 30-day grace period for the scheduled April 15interest payment ($4.0 million) on our outstanding 3.5% Senior ConvertibleNotes due 2011. Failure to pay an installment payment on the interest within 30days of the due date would constitute an event of default. If an event ofdefault occurs with respect to the installment payment on the interest and iscontinuing, the trustee or the holders of at least 25% in aggregate principalamount of the Notes then outstanding may declare the Notes due and payable attheir principal amount together with accrued interest.

 

In January 2009we transferred our auction rate securities to an Icelandic financialinstitution which was accounted for as a secured borrowing due to the put andcall rights. During the three-months ended March 31, 2009, deCODErecognized $0.4 million of interest expense related to this secured borrowing.

 

***Othernon-operating income and (expense), net***

 

| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** | **2009 as Compared to 2008** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2009**                                         | ** ** | **2008**                                         | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| ** **                                 | ** ** | **(In thousands, except %)**      | ** ** |
| Other  non-operating income (expense), net |       | $                                                | 235        |                                             | $          | (4,077 | ) | $ | 4,312 |   | 106 | % |
|                                            |            |                                                  |            |                                                  |            |  |  |  |  |  |  |  |

 

We recognized another-than-temporary loss on investments in auction rate securities (“ARS”),classified as non-current investments on our balance sheet at March 31,2009 and 2008 of $0.5 million and $4.0 million during the three-months ended March 31,2009 and 2008, respectively. For the three-months ended March 31, 2009,this impairment related to the ARS was offset by $603,000 related to foreigncurrency translation gains due primarily to the change in valuation of theIcelandic krona versus the U.S. dollar. For the three-months ended March 31,2008, the ARS impairment charge included $0.9 million of impairment determinedto be temporary at December 31, 2007. If uncertainties in these credit andcapital markets continue, these markets deteriorate further or we experienceadditional downgrades on our investments, we may incur additional impairmentsto our investment portfolio, which could negatively affect our financialcondition, cash flows and reported earnings.

 

**Liquidityand Capital Resources**

 

*FinancialCondition*.  Our planned operations require immediateadditional liquidity which may not be available, raising

 

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substantial doubt aboutour ability to continue as a going concern. deCODE cash used in operations havebeen $8.2 and $20.0 million for the three-months ended March 31, 2009 and2008, respectively and $54.8 million for the year ended December 31, 2008.In addition, the Company has significant amounts of long-term debt whichrequires interest payments of approximately $8.1 million per annum. At March 31,2009, we had liquid funds available (cash and cash equivalents) of $6.1 millionas compared to $3.7 million at December 31, 2008. In January 2009 wetransferred our ARS to an Icelandic financial institution for an aggregateprice of approximately $11.3 million. In April 2009, we signed anon-exclusive worldwide license with Celera Corporation (“Celera”) for ourgenetic markers for increased risk of major cardiovascular and metabolicdiseases, including heart attack, stroke, atrial fibrillation (AF) and type 2diabetes (T2D). Under the terms of the agreement we received an upfront paymentof $10.0 million, which was received in April 2009.

 

We believe we havesufficient funds to sustain our operations through the second quarter of 2009. To addressdeCODE’s immediate need for funds, management and the Board of Directors areexploring the possibilities of (i) selling some or all of deCODE’s U.S.subsidiaries and/or its diagnostics and deCODEme businesses based in Iceland, (ii) grantingfurther licenses to specific diagnostic products, (iii) entering into acollaboration for gene sequencing, (iv) selling some or all of deCODE’sclinical and pre-clinical drug discovery programs, (v) restructuringdeCODE’s outstanding convertible notes and (vi) obtaining new equityfinancing.  Achieving (v) couldresult in a settlement of deCODE’s convertible note obligation forsubstantially less than the carrying amount or in either a cash conversion ofthe convertible notes into equity of deCODE. Receipt of additional equityfinancing to support operations in the longer term depends in large part on theoutcomes of actions in (i), (ii), (iii) and (v). Management and the boardare having ongoing dialogues and negotiations with third parties in each ofthese areas.If deCODE’s Board ofDirectors concludes that any of these options can be better implemented in abankruptcy proceeding, deCODE will commence a proceeding under Chapter 11 ofthe U.S. Bankruptcy Code. Whether in a bankruptcy proceeding or otherwise, theconsummation of any of these approaches are dependent on successfulnegotiations with third parties and in many cases the availability of financingto such third parties. There can be no asssurance that any potentialtransactions will be consummated or will result in sufficient funding tosustain operations. If deCODE is unable to raise additional capital through one or more of theseoptions, it will be able to continue operations through the second quarter of2009 and thereafter may be forced to discontinue its operations and liquidateits remaining assets.

 

We have financed ouroperations primarily through funding from research and developmentcollaborative agreements, and the issuance of equity securities and long-termfinancing instruments ($1,082 million from the beginning of 1999 to March 31,2009). At March 31, 2009, future funding under terms of our existingagreements is approximately $37.5 million (excluding milestone payments,royalties and other payments that we may earn under such collaborations), forwhich significant expense will need to be incurred in order to earn thisrevenue. Of the $37.5 million, approximately $25.0 million is expected to bereceived during the year ending December 31, 2009, with the remainingamount due through 2012.

 

*IcelandicEconomic Situation.*deCODE has significant operations in Iceland and pays a large proportion of itsfixed costs in Icelandic Krona (ISK), while its sales are generally denominatedin U.S. dollars and its reporting currency is the U.S. dollar. Beginning in thethird quarter of 2008 and particularly in the first weeks of the fourthquarter, the effects of the global credit and financial crisis hit theIcelandic economy particularly hard. In mid-October 2008, the Icelandicparliament passed emergency legislation to minimize the impact of the financialcrisis, resulting in the government takeover of the three largest Icelandicbanks. By the end of October, with significant foreign exchange controls inplace, the official exchange rate was 120.6 ISK to the U.S. dollar. The ISKfell from 62 ISK to the U.S. dollar on January 1, 2008 to 123 ISK to theU.S. dollar on December 31, 2008 and was 120 ISK to the U.S. dollar on March 31,2009. The turmoil in the Icelandic financial sector and economy as a whole hasnot had a significant impact on deCODE and has had no material adverse impacton our day to day operations, except to decrease the dollar value of ourISK-denominated costs. At March 31, 2009, deCODE has ISK denominatedoperating lease obligations of $38.6 million,, ISK denominated put rightsrelated to our ARS of $11.6 million and cash and cash equivalents denominatedin ISK of $1.4 million. Our most significant operating expenses denominated inISK include salaries and rental payments on our leased facilities and capitalequipment leases and we expect that in as far as the ISK decreases in valueversus the U.S. dollar our ISK-denominated operating expenses will generallydecrease.

 

*FairValue.*As of March 31,2009, we have certain assets recorded at fair value. In accordance withStatement of Financial Accounting Standards No. 157, *Fair ValueMeasurement*, or SFAS No. 157, we have classified our financialassets as Level 1, 2 or 3 within the fair value hierarchy. Fair valuesdetermined by Level 1 inputs utilize quoted prices (unadjusted) in activemarkets for identical assets or liabilities. Fair values determined by Level 2inputs utilize quoted prices for similar assets and liabilities in activemarkets or inputs that are observable for the asset or liability, eitherdirectly or indirectly through market corroboration, for substantially the fullterm of the financial instrument. Fair values determined by Level 3 inputsutilize unobservable inputs based on assumptions used to measure assets andliabilities at fair value. A financial asset or liability’s classificationwithin the hierarchy is determined based on the lowest level input that issignificant to the fair value measurement.

 

As noted in Note 9 to ourconsolidated financial statements, a majority of our financial assets consistof auction rate securities (ARS) and have been classified as Level 3 in thefair value hierarchy. These assets are pledged to an Icelandic financialinstitution as of March 31, 2009 related to our secured borrowing. Thepledged ARS consist of private placement securities with long-term nominalmaturities for which the interest rates are reset through a Dutch auctionprocess at pre-determined calendar intervals, generally each month. This mechanismgenerally allowed existing investors to rollover their holdings and continue toown their respective securities or liquidate their holdings by selling theirsecurities at par value. We generally invested in these securities for shortperiods of time as

 

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part of our cashmanagement program. However, the ongoing uncertainties in the credit marketsprevented us and other investors from liquidating holdings of our remaining ARSin recent auctions for these securities because the amount of securitiessubmitted for sale has exceeded the amount of purchase orders and this hasresulted in multiple failed auctions. The pledged ARS at March 31, 2009,represent interests in debt obligations, namely life insurance wrapped issues,of companies offering credit derivatives, and of entities on which monolineinsurers retain capital put rights. The remaining ARS investments weregenerally collateralized by pools of commercial paper, investment-gradecorporate debt, asset and mortgage-backed securities, government andmoney-market issues and other ARS.

 

Our Level 3 investmentsin ARS have a present lack of observable market quotes. The valuation modelsused to value the securities include those that are based on expected cash flowstreams and collateral values, including assessments of counterparty creditquality, default risk underlying the security, discount rates and overall capitalmarket liquidity. The valuation of our investments in ARS is subject touncertainties that are difficult to predict. Factors that may impact thevaluation include changes in credit ratings of the securities or theirguarantors, underlying collateral value, discounts rates, counterparty risk andongoing strength and quality of market credit and liquidity. We validate theprices provided by our third party pricing service by understanding the modelsused and challenging pricing data in certain instances.

 

As previously noted, in January 2009 we entered into an agreementwith an Icelandic financial institution (NBI hf) pursuant to which NBI haspurchased all auction rate securities (“ARS”) owned by deCODE for an aggregateprice of approximately $11.3 million. The agreement includes both call and putrights under certain instances and which expire at the end of 2009. Theestimated market value of our pledged non current investments in ARS at March 31,2009 was $12.6 million. Based on the valuation models and an analysis ofother-than-temporary impairment factors, we have recorded an impairment chargeof $0.5 million and $4.0 million during the three-months ended March 31,2009 and 2008, respectively, reflecting the portion of ARS holdings that wehave concluded have an other-than-temporary decline in value and this charge isincluded in Other non-operating income and (expense), net in our Statements ofOperations.

 

Our cash was provided by and used as follows:

 
| ** **                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                          | ** ** | **(In thousands)**                          | ** ** |
| **Cash provided by (used in):** | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Operating  activities                               |       | $                                                | (8,190     | ) | $ | (20,031 | ) |
| Investing  activities                               |       | 253                                              |       | 9,291 |   |
| Financing  activities                               |       | 10,384                                           |       | (704 | ) |
| Cash and cash  equivalents, at end of period        |       | 6,148                                            |       | 42,728 |   |
|                                                     |            |                                                  |            |  |  |  |  |

 

*Cashand Cash Equivalents.*  At March 31, 2009 we had $6.1 million in cash and cashequivalents compared to $3.7 million at December 31, 2008. The netutilization of our cash in 2008 is principally owing to cash used in productdevelopment, research and general operations as reflected in the $8.0 millioncash we used in operations.

 

Available cash isinvested in accordance with our investment policy having primary objectives ofliquidity and safety of principal while generating income from our investmentswithout significantly increasing risk. Our cash and cash equivalents aredeposited with financial institutions having a high credit rating (A-/A3 orbetter in the United States and the United Kingdom and Baa1 in Iceland). InIceland the financial institutions are owned by the Government of Iceland andthe credit rating of the government applies to the financial institutions atthis time as they are not separately rated. At March 31, 2009, we had $3.5million of cash and cash equivalents held in Icelandic financial institutions.We expect to maintain our portfolio of cash equivalents and investments inaccordance with our policy, having the objective of preserving principal andmaintaining a high degree of liquidity to meet operating needs and obtainingreturns subject to prevailing market conditions. At March 31, 2009, ourinvestments are in auction rate securities and are pledged to and held by anIcelandic financial institution. At present, we expect to maintain ourportfolio of cash equivalents and investments in money market funds andgovernment debt securities. At March 31, 2009, our cash is largelyinvested in U.S. dollar denominated money market and checking accounts and alsoin Icelandic krona denominated accounts.

 

*OperatingActivities.* Netcash used in operating activities decreased to $8.2 million in 2009 as comparedto $20.0 million in 2008. Cash used in our operations is principally owingto cash used in diagnostic and therapeutic product development, research andgeneral operations as reflected in the $8.2 million cash we used in operations,as more fully described above; most importantly attributable to our focus onapplying our established capabilities in human genetics to drive ourdiagnostics and deCODEme businesses.

 

*InvestingActivities.*Ourinvesting activities have consisted of short-term investments in marketablesecurities and capital expenditures. Capital expenditures have been principallyreplacement capital expenditures during 2009 and we anticipate making onlynecessary replacement capital expenditures in the near term.

 

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*FinancingActivities.* Netcash of $10.4 million was provided by financing activities in 2009 as comparedto $0.7 million used in financing activities in 2008. As previously noted, in January 2009we entered into an agreement with an Icelandic financial institution (NBI hf)pursuant to which NBI has purchased all auction rate securities (“ARS”) ownedby us for an aggregate price of approximately $11.3 million. The agreementincludes both call and put rights under certain instances and which expire atthe end of 2009. Financing activities for 2008 consisted primarily of ongoingrepayment of and installment payments on debt, capital lease and financeobligations ($1.0 million).

 

*ContractualCommitments and Off-Balance Sheet Arrangements.*  The followingsummarizes our contractual obligations at March 31, 2009, and the effectssuch obligations are expected to have on our liquidity and cash flows in futureperiods:

 
| ** **                                         | ** ** | ** **              | ** ** | **Payments Due by Period** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **Total**               | ** ** | **Less Than  1 Year**           | ** ** | **1 – 2 Years** | ** ** | **2 – 3 Years** | ** ** | **3 – 4 Years** | ** ** | **4 – 5 Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **                                         | ** ** | **(In thousands)** | ** ** |
| 3.5% Senior  convertible notes, including interest |       | $                       | 250,125    |                                      | $          | 8,050 |   | $ | 8,050 |   | $ | 234,025 |   | $ | — |   | $ | — |   | $ | — |   |
| Long-term debt,  including interest                |       | 281                     |       | 250                                       |       | 31 |   | — |   | — |   | — |   | — |   |
| Capital lease  obligations, including interest     |       | 1,496                   |       | 1,496                                     |       | — |   | — |   | — |   | — |   | — |   |
| Finance  obligation, including interest            |       | 37,237                  |       | 2,047                                     |       | 2,098 |   | 2,151 |   | 2,204 |   | 2,259 |   | 26,478 |   |
| Operating leases  (1)                              |       | 39,474                  |       | 3,843                                     |       | 3,701 |   | 3,689 |   | 3,642 |   | 3,500 |   | 21,099 |   |
| Secured debt  collateralized by ARS (2)            |       | 11,566                  |       | 11,566                                    |       | — |   | — |   | — |   | — |   | — |   |
| Total                                              |       | $                       | 340,179    |                                      | $          | 27,252 |   | $ | 13,880 |   | $ | 239,865 |   | $ | 5,846 |   | $ | 5,759 |   | $ | 47,577 |   |

 

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(1)          Balance includes $38.6 million of Icelandic krona(ISK) denominated lease obligations which are variable based on the exchangerate of the ISK versus the U.S. dollar and also this amount is subject toperiodic adjustments based on the Icelandic Consumer Price Index (ICPI). Ahypothetical 10% increase or decrease in the ISK and U.S. dollar exchange ratewould result in an increase or decrease of our annual lease payments of $0.4million. A hypothetical 100 basis point increase of the ICPI would result in anincrease or decrease of our annual lease payments of $0.1 million.

(2)          Balance represents the put and call rights related toa secured borrowing and is denominated in ISK which is variable based on theexchange rate of the ISK versus the U.S. dollar and also this amount willincrease each period through the end of 2009 due to fixed interest related tothese put and call rights. A hypothetical 10% increase or decrease in the ISKand U.S. dollar exchange rate would result in an increase or decrease of thevalue of this balance by $1.2 million.

 

In January 2009,deCODE entered into an agreement with NBI hf., an Icelandic financialinstitution, pursuant to which NBI has purchased all auction rate securities (“ARS”)owned by deCODE for an aggregate price of ISK 1,375,000,000, which represented$11.3 million at the then current currency exchange rates. NBI has the putoption to require deCODE to repurchase the ARS upon the earlier of (a) thesale of all or a majority of the stock of deCODE genetics ehf, deCODE’sIcelandic subsidiary, (“IE”) or a specified part of the operations of IE or (b) December 16,2009, and deCODE has the call option to require NBI to sell the ARS to it atany time until January 1, 2010. The repurchase price on exercise of theput or call option (the “Repurchase Price”) will be equal to the Purchase Priceplus interest from January 16, 2009 at a rate of five percent (5%) abovethe Reykjavik Interbank Offered Rate (REIBOR) in effect on the date payment ismade less the aggregate amount of interest and principal received by NBI on theARS. Due to the put and call options, the sale of the ARS to NBI was accountedfor as a secured borrowing and as such, the ARS remain on deCODE’s ConsolidatedBalance Sheet, although they are held by NBI, and continue to be marked to fairvalue unless the put option as described above is not exercised prior to December 16,2009. At March 31, 2009, deCODE’s Obligation Under the Auction RateSecurities Repurchase Agreement was $11.6 million on the Consolidated BalanceSheet, which represents deCODE’s liability at March 31, 2009  if the put or call right had been exercisedto repurchase the ARS. deCODE recognized interest expense related to the putrights of $0.4 million during the three months ended March 31, 2009.

 

Under the terms of certain technology licensing agreements, deCODE isobligated to make payments upon the achievement of established milestonesleading to the discovery of defined products. These payments could total $5.0million, with the timing of payments not determinable at the current time.These potential payments are not included in the above table.

 

In November 2007, deCODE adopted a Change In Control Benefits Planthat provides for, among other things, upon a change in control, alloutstanding stock options, restricted stock and stock appreciation rights, andany similar awards under any equity compensation plan of deCODE, shall vest,become immediately exercisable or payable and have all restrictions lifted. Inthe event of a change in control, the Plan also requires deCODE to make a lumpsum payment to the CEO and reporting officers based on their most recent salaryand bonus history. Also, the Plan requires other benefits to be paid, toinclude life, disability, accident and health insurance for these employees fora period of 24 to 36 months depending on employment. deCODE believes that it isunlikely that these circumstances will transpire, as such no charge has beenrecognized in its Statements of Operations. Further, these potential paymentsare not included in the above table. As of March 31, 2009, the potentialminimum lump sum payment (salary and bonus amounts only) under these change incontrol provisions would have totaled approximately $6.1 million.

 

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All material intercompany balances and transactions have beeneliminated. We do not have any other significant relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet arrangementsor other contractually narrow or limited purposes. As such, we are not exposedto any financing, liquidity, market or credit risk that could arise if we hadengaged in such relationships. Additionally, holders of our 3.5% seniorconvertible notes may elect to convert their notes into shares of our common stockat any time at a price of $14.00 per share.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires us to make certain estimates and assumptions that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the financial statements, and thereported amounts of revenues and expenses during the reported period. On anongoing basis we evaluate our estimates, which include, among others, thoserelated to collaborative arrangements, long-lived assets, and litigation andother commitments and contingencies. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form our basis for makingjudgments about carrying values of assets and liabilities that are not readilyapparent from other sources. The impact and any associated risks related tothese and our other accounting policies on our business or operations isdiscussed throughout Management’s Discussion and Analysis of FinancialCondition and Results of Operations where such policies affect our reported andexpected financial results. For a detailed discussion on the application ofthese and other accounting policies, please refer to our notes to the CondensedConsolidated Financial Statements in this quarterly report on Form 10-Qand the Consolidated Financial Statements in the Annual Report on Form 10-K.There can be no assurance that actual results may not differ from the estimatesreferred to above.

 

**FORWARD-LOOKING STATEMENTS AND CAUTIONARY FACTORS**

**THAT MAY AFFECT FUTURE RESULTS**

 

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934. These statements relate to future events or our futurefinancial performance. In some cases, forward-looking statements can be identifiedby terminology such as “may,” “should,” “could,” “expect,” “plan,” “anticipate,”“believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or thenegative of such terms or other comparable terminology. These statements areonly expectations. We cannot assure you that our expectations and assumptionswill prove to be correct. We do not intend to update or revise anyforward-looking statements, whether as a result of future events, newinformation or otherwise, except to the extent that the reports we are requiredto file under the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”) contain such updates or revisions. Actual events or results may differmaterially from the forward- looking statements due to a number of factors, including.but not limited to, those set forth in Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2008 as updated by Item 1A of Part IIof this Quarterly Report on Form 10-Q and elsewhere in this QuarterlyReport on Form 10-Q and in the reports we file under the Exchange Act.

 

**ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The primary objectives ofour investment activities are to preserve principal, maintain a high degree ofliquidity to meet operating needs, and obtain competitive returns subject toprevailing market conditions. At March 31, 2009, our cash and cashequivalents are in U.S. Treasury Bills and money market funds, our currentinvestments are in U.S. Treasury Bills and our non-current investments are inauction rate securities. At present, we expect to maintain our portfolio ofcash equivalents and current investments in government debt securities andmoney market funds, and to liquidate our remaining holdings of non-currentinvestments in auction rate securities if and when auctions on them begin toclear or when secondary markets for the auction rate securities begin topresent themselves. At March 31, 2009, our cash and cash equivalents arelargely invested in U.S. dollar denominated U.S. Treasury Bills, money marketand checking accounts and also in Icelandic krona denominated accounts. Ourobligation under the secured debt collateralized by auction rate securities isdenominated in Icelandic krona. Our investments are subject to risk of default,changes in credit rating and changes in market value. These investments arealso subject to interest rate risk and will decrease in value if marketinterest rates increase. A hypothetical 100 basis point increase in interestrates would result in an immaterial decrease in the fair value of ourinvestments as of March 31, 2009. Changes in interest rates do not affectinterest expense incurred on deCODE’s Convertible Notes, because they bearinterest at a fixed rate. Using the price in the latest trade in March 2009,the market value of the Convertible Notes was approximately $8.5 million on March 31,2009.

 

As a consequence of thenature our business and operations our reported financial results and cashflows are exposed to the risks associated with fluctuations in the exchangerates of the U.S. dollar, the Icelandic krona and other world currencies. Wecontinue to monitor our exposure to currency risk. A hypothetical 10% decreasein value of the U.S. dollar against the Icelandic krona would result in an immaterialgain on our Icelandic krona denominated assets and liabilities.

 

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**ITEM4. CONTROLS AND PROCEDURES**

 

a)*Evaluation of disclosure controls and procedures.*Our Chief Executive Officer and our Chief Financial Officer evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the fiscal quarter covered by this Quarterly Report on Form 10-Q.Based upon that evaluation, the Chief Executive Officer and the Chief FinancialOfficer have concluded that as of the end of such fiscal quarter deCODE’sdisclosure controls and procedures are adequate and effective to ensure thatinformation required to be disclosed in the reports deCODE files under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms. Disclosure controls and procedures include without limitation, controlsand procedures designed to ensure that information required to be disclosed byan issuer in the reports that it files or submits under the Act is accumulatedand communicated to the issuer’s management including its principal executiveand principal financial officers or persons performing similar functions asappropriate to allow timely decisions regarding required disclosures.

 

In designing andevaluating our disclosure controls and procedures, our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance that the desired objectives of the control systemwill be met. In addition, the design of any control system is based in partupon certain assumptions about the likelihood of future events and theapplication of judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures. Because of these and other inherent limitations ofcontrol systems, there is only reasonable assurance that our controls willsucceed in achieving their goals under all potential future conditions.

 

b) *Changes in Internal Controls.* There was nochange in our internal control over financial reporting (as defined in Rule 13a-15(f) underthe Exchange Act) during the fiscal quarter covered by this Quarterly Report onForm 10-Q that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**PART IIOTHER INFORMATION**

 

**ITEM1. LEGAL PROCEEDINGS**

 

Other than claims and legal proceedings that arise from time to time inthe ordinary course of business which are not material, and matters describedbelow, there has been no change in the matters reported in our Annual Report onForm 10-K for the year ended December 31, 2008.

 

On or about April 20, 2002, an amended class action complaint,captioned *In re deCODE genetics, Inc. Initial PublicOffering Securities Litigation*(01 Civ. 11219(SAS)), allegingviolations of federal securities laws in connection with deCODE’s initialpublic offering was filed in the United States District Court for the SouthernDistrict of New York (the “District Court”) on behalf of certain purchasers ofdeCODE common stock. The complaint names deCODE, two individuals who wereexecutive officers of deCODE at the time of its initial public offering (the “IndividualDefendants”), and the two lead underwriters (the “Underwriter Defendants”) forour initial public offering in July 2000 (the “IPO”) as defendants. deCODEis aware that similar allegations have been made in hundreds of other lawsuitsfiled (many by some of the same plaintiff law firms) against numerousunderwriter defendants and issuer companies (and certain of their current andformer officers) in connection with various public offerings conducted inrecent years. All of the lawsuits that have been filed in the Southern Districtof New York have been consolidated for pretrial purposes before United StatesDistrict Judge Shira Scheindlin. Pursuant to the underwriting agreementexecuted in connection with our IPO, deCODE has demanded indemnification fromthe Underwriter Defendants. The Underwriter Defendants have asserted that ourrequest for indemnification is premature.

 

Pursuant to an agreement the Individual Defendants have been dismissedfrom the case without prejudice.

 

On July 31, 2003, our Board of Directors (other than our Chairmanand Chief Executive Officer, who recused himself because he was an IndividualDefendant) approved a proposed partial settlement with the plaintiffs in thismatter, subject to a number of conditions, including the participation of asubstantial number of other issuer defendants in the proposed settlement, theconsent of deCODE’s insurers to the settlement, and the completion ofacceptable final settlement documentation. A settlement fairness hearing washeld on April 24, 2006. On June 25, 2007, the United States DistrictCourt for the Southern District of New York entered an order formally denyingthe motion for final approval of the settlement agreement because thesettlement class could not be certified. On August 14, 2007, theplaintiffs filed their second consolidated amended class action complaints againstthe “focus cases” and on September 27, 2007, again moved for classcertification. The focus cases are a small group of cases that were selected astest cases due to the large number of nearly identical actions which wereconsolidated in the Initial Public Offering litigation. The court has indicatedthat the focus cases are intended to provide strong guidance for the othercases. The case involving deCODE is not a focus case. On November 12,2007, certain of the defendants in the focus case moved to dismiss the secondconsolidated amended class action complaints. On March 26, 2008, theDistrict Court denied the motions to dismiss except as to Section 11claims raised by those plaintiffs who sold their securities for a price inexcess of the initial offering price and those who purchased outside thepreviously certified class period. Briefing on the class certification motionwas completed in May 2008. That motion was withdrawn without prejudice on October 10,2008. On February 25, 2009, liaison counsel for the plaintiffs informedthe district court that a settlement has been agreed to in principle, subjectto formal approval by the parties, and preliminary and final approval by thecourt. On April 2, 2009, a stipulation and agreement of settlement amongthe plaintiffs, issuer defendants and underwriter defendants was submitted to

 

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the Court for preliminaryapproval. If the Court grants the motion for preliminary approval, notice willbe given to all class members of the settlement, a “fairness” hearing will beheld and if the Court determines that the settlement is fair to the classmembers, the settlement will be approved. There can be no assurance that thisproposed settlement will be approved and implemented in its current form, or atall. Due to the inherent uncertainties of litigation and because the settlementapproval process is at a preliminary stage, the ultimate outcome of the matteris uncertain.

 

WhiledeCODE’s expenses in this matter to date have been paid primarily by itsinsurers, if deCODE were required to pay significant monetary damages as aresult of an adverse determination in this matter (or any other lawsuitsalleging similar claims filed against deCODE and deCODE’s directors andofficers in the future), deCODE’s business could be significantly harmed. Evenif such litigation concludes in deCODE’s favor, deCODE may be required toexpend significant funds to defend against the allegations. deCODE is unable toestimate the range of possible loss from this litigation and no amounts havebeen provided for it in deCODE’s financial statements.

 

**ITEM1A. RISK FACTORS**

 

Other than with respectto the risk factors set forth below, there have been no material changes fromthe risk factors disclosed in Item 1A of our Annual Report on Form 10-Kfor the year ended December 31, 2008. The risk factors set forth belowhave been updated to provide data for and as of the quarter ended March 31,2009.

 

*****We are confronted by seriousliquidity concerns which threaten our operations.*****

 

As of the datehereof, we have very limited financial resources. Our operations to date haveconsumed substantial amounts of cash and will continue to require substantialamounts of cash in the future. We are evaluating ouralternatives for addressing this situation, which include primarily the sale ofbusiness units and programs, the sale or licensing of products and intellectualproperty, the entry into corporate partnerships and the restructuring of ourdebt together with new financing. Given our current liquid assets we have resources tocontinue operations only through the second quarter of 2009 and must obtainfurther financial resources in order to continue operations beyond this time.While negotiations regarding various alternatives are ongoing, we cannotprovide any assurance that such negotiations will be completed within the time,or in a manner, that will enable us to continue operations.

 

Our liquiditysituation has resulted in risks and uncertainties affecting our operations andthe execution of our business plan, including the following:

 

·                  we may not be able to obtain and maintain normal termswith vendors and service providers;

 

·                  vendors and service providers may require securitydeposits or prepayment before delivering goods and services, which will resultin additional demands on our cash;

 

·                  we may incur costs associated with responding to theconcerns of customers, vendors and service providers;

 

·                  we may not be able to maintain contracts, includingcontracts with fee-paying customers, that are critical to our operations;

 

·                  our ability to retain management and other keyindividuals may be negatively affected;  and

 

·                  actions and decisions of our creditors and other thirdparties with interests in our financial status may be inconsistent with ourplans.

 

We have identified anddisclosed in Note 1 to our consolidated financial statements a number offactors that raise substantial doubt about our ability to continue as a goingconcern. If we become unable to continue as a going concern, we would have toliquidate our assets, and we might realize significantly less than the valuesat which they are carried on our financial statements. The funds resulting fromthe liquidation of our assets would be used first to pay off the debt owed tocreditors before any funds would be available to pay our stockholders, and anyshortfall in the proceeds would directly reduce the amounts available fordistribution, if any, to our creditors and to our stockholders. In the event wewere required to liquidate, it is unlikely that stockholders would receive anyvalue for their shares.

 

The report of ourindependent registered public accounting firm on our financial statementsincluded in our annual report on Form 10-K contains an explanatoryparagraph regarding going-concern uncertainty. The accompanying financialstatements do not include any adjustments or charges that might be necessaryshould we be unable to continue as a going concern, such as charges related toimpairment of our assets, the recoverability and classification of assets orthe amounts and classification of liabilities or other similar adjustments. Ifwe are not able to continue as a going concern, it is likely that investorswill lose all or a part of their investment.

 

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***If we are able to continue operations in the near term, wewill continue to require sufficient additional funding to meet our capitalrequirements; if we are not able to obtain such financing, we may beforced to reduce or terminate our research and product development programs andabandon portions of our intellectual property.***

 

We have spentsubstantial amounts of cash to fund our research and development activities andexpect to continue to spend substantial amounts for these activities over thenext several years. Many factors, including which, if any, assets we sell inorder to obtain funds to continue operations in the near future and which ofour business units and properties we retain, will influence our future capitalneeds, including:

 

·                  the number, breadth and progress of ourdiscovery and research programs;

 

·                  our ability to attract customers;

 

·                  our ability to commercialize ourdiscoveries and the resources we devote to commercialization;

 

·                  the amount we spend to enforce patentclaims and other intellectual property rights; and

 

·                  the costs and timing of regulatoryapprovals.

 

We have relied on, and may continue to rely on, revenues generatedby our corporate alliances and fee-paying customers for significant funding ofour research efforts. Historically, a substantial portion of our revenue hasbeen derived from contracts with a limited number of significantcustomers. Divisions of the National Institute of Health (NIH) represented26% and 24% of consolidated revenue during the three months ended March 31,2009 and 2008, respectively. The European Community (EC) represented 12% and 8%of consolidated revenue during the three-months ended March 31, 2009 and2008, respectively. The loss of any significant customer may significantlylower deCODE’s revenues which could affect the resources available to supportour product discovery and development programs.

 

In addition, wemay seek additional funding through public or private equity offerings anddebt financings. We may not be able to obtain additional financing when weneed it or the financing may not be on terms favorable to us or ourstockholders. Stockholders’ ownership will be diluted if we raise additionalcapital by issuing equity securities. The going concern qualification from our independentregistered public accounting firm may make it more difficult for us to raisefunds.

 

If we raiseadditional funds through collaborations and licensing arrangements, wemay have to relinquish rights to some of our technologies or productcandidates, or grant licenses on unfavorable terms. If adequate funds are notavailable, we would have to scale back or terminate our discovery and researchprograms and product development.

 

***If we are able to continue operations in the near term butcontinue to incur operating losses longer than anticipated, or in amountsgreater than anticipated, we may be unable to continue our operations.***

 

We incurred a netloss of $12.6 million and $26.7 million during the three-months ended March 31,2009 and 2008, respectively, and $80.9 million during the year ended December 31,2008, and had an accumulated deficit of $724.8 million at March 31, 2009.We have never generated a profit and we have not generated significant revenuesexcept for payments received in connection with our research and developmentcollaborations with Roche, Merck and others, from contract services, EmeraldBioSystems products and instruments, and under grants and more recently in April 2009our licensing agreement with Celera. Our research and development expendituresand general and administrative costs have exceeded our revenue to date, and weexpect to spend significant additional amounts to develop our diagnostics anddeCODEmeTM products and services, fund research anddevelopment in order to enhance our core technologies and undertake productdevelopment (including drug development and related clinical trials). We do notexpect to receive royalties or other revenues from commercial sales of productsdeveloped using our technology in the near term. It may be several yearsbefore product revenues materialize, if they do at all. As a result, we expectto incur net losses for several years. If the time required to generate productrevenues and achieve profitability is longer than we currently anticipate orthe level of losses is greater than we currently anticipate, we may not beable to continue our operations.

 

***We may be adversely impacted by economicfactors beyond our control and may incur additional impairment charges to ourinvestment portfolio.***

 

In January, 2009, we transferred $33.5 million principal amount ofauction rate securities (“ARS”) to an Icelandic financial institutionfor an aggregate price of approximately $11.3 million. We have the calloption to require the financial institution to sell the securities back tous at any time prior to December 31, 2009, and the financialinstitution has the put option to require us to repurchase the securities uponthe earlier of (a) the sale of all or a majority of the stock of deCODEgenetics ehf,  our Icelandic subsidiary,(“IE”) or a specified part of the operations of IE or (b) December 16,2009, in each case for a specified price. For accounting purposes thistransaction was accounted for as a secured borrowing and, as such, these ARSinvestments remain on our balance sheet and are collateral pledged to and heldby the Icelandic institution. As of March 31, 2009, we had $33.5 millionof principal invested in auction

 

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rate securities (“ARS”),all of which are classified as non-current investments on our balance sheet and arepledged to and held by the purchaser. These investments represent interestsin debt obligations, namely life insurance wrapped issues, of companiesoffering credit derivatives, and of entities on which monoline insurers retaincapital put rights. The remaining ARS investments are generally collateralizedby pools of commercial paper, investment-grade corporate debt, asset andmortgage-backed securities, government and money-market issues and other ARS.Consistent with our investment policy guidelines, all of the ARS investmentswere rated as investment grade (at least A or better) at the time of purchaseand subsequent to year end remain rated as investment grade. The estimatedmarket value of the non-current ARS holdings at March 31, 2009 was $12.6million, which reflects a $20.9 million adjustment to the principal value of$33.5 million. Based on valuation models and an analysis ofother-than-temporary impairment factors, we have recorded an impairment chargeof $0.5 million  and $4.0 million inOther non-operating income (expense), net in the Statements of Operations forthe three-months ended March 31, 2009 and 2008, respectively, reflectingthe portion of ARS holdings that we have concluded have an other-than-temporarydecline in value. We recognized an unrealized gain of $0.4 million in OtherComprehensive Income during the three-months ended March 31, 2009. Duringthe three-months ended March 31, 2008, the $4.0 million charge included$0.9 million related to ARS which deCODE had previously believed to betemporary and accounted for as an unrealized loss at December 31, 2007.

 

The credit and capital markets continue to bevolatile. If uncertainties in credit and capital markets continue, thesemarkets deteriorate further or the estimated value of these ARS continue todecline, we may incur additional impairments, realized or unrealized, to ourinvestment portfolio, which could negatively affect our financial condition,cash flows and reported earnings. In addition, these uncertainties may make itdifficult, if not impossible, for us to obtain funding.

 

***Ourcommon stock may be de-listed from Nasdaq, which******couldseriously limit its liquidity.***

 

On February 4, 2009, the listing of our common stock wastransferred from the Nasdaq Global Market to the Nasdaq Capital Market as aresult of our inability to meet the requirement that we maintain a minimum $50million market value of listed securities for continued inclusion on the NasdaqGlobal Market. The transfer was made pursuant to a decision of the NasdaqListing Qualifications Panel (the “Panel”), which required that we demonstratecompliance with all the requirements for continued listing on the NasdaqCapital Market, including the requirement that we maintain a $35 million marketvalue of listed securities for ten consecutive days, by April 29, 2009. OnApril 22, 2009, we received a letter from the Panel stating that ourcommon stock would be delisted from The Nasdaq Stock Market and that trading ofthe common stock on The Nasdaq Stock Market would be suspended at the open oftrading on April 30, 2009 unless the Nasdaq Listing and Hearing ReviewCouncil (the “Listing Council”) called the matter for review and stayed thesuspension,. On April 28, 2009, we received a letter from the ListingCouncil stating that the Listing Council has called the matter for review andhas determined to stay the Panel’s decision to suspend our common stock fromtrading pending further action by the Listing Council. Accordingly, our commonstock will continue to trade on The Nasdaq Stock Market until further action bythe Listing Council. However, there can be no assurance that we will be able tomeet the requirements for continued listing. If our common stock is delisted,it would seriously impair stockholders’ ability to trade their shares, limitthe liquidity of our common stock and impair our ability to raise capitalthrough the sale of our common stock, which could seriously harm our business,especially in light of our need to raise substantial additional capital tocontinue our operations.

 

**ITEM6. EXHIBITS**

 

The following is a listof exhibits filed as part of this Quarterly Report on Form 10-Q.

 
| **EXHIBIT** | ** ** | ** **                                                                                                                                                                                                                                                                                   |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NUMBER**  | ** ** | **DESCRIPTION OF EXHIBIT**                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.1         |       | Amended and Restated  Certificate of Incorporation, as further amended (Incorporated by reference  to Exhibit 3.1 and Exhibit 3.3 to the Company’s Registration  Statement on Form S-1 (Registration No. 333-31984) which became  effective on July 17, 2000). |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.2         |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation dated  August 30, 2002 (Incorporated by reference to Exhibit 3.2 to the  Company’s Quarterly Report on Form 10-Q filed on November 14,  2002).                                       |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.3         |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation dated  May 11, 2007 (Incorporated by reference to Exhibit 3.3 to the  Company’s Quarterly Report on Form 10-Q filed August 9, 2007).                                                 |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.4         |       | Bylaws, as amended  (Incorporated by reference to Exhibit 3.2 to the Company’s Registration  Statement on Form S-1 (Registration No. 333-31984) which became  effective on July 17, 2000).                                                                          |
|        |       |                                                                                                                                                                                                                                                                                         |
| 10.1        |       | Agreement, dated  January 14, 2009, by and between deCODE genetics, Inc. and NBI HF.                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                         |
| 31.1        |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |

 

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| 32.1 |   | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |
|------|--------|--------------------------------------------------------------------------------|

 

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*                    Constitutes a management contract orcompensatory plan or arrangement.

 

Note: Unless otherwisenoted, the SEC File number of each of the above referenced documents is000-30469.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

Dated:  May 11,2009

 
| deCODE genetics, Inc. |
|----------------------------|
|                       |   |
|                       |   |
|                       | /s/ Kari Stefansson |
|                       | Kari Stefansson |
|                       | Chairman,  President, |
|                       | and Chief  Executive Officer |
|                       |   |
|                       | /s/ Lance Thibault |
|                       | Lance Thibault |
|                       | Chief Financial  Officer and Treasurer |

 

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| **EXHIBIT** | ** ** | ** **                                                                                                                                                                                                                                                                                   |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **NUMBER**  | ** ** | **DESCRIPTION OF EXHIBIT**                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.1         |       | Amended and Restated  Certificate of Incorporation, as further amended (Incorporated by reference  to Exhibit 3.1 and Exhibit 3.3 to the Company’s Registration  Statement on Form S-1 (Registration No. 333-31984) which became  effective on July 17, 2000). |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.2         |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation dated  August 30, 2002 (Incorporated by reference to Exhibit 3.2 to the  Company’s Quarterly Report on Form 10-Q filed on November 14,  2002).                                       |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.3         |       | Certificate of Amendment  to Amended and Restated Certificate of Incorporation dated May 11, 2007  (Incorporated by reference to Exhibit 3.3 to the Company’s Quarterly  Report on Form 10-Q filed August 9, 2007).                                                 |
|        |       |                                                                                                                                                                                                                                                                                         |
| 3.4         |       | Bylaws, as amended  (Incorporated by reference to Exhibit 3.2 to the Company’s Registration  Statement on Form S-1 (Registration No. 333-31984) which became  effective on July 17, 2000).                                                                          |
|        |       |                                                                                                                                                                                                                                                                                         |
| 10.1        |       | Agreement, dated  January 14, 2009, by and between deCODE genetics, Inc. and NBI HF.                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                         |
| 31.1        |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                         |
| 32.1        |       | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                               |

 

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*                    Constitutes a management contract or compensatory planor arrangement.

 

Note: Unless otherwisenoted, the SEC File number of each of the above referenced documents is000-30469.

 

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