DCGN Decode Genetics (MM)

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

FOR THE QUARTERLY PERIOD ENDED June 30, 2009

OR

FOR THE TRANSITION PERIOD FROM             TO            

COMMISSION FILE NUMBER 000-30469

deCODE genetics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

STURLUGATA 8, IS-101 REYKJAVIK, ICELAND

(Address of Principal Executive Offices)

+354-570-1900

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 registrant was required to submit and post such files).   o  Yes   o  No

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

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

The aggregate number of shares of the registrant’s common stock outstanding on July 31, 2009 was 61,760,805 shares of common stock $.001 par value.

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deCODE genetics, Inc.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

deCODE genetics, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

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

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deCODE genetics, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

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deCODE genetics, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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deCODE genetics, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

1.      Organization and Business

References in these financial statements to deCODE refer to deCODE genetics, Inc., a Delaware company, and its wholly owned subsidiaries, Islensk erfdagreining ehf., an Icelandic company registered in Reykjavik, and its subsidiaries and MediChem Life Sciences, Inc., a Delaware corporation, and its subsidiaries.

With its headquarters in Reykjavik, Iceland, deCODE is a biotechnology company developing and marketing products to improve the treatment, diagnosis and prevention of common diseases. deCODE applies its discoveries in human genetics to bring to market DNA-based reference laboratory tests and consumer genome analysis services to assess individual risk of common diseases. deCODE’s customers include major pharmaceutical companies, biotechnology firms, pharmacogenomics companies, government institutions, universities and other research institutions. deCODE’s business is global, with its principal markets in the United States and in Europe.

deCODE’s advantage in DNA-based disease risk assessment tests and personal genomics is derived from its population approach to human genetics and the ability to apply its discoveries directly to the development of DNA-based reference laboratory tests for common diseases and to its retail genome scans. deCODE has in Iceland comprehensive population resources and one of the largest genotyping facilities in the world, enabling its scientists to effectively identify key variations in the sequence of the human genome associated with a major impact on individual risk of common diseases. Well-validated genetic variations conferring risk of disease are the basis for DNA-based reference laboratory tests and personal genome scans that can more accurately assess individual risk of disease. As virtually all common diseases have both genetic and environmental risk factors, measuring genetic risk is in deCODE’s view a critical component for the realization of personalized medicine. By providing a more complete understanding of individual risk, such tests can empower better prevention in those conditions in which known lifestyle and environmental risk can be modified, as well as targeted screening and early intervention in diseases such as cancer.

Going Concern : The financial statements have been prepared on a going-concern basis, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business. deCODE has recorded substantial operating and net losses. Its negative cash flows from operations have been $9,335,000 and $37,982,000 during the six-months ended June 30, 2009 and 2008, respectively, and $54,779,000 during the year ended December 31, 2008. In addition, deCODE has significant amounts of long-term debt which requires interest payments of approximately $8,050,000 per annum. At June 30, 2009, deCODE had liquid funds available for operating activities of $3,765,000 (cash and cash equivalents) as compared to $3,701,000 at December 31, 2008.

At June 30, 2009, deCODE had cash and cash equivalents of $3,765,000, compared to $3,701,000 at December 31, 2008. In early 2009 deCODE sold its ARS for approximately $11,314,000 in cash, and in April deCODE signed licensing agreements with Celera Corporation (“Celera”) under which it received an upfront payment of $10.0 million and will receive royalties on sales of Celera testing products and services incorporating deCODE genetic risk markers. deCODE believes it has sufficient resources to fund operations only into the latter half of the third quarter. It is simultaneously pursuing several options to ensure sufficient funding to take it to the execution of strategic options that can support the near- and longer-term viability of its core business. deCODE’s planned operations require immediate additional liquidity substantially in excess of the amounts noted above, raising substantial doubt about deCODE’s ability to continue as a going concern.

In deCODE’s ongoing strategic review, deCODE has been evaluating and pursuing various alternatives aimed at focusing its business and underpinning ongoing product development and commercialization in its core business. One component of this effort is the sale of deCODE’s US medicinal chemistry and structural biology units. Although these units continue to operate and contribute to deCODE, in view of their prospective sale the company has accounted for these businesses as “discontinued operations” (see Note 12). With the exception of combined net loss figures, the operating results are thus all for deCODE’s continuing operations in its core business of employing the Company’s capabilities in gene discovery to advance DNA-based diagnostics, personal genome analysis, intellectual property licensing opportunities, and contract genotyping.

Management’s Plans: To address deCODE’s immediate need for funds, management and the Board of Directors are exploring the possibilities of (i) selling some or all of deCODE’s U.S. medicinal chemistry and structural biology units (as noted above), (ii) granting further licenses to specific diagnostic products, (iii) entering into a collaboration for gene sequencing, (iv) selling or licensing some or all of deCODE’s clinical and pre-clinical drug discovery programs, (v) restructuring deCODE’s outstanding convertible notes and (vi) obtaining new equity financing. Achieving (v) could result in either a cash settlement of deCODE’s convertible note obligation for substantially less than the carrying amount or in a conversion of the convertible notes into equity of deCODE. Receipt of additonal equity financing to support operations in the longer term depends in large part on the outcomes of actions in (i), (ii), (iii) and (v). Management and the board are having ongoing dialogues and negotiations with third parties in each of these areas. If deCODE’s Board of Directors concludes that 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.

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Whether in a bankruptcy proceeding or otherwise, the consummation of any of these approaches is dependent on successful negotiations with third parties and in many cases the availability of financing to such third parties. There can be no asssurance that any potential transactions will be consummated or will result in sufficient funding to sustain operations. If deCODE is unable to raise additional capital through one or more of these options, it may be forced to liquidate its remaining assets and discontinue as a business.

2.      Basis of Presentation

In the opinion of deCODE’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of June 30, 2009 and the results of operations for the three and six-month periods ended June 30, 2009 and 2008 and cash flows for the six-month periods ended June 30, 2009 and 2008. deCODE considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated through August 10, 2009. The results of operations for the three and six-month periods ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with deCODE’s Annual Report on Form 10-K for the year ended December 31, 2008, which includes consolidated financial statements and notes thereto for the years ended December 31, 2008, 2007 and 2006.

As discussed more fully in Note 1, deCODE does not have adequate cash flows from operations or, currently, access to sufficient available capital to meet its requirements for its 2009 operations. These factors raise significant uncertainty about deCODE’s ability to continue as a going concern. The Consolidated Financial Statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities should deCODE be unable to continue as a going concern.

3.      Revenue

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

Celera license .  In April 2009, deCODE signed a non-exclusive worldwide license with Celera for deCODE’s genetic markers for increased risk of major cardiovascular and metabolic diseases, including heart attack, stroke, atrial fibrillation (AF) and type 2 diabetes (T2D). Under the terms of the agreements, deCODE received an upfront payment ($10,000,000) and will receive milestones and royalties on future sales of Celera testing products and services incorporating deCODE genetic markers. deCODE has determined that the revenue recognition criteria have not been met and has deferred the recognition of the $10,000,000 upfront payment to a future period. As such, the $10,000,000 upfront payment is included in long-term deferred revenue on the balance sheet at June 30, 2009.

deCODEs largest customers as a percentage of consolidated revenue are as follows:

During the three and six-month periods ended June 30, 2008, deCODE performed services totaling $34,000 and $129,000 for employers of members of deCODE’s Board of Directors.

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4.      Cost of Revenue

deCODE’s cost of revenue consists of the costs of services provided to customers and collaborators and the costs of programs under research contracts and grants, including: (i) the entirety of the costs incurred in connection with programs that have been partnered and on which deCODE receives research funding; (ii) costs associated with other service fee revenues; and (iii) the total amount of those costs incurred in connection with discovery and development work performed under research contracts and grants.

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

5.      Research and Development

deCODE’s research and development expense consists of the costs of its own proprietary programs, comprised of the following:

6.      Stock-Based Compensation

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

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As of June 30, 2009 there was approximately $4,098,000 of total unrecognized compensation expense related to nonvested stock options. This expense is expected to be recognized over a weighted-average period of approximately 1.8 years. There were no option grants during the six-months ended June 30, 2009.

The following table summarizes stock option activity for the six-months ended June 30, 2009:

deCODE’s Equity Incentive Plans allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation related to these awards is amortized to compensation expense over the period the restrictions lapse. The stock-based compensation expense for these awards is determined based on the market price of our stock at the date of the grant applied to the total numbers of shares that are anticipated to fully vest and then amortized over the vesting period. At June 30, 2009, deCODE had no unvested restricted shares.

7.      Net Loss Per Share

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

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

8.      Comprehensive Loss

Comprehensive income (loss) generally represents all changes in stockholders’ equity (deficit) except those resulting from investments or contributions by stockholders. Amounts reported in other comprehensive income (loss) include foreign currency translation adjustments and unrealized gains and losses associated with investments. The following table presents the calculation of comprehensive income (loss):

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9.      Secured Borrowing

In January 2009, deCODE entered into an agreement with NBI hf., an Icelandic financial institution, 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 currency exchange rates. NBI has the put option to require deCODE to repurchase the ARS upon the earlier of (a) the sale of all or a majority of the stock of deCODE genetics ehf, deCODE’s Icelandic 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 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 less the aggregate amount of interest and principal received by NBI on the ARS. In addition, if the aggregate amount of interest and principal received by NBI with respect to the ARS is higher than the Repurchase Price, upon deCODE’s repurchase of the ARS pursuant to the exercise of the put or call option, NBI will be required to deliver to deCODE, in addition to the ARS, an amount equal to (A) the aggregate amount of principal and interest that it received less (B) the sum of (i) the Repurchase Price and (ii) ISK 375,000,000 (approximately $2,919,000 at June 30, 2009).

Due to the put and call options, the transfer of the ARS to NBI was accounted for as a secured borrowing and as such, the ARS remain on deCODE’s Consolidated Balance Sheet, although they are held by NBI, and continue to be carried at fair value. At June 30, 2009, deCODE’s Obligation Under the Auction Rate Securities Repurchase Agreement was $11,664,000  (1,498,505,000 ISK) on the Consolidated Balance Sheet, which represents deCODE’s liability at June 30, 2009 if the put or call right had been exercised to repurchase the ARS. deCODE recognized interest expense related to the put rights of $556,000 and $992,000 during the three and six-months ended June 30, 2009.

The pledged investments at June 30, 2009 consist of marketable securities, and are as follows:

Gross unrealized holding gains and gross unrealized holding losses at June 30, 2009 were $1,459,000 and $0, respectively. There were no unrealized holdings gains or losses at December 31, 2008. The contractual maturity of investments was as follows:

The ARS consist of private placement securities with long-term nominal maturities for which the interest rates are reset through a Dutch auction process at pre-determined calendar intervals, generally each month. This mechanism generally allows existing investors to rollover their holdings and continue to own their respective securities or liquidate their holdings by selling their securities at par value. deCODE generally invested in these securities for short periods of time as part of its cash management program. However, uncertainties in the credit markets beginning in 2007 have prevented deCODE and other investors from liquidating holdings of its ARS in recent auctions because the amount of securities submitted for sale has exceeded the amount of purchase orders resulting in multiple failed auctions.

The estimated market value of deCODE’s investments in ARS at June 30, 2009 was $13,517,000, which reflects a $19,983,000 adjustment to the original principal value of $33,500,000. Based on valuation models and an analysis of other-than-temporary impairment factors, deCODE has recorded an impairment charge of $120,000 and $663,000 for the three and six-months ended June 30, 2009, respectively, and $1,072,000 and $5,107,000 for the three and six-months ended June 30, 2008, respectively, in Other non-operating income (expense), net in the Statements of Operations, reflecting the portion of ARS holdings that deCODE has concluded have an other-than-temporary decline in value. deCODE recognized an unrealized gain of $1,036,000 and $1,459,000 in Other Comprehensive Income during the three and six-months ended June 30, 2009, respectively. During the six-months ended June 30,

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2008, the $5,107,000 charge included $914,000 related to ARS which deCODE had previously believed to be temporary and accounted for as an unrealized loss at December 31, 2007.

The credit and capital markets have continued to be volatile into 2009. If uncertainties in these credit and capital markets continue, these markets deteriorate further or deCODE experiences additional downgrades on its investments, deCODE may incur additional impairments to its pledged investment portfolio, which could negatively affect our financial condition, cash flows and reported earnings.

10.    Litigation

Other than claims and legal proceedings that arise from time to time in the ordinary course of business which are not material, and matters described below, there has been no change in the matters reported in deCODE’s Annual Report 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 Public Offering Securities Litigation (01 Civ. 11219(SAS)), alleging violations of federal securities laws in connection with deCODE’s initial public offering was filed in the United States District Court for the Southern District of New York (the “District Court”) on behalf of certain purchasers of deCODE common stock. The complaint names deCODE, two individuals who were executive officers of deCODE at the time of its initial public offering (the “Individual Defendants”), and the two lead underwriters (the “Underwriter Defendants”) for our initial public offering in July 2000 (the “IPO”) as defendants. deCODE is aware that similar allegations have been made in hundreds of other lawsuits filed (many by some of the same plaintiff law firms) against numerous underwriter defendants and issuer companies (and certain of their current and former officers) in connection with various public offerings conducted in recent years. All of the lawsuits that have been filed in the Southern District of New York have been consolidated for pretrial purposes before United States District Judge Shira Scheindlin. Pursuant to the underwriting agreement executed in connection with our IPO, deCODE has demanded indemnification from the Underwriter Defendants. The Underwriter Defendants have asserted that our request for indemnification is premature.

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

On July 31, 2003, our Board of Directors (other than our Chairman and Chief Executive Officer, who recused himself because he was an Individual Defendant) approved a proposed partial settlement with the plaintiffs in this matter, subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of deCODE’s insurers to the settlement, and the completion of acceptable final settlement documentation. A settlement fairness hearing was held on April 24, 2006. On June 25, 2007, the United States District Court for the Southern District of New York entered an order formally denying the motion for final approval of the settlement agreement because the settlement class could not be certified. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the “focus cases” and on September 27, 2007, again moved for class certification. The focus cases are a small group of cases that were selected as test cases due to the large number of nearly identical actions which were consolidated in the Initial Public Offering litigation. The court has indicated that the focus cases are intended to provide strong guidance for the other cases. 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 second consolidated amended class action complaints. On March 26, 2008, the District Court denied the motions to dismiss except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. Briefing on the class certification motion was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008. On April 2, 2009, a stipulation and agreement of settlement among the plaintiffs, issuer defendants and underwriter defendants was submitted to the Court for preliminary approval. The Court granted the plaintiffs’ motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement fairness hearing has been scheduled for September 10, 2009. Following the hearing, if the Court determines that the settlement is fair to the class members, the settlement will be approved and the case against deCODE and the Individual Defendants will be dismissed with prejudice. There can be no assurance that this proposed settlement will be approved and implemented in its current form, or at all. Due to the inherent uncertainties of litigation and because the settlement approval process is at a preliminary stage, the ultimate outcome of the matter is uncertain.

While deCODE’s expenses in this matter to date have been paid primarily by its insurers, if deCODE were required to pay significant monetary damages as a result of an adverse determination in this matter (or any other lawsuits alleging similar claims filed against deCODE and deCODE’s directors and officers in the future), deCODE’s business could be significantly harmed. Even if such litigation concludes in deCODE’s favor, deCODE may be required to expend significant funds to defend against the allegations. deCODE is unable to estimate the range of possible loss from this litigation and no amounts have been provided for it in deCODE’s financial statements.

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11.    Fair Value Measurement

deCODE has used a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2009:

The following table presents deCODE’s changes in assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2009:

Valuation Techniques. deCODE’s i nvestments in auction rate securities at June 30, 2009 did not have quoted market prices and are classified within Level 3 of the valuation hierarchy. The valuation models used to value the ARS include those that are based on expected cash flow streams and collateral values, including assessments of counterparty credit quality, default risk underlying the security, discount rates and overall capital market liquidity. The valuation of deCODE’s investments in ARS is subject to uncertainties that are difficult to predict. Factors that may impact the valuation include changes in credit ratings of the securities or their guarantors, underlying collateral value, discounts rates, counterparty risk and ongoing strength and quality of market credit and liquidity.

The fair value of deCODE’s 3.5% convertible notes at June 30, 2009 and December 31, 2008 was approximately $15,250,000 and $25,744,000, respectively. The fair value of the convertible notes was based on the most recent quoted market prices at June 30, 2009 and December 31, 2008. The fair values of equipment notes at June 30, 2009 and December 31, 2008 were approximately $206,000 and $334,000, respectively, as estimated based on quoted market rates for instruments with similar terms and remaining maturities.

The fair value of short-term financial instruments, including cash and cash equivalents, investments, receivables, certain other current assets, trade accounts payable, certain accrued liabilities, and other current liabilities approximates their carrying amount in the financial statements due mainly to the short maturity of such instruments. Based on borrowing rates currently available to deCODE for capital lease obligations with similar terms, the carrying value of such of its debt obligations approximates fair value.

12.    Discontinued Operations

As part of deCODE’s ongoing strategic review, management and the Board of Directors have been evaluating and pursuing various alternatives aimed at focusing the company’s long-term business and securing financial resources to fund ongoing product development and commercialization. The Company plans to sell deCODE’s U.S. subsidiaries.

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deCODE has accounted for it’s U.S. operations as discontinued operations, and, accordingly, has presented the results of operations and related cash flows as discontinued operations for all periods presented. The assets and liabilities of deC ode ’s U.S. operations to be sold have been been presented separately, and are reflected within these assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of June 30, 2009 and December 31, 2008.

The summary of the operating results of the discontinued operations are as follows:

Assets and liabilities classified as discontinued operations on deCODE’s condensed consolidated balance sheets are as follows:

13.    Subsequent Events

On July 30, 2009, deCODE’s stockholders approved the increase in deCODE’s number of authorized shares of common stock from 150,000 to 1,150,000 and also approved the amendment of its Amended and Restated Certificate of Incorporation to allow for a reverse stock split at the discretion of deCODE’s Board of Directors.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2009 and for the three and six-month periods ended June 30, 2009 and 2008 should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto set forth in Item 1 of this report.

This quarterly report on Form 10-Q contains forward-looking statements, including our expectations of future industry conditions, strategic plans and forecasts of operational results. Various risks may cause our actual results to differ materially. A list and description of some of the risks and uncertainties is contained below and in the summary of risk factors that follow in Part II, Item 1A.

Overview

Headquartered in Reykjavik, Iceland, deCODE is a biotechnology company developing and marketing products to improve the treatment, diagnosis and prevention of common diseases. deCODE employs its discoveries in human genetics to bring to market DNA-based reference laboratory tests and consumer genome analysis services to assess individual risk of common diseases, and applies its capabilities to the development of drugs in major therapeutic areas. As these diseases are common and there is significant unmet need for both for tools to empower better prevention as well as for more effective therapies, we believe that our strategy represents a significant opportunity to create better models for diagnosis and prevention, leading to improved outcomes with major potential — both near- and longer-term — in the global marketplace.

We believe that our advantage in DNA-based disease risk assessment tests and personal genomics derives from our population approach to human genetics and the ability to apply our discoveries directly to product development. We have comprehensive population resources in Iceland and one of the largest genotyping facilities in the world, enabling our scientists to effectively identify key variations in the sequence of the human genome associated with a major impact on individual risk of common diseases. Well-validated genetic variations conferring risk of disease are the requisite basis for DNA-based reference laboratory tests and personal genome scans that can aid in assessing individual risk of disease, and deCODE is a global leader in the discovery of these genetic risk factors. As virtually all common diseases have both genetic and environmental risk factors, measuring genetic risk is in our view a critical component for the realization of personalized medicine. By providing a more complete understanding of individual risk, such tests can empower better prevention in those conditions in which known lifestyle and environmental risk can be modified, as well as targeted screening and early intervention in major fields such as cardiovascular disease and cancer. Because we have discovered many major genetic risk factors before others, and file for intellectual property on our discoveries, we believe that we are well positioned not only to launch pioneering products but also to create additional value from our discoveries through partnerships and licensing agreements.

In the context of limited financial resources the company’s principal focus continues to be on maximizing near-term value creation. We are pursuing the commercial opportunities coming out of our gene discovery work, applying these discoveries in our diagnostics and deCODEme™ businesses, and for out-licensing agreements such as that we signed in April 2009 with Celera, Inc., under which we granted non-exclusive licenses for our genetic markers for increased risk of several major cardiovascular and metabolic diseases for use in Celera’s risk assessment products and services. At the same time we are seeking to realize revenues from our existing therapeutics programs through partnerships, out-licensing or sales, and are employing our drug discovery capabilities to generate contract service revenue.

At June 30, 2009, we had cash and cash equivalents of $3.8 million, compared to $3.7 million at December 31, 2008. In early 2009 deCODE sold its ARS for approximately $11.3 million in cash, and in April we signed licensing agreements with Celera Corporation (“Celera”) under which we received an upfront payment and will receive royalties on sales of Celera testing products and services incorporating deCODE genetic risk markers. deCODE believes it has sufficient resources to fund operations only into the latter half of the third quarter. We are simultaneously pursuing several options to ensure sufficient funding to take it to the execution of strategic options that can support the near- and longer-term viability of our core business. Regardless, deCODE’s planned operations require immediate additional liquidity substantially in excess of the amounts noted above, raising substantial doubt about deCODE’s ability to continue as a going concern.

In deCODE’s ongoing strategic review, deCODE has been evaluating and pursuing various alternatives aimed at focusing its business and underpinning ongoing product development and commercialization in its core business. One likely component of this effort is the sale of some or all of deCODE’s US medicinal chemistry and structural biology units. Although these units continue to operate and contribute to deCODE, in view of their prospective sale the company has accounted for these businesses as “discontinued operations”. With the exception of combined net loss figures, the operating results are thus all for deCODE’s continuing operations in its core business of employing the Company’s capabilities in gene discovery to advance DNA-based diagnostics, personal genome analysis, intellectual property licensing opportunities, and contract genotyping.

Diagnostics. We are applying our discoveries and unique expertise in human genetics and genotyping to the development of

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reference laboratory DNA-based tests for assessing individual risk of a growing range of common diseases. Since April 2007 we have launched six reference laboratory DNA-based diagnostic tests to detect single-letter variations in the human genome (called SNPs) that we have linked to increased risk of several common diseases:

·              deCODE T2 ™ - which detects SNPs we discovered to be associated with increased risk of type 2 diabetes.

·              deCODE AF™ - which detects SNPSs we discovered to be associated with increased risk of atrial fibrillation and stroke

·              deCODE MI™ - which detects SNPs we discovered to be associated with early-onset heart attack, (myocardial infarction, or MI)

·              deCODE ProstateCancer™ - which detects SNPs we have linked to increased risk of prostate cancer

·              deCODE Glaucoma™ - which detects SNPs we have linked to increased risk of exfoliation glaucoma

·              deCODE BreastCancer™ - which detects SNPs we and others have linked to risk of the most common forms of breast cancer

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

In April 2009, we entered into a non-exclusive outlicensing agreement with Celera.  This agreement gives Celera the right , on a non-exclusive worldwide basis, to use markers deCODE has associated with risk of heart attack, atrial fibrillation/stroke, and type 2 diabetes in Celera’s risk assessment products and services. deCODE is exploring similar opportunities as a pathway to monetizing the value of its gene discoveries as it continues to extend the marketing of its own diagnostic products.

deCODEme™. In November 2007, we launched the first consumer genetic analysis service: deCODEme™. This service takes advantage of deCODE’s leadership in human genetics and the capabilities of its high-throughput genotyping laboratory, which is CLIA registered for analytical and clinical validation. Through deCODEme™, subscribers can put themselves in the context of the latest discoveries in genetics, learning what their own DNA says about their ancestry and certain physical traits, as well as whether they have genetic variants that have been associated with higher or lower than average risk of a range of common diseases. This information is continually updated as new discoveries are made, and is presented in subscribers’ secure individual web pages. Recently, we launched two focused disease scans, deCODEme Cardio™ for cardiovascular-related diseases and deCODEme Cancer™ for several common types of cancer. These scans offer subscribers an opportunity to understand their risk of groups of diseases that may be of particular interest at a more modest price than the full genome scan. deCODEme™ products are offered through a dedicated website, www.decodeme.com.

Drug Discovery and Development . Given our focus on furthering our diagnostic business, we are actively exploring drug development partnerships and out-licensing and sale opportunities in order to realize revenues from our therapeutics programs. Our lead drug development programs include:

·              DG041 for the prevention of arterial thrombosis. DG041 is our novel, first-in-class antagonist of the EP3 receptor for prostaglandins E2. DG041 was developed as a next-generation oral anti-platelet therapy aimed at preventing arterial thrombosis without increasing bleeding risk, and have taken it through successful Phase II clinical studies.

·              DG051 and DG031 for the prevention of heart attack. We have completed Phase I and Phase IIa clinical studies for DG051, our leukotriene A4 hydrolase (LTA4H) inhibitor being developed for the prevention of heart attack.

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

Our product portfolio and development pipeline

Over the course of more than a decade we have also actively studied the genetics and pathology of over 50 different common diseases using our population genetics approach. We have led the world in the discovery of variations in the sequence of the human genome conferring risk of common diseases, and our pioneering DNA-based reference laboratory diagnostic tests and personal genome scans are based upon these discoveries. Over the past several years we have discovered and brought into clinical testing several novel small molecule compounds in major disease areas, compounds we believe have major therapeutic and commercial potential and which we are now seeking to bring forward in clinical development through corporate partnerships or to out-license or sell.

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DNA-based risk-predictive diagnostic tests and consumer genome analysis

Diagnostics represent an important avenue for rapidly pursuing the medical and commercial value of our genetic discoveries, and since the beginning of 2007 we have brought to market six DNA-based reference laboratory tests for measuring individual inherited risk of several common diseases. We also offer a personal genome analysis service, deCODEme™. Because genetic variants linked to disease are by definition markers of disease susceptibility, we can apply the same findings we employ in our drug discovery efforts to the development of DNA-based diagnostic tests. We believe that such tests may be useful as a means for identifying patients who are at a particularly high risk of a given disease, and those who are likely to respond well to drugs that target the same disease pathway.

The key to developing such tests and scans is the ability to identify common SNPs that confer significant risk of common diseases. deCODE is a world leader in gene discovery, based upon a unique set of capabilities and resources the company has assembled in Iceland. These include a genealogy database linking together the entire current-day population of Iceland; detailed genetic and medical information from most of the adult population of Iceland, who are taking part in one or more of our research programs; genetic and medical data from hundreds of thousands of participants from the U.S., Europe and around the world; one of the world’s largest high-throughput genotyping facilities, enabling us to conduct genome-wide association studies utilizing hundreds of thousands of markers across the genomes of many thousands of patients and control subjects in each study; and proprietary bioinformatics and statistical tools to correlate information on disease with specific genetic variations.

By mining these datasets our scientists can effectively trace the genetic components of virtually any common disease, pinpointing key SNPs and genes that confer increased risk. The company’s discoveries are also validated in multiple populations before they are integrated into our tests and scans. Once we have replicated our discoveries in several populations we publish them, a process which enables independent groups to analyze the role of our disease markers in yet more populations around the world and provides additional information we can then use to fold back into and expand the utility of our products.

Key new genetic risk factors for bladder cancer, skin cancer and thyroid cancer, and for lung cancer and nicotine dependence, are elements in the deCODEme Cancer™ scan. New genetic markers for risk of abdominal aortic and intracranial aneurysm and heart attack have been added to the company’s well-established heart attack and atrial fibrillation/stroke markers in the deCODE MI™ test and the deCODEme Cardio™ scan. All of these discoveries, along with others in bone mineral density and osteoporosis, obesity, schizophrenia, essential tremor, and asthma, have provided an unrivalled series of replicated and validated updates for subscribers of deCODEme™.

We believe that DNA-based diagnostic tests are an important new means for improving disease prevention, and that they will be used in tandem with existing approaches to increase the success of prevention efforts. Common diseases occur at the interface of genetics and the environment, as both inherited as well as lifestyle and environmental risk factors play important roles in the disease process. Carrying a genetic risk variant for a common disease does not mean that one will necessarily develop the disease; and not having a certain risk variant does not eliminate all risk of developing the disease. Rather, in the common diseases, genetic risk variants impact the likelihood that one may develop a given condition. Understanding this inherited risk is empowering information with potentially important clinical utility, as it is possible to take preventive action — through lifestyle modification or by taking certain medications — to minimize the likelihood of an inherited predisposition ever developing into a disease. This is similar to the approach that is taken to address other risk factors for common diseases, such as high cholesterol, which is commonly treated using statin drugs to lower the risk of heart disease if dietary change is not enough.

We are actively marketing and working to secure reimbursement for these tests, even as we continue to bring new diagnostic products to market. These products are listed in the table below.

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Other DNA-based risk diagnostic tests currently in development include: melanoma, basal cell cancer, bladder cancer and lung cancer.

Drug Development Programs

deCODE has discovered and brought into clinical development several novel compounds in major disease areas and we are working to realize revenues from these compounds through corporate partnerships and out-licensing sales. Our most advanced programs are listed in the following table. Squares indicate the phases in which at least one clinical trial has been completed.

DG041 . DG041 is being developed as an anti-platelet compound for the prevention of arterial thrombosis. DG041 is a first-in-class small molecule inhibitor of the EP3 receptor for prostaglandin E2, a G-protein coupled receptor (GPCR). It has been demonstrated by in vitro studies that PGE2 may have additive stimulatory effects on platelet aggregation beyond those of other potent agonists such as ADP or thromboxane A2, targeted by clopidogrel and aspirin, respectively.

Structure-based drug design has also been crucial in our DG041 program. The current mainstays of anti-thrombotic therapy are compounds that broadly inhibit platelet activation, with the result that they also cause increased bleeding risk and are therefore problematic for chronic use. In the discovery of DG041, deCODE began with a target — the EP3 receptor for prostaglandins E2 — that the company’s genetics and biology work had identified as a key modulator of arterial thrombosis. And the use of ligand-based drug design and crystallographic modeling of the PGE2 bound to EP3 enabled the discovery of DG041 as a very highly selective inhibitor of EP3.

Based on the results of our clinical studies thus far, DG041 appears to be well-tolerated, showing little difference in bleeding events between dosing arms and placebo, and to potentially offer focused means of preventing the formation of thrombi by specifically inhibiting platelet aggregation mediated by EP3. In the first half of 2008, we completed a second clinical pharmacology study examining the impact of DG041 on top of aspirin and Plavix TM , the results of which show that DG041 blocks platelet aggregation and does not increase bleeding time when given alone, with Plavix TM , or with Plavix™ and aspirin.