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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to ___________
Commission file number: 000-24207
ABGENIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3248826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7601 DUMBARTON CIRCLE
FREMONT, CALIFORNIA 94555
(Address of principal executive offices)
TELEPHONE NUMBER (510) 608-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X ] No [ ]
As of November 1, 1998 there were 11,082,506 shares of the Registrant's Common
Stock outstanding.
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<PAGE>
ABGENIX, INC.
FORM 10-Q
INDEX
Cover Page
Index
PART I - Financial Information
Item 1 - Financial Statements
Condensed Balance Sheets - September 30, 1998,
and December 31, 1997
Condensed Statements of Operations - Three and nine months ended
September 30, 1998 and 1997
Condensed Statements of Cash Flows - Nine months ended
September 30, 1998 and 1997
Notes to Condensed Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - Other Information
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
ABGENIX, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Unaudited) (Note 1)
Current assets:
Cash and cash equivalents ......................... $2,283 $4,617
Short-term investments ............................ 22,290 10,704
Prepaid expenses and other current assets ......... 370 550
------------ ------------
Total current assets .............................. 24,943 15,871
Property and equipment, net ......................... 5,418 5,776
Deposits and other assets ........................... 420 437
------------ ------------
$30,781 $22,084
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Short-term payable to affiliate ................... $34 $212
Payable to Xenotech for cross-license
and settlement obligation ....................... 3,750 3,750
Accounts payable .................................. 474 426
Accrued stock issuance costs ...................... -- 1,200
Other accrued liabilities ......................... 1,135 2,000
Current portion of long-term debt ................. 1,694 1,646
------------ ------------
Total current liabilities ......................... 7,087 9,234
Long-term debt ...................................... 2,710 3,979
Commitments
Redeemable convertible preferred stock,
$0.0001 par value; 20,000,000 shares
authorized, 0 and 7,263,209 shares
issued and outstanding at September 30,
1998 and December 31, 1997, at amount
paid in; aggregate redemption and
liquidation value of approximately $45,003
at December 31, 1997............................ -- 31,189
Redeemable convertible preferred stock
subscription receivable ......................... -- (2,737)
Redeemable convertible preferred
stock issuable .................................. -- 2,737
Stockholders' equity (net capital deficiency):
Common stock, $0.0001 par value; 50,000,000
shares authorized, 11,054,431 and 233,542
shares issued and outstanding at September
30, 1998 and December 31, 1997,
respectively; at amount paid in ................. 55,506 351
Contributions from parent ......................... 29,277 29,277
Additional paid-in capital ........................ 2,296 1,776
Deferred compensation ............................. (1,320) (1,248)
Accumulated deficit ............................... (64,775) (52,474)
------------ ------------
Total stockholders' equity (net capital deficiency) 20,984 (22,318)
------------ ------------
$30,781 $22,084
============ ============
</TABLE>
See accompanying notes.
<PAGE>
ABGENIX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Revenues:
Revenue under collaborative
agreements from related parties
(net of equity in losses of
Xenotech of $210 and $343 for the
three months ended September 30,
1998 and 1997 and $520 and $990 for
the nine months ended September 30,
1998 and 1997, respectively) ..... $212 $345 $710 $1,109
Contract revenue ................. 175 -- 1,298 0
--------- --------- --------- -----------
Total revenues ..................... 387 345 2,008 1,109
--------- --------- --------- -----------
Operating expenses:
Research and development ......... 3,120 3,726 11,976 8,787
General and administrative ....... 782 692 2,562 1,966
Charge for cross-license and
settlement-amount allocated
from Cell Genesys .............. -- -- -- 11,250
Equity in losses from the
Xenotech joint venture (charge
for cross-license and
settlement) .................... -- 3,750 -- 7,500
--------- --------- --------- -----------
Total operating expenses ........... 3,902 8,168 14,538 29,503
--------- --------- --------- -----------
Operating loss ..................... (3,515) (7,823) (12,530) (28,394)
Other income and expenses:
Interest income .................. 328 61 657 274
Interest expense ................. (118) (217) (428) (480)
--------- --------- --------- -----------
Net loss ........................... ($3,305) ($7,979) ($12,301) ($28,600)
========= ========= ========= ===========
Basic and diluted net loss per share ($0.31) ($383.88) ($3.27) ($2,576.11)
========= ========= ========= ===========
Shares used in computing basic and
diluted net loss per share ...... 10,716 21 3,767 11
========= ========= ========= ===========
</TABLE>
(See accompanying notes.)
<PAGE>
ABGENIX, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ................................................. ($12,301) ($28,600)
Adjustments to reconcile net loss to net cash used by
operating activities:
Equity in losses of Xenotech (including the charge
for cross-license and settlement) ............... 520 4,740
Depreciation and amortization ....................... 1,347 613
Charge for cross-license and settlement ............. -- 11,250
Changes in certain assets and liabilities:
Prepaid expenses and other current assets ....... 180 (814)
Deposits and other assets ....................... (100) (100)
Short-term payable to parent .................... (178) (2,429)
Payable to Xenotech for cross-license and
settlement obligation.......................... -- 3,750
Accounts payable ................................ 49 796
Deferred revenue from related parties ........... -- (376)
Accrued stock issuance costs .................... (1,200) --
Other accrued liabilities ....................... (866) (677)
--------- ---------
Net cash used in operating activities .................... (12,549) (11,847)
--------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments ...................... (26,148) (4,979)
Sales of short-term investments at maturity .............. 14,562 7,961
Capital expenditures ..................................... (528) (2,613)
Contributions to Xenotech ................................ (417) (935)
--------- ---------
Net cash used in investing activities ...... (12,531) (566)
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuances of redeemable convertible
preferred stock ..................................... 3,936 --
Proceeds from long-term debt ............................. -- 8,495
Payments under long-term debt ............................ (1,221) (333)
Proceeds from issuance of common stock ................... 20,031 13
--------- ---------
Net cash provided by financing activities ................ 22,746 8,175
--------- ---------
Net increase (decrease) in cash and cash equivalents ..... (2,334) (4,238)
Cash and cash equivalents at the beginning of the period . 4,617 7,190
--------- ---------
Cash and cash equivalents at the end of the period ....... $2,283 $2,952
========= =========
</TABLE>
See accompanying notes.
<PAGE>
ABGENIX, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
1. BASIS OF PRESENTATION
The unaudited condensed financial statements of Abgenix, Inc.
(the "Company" or "Abgenix") included herein has been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information or footnote disclosure
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the Company,
the accompanying unaudited condensed financial statements contain all
adjustments, consisting only of normal recurring adjustments, necessary
to present fairly the financial information included therein. While the
Company believes that the disclosures are adequate to make the
information not misleading, it is suggested that these financial
statements be read in conjunction with the audited financial statements
for the year ended December 31, 1997 and accompanying notes included in
the Company's Prospectus dated July 2, 1998 filed as part of a
Registration Statement on Form S-1 (Reg. No. 333-49415), as amended.
The results of operations for the quarter ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full
year.
Reclassification
Certain 1997 balances have been reclassified to conform to the
1998 presentation.
2. NET LOSS PER SHARE
In 1997, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standard No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share is
computed using the weighted average number of common shares outstanding
and excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Potentially
dilutive securities have been excluded from the computation of net loss
per share for the periods presented as their effect is antidilutive.
Pro forma net loss per share has been computed to give effect
to the automatic conversion of redeemable convertible preferred stock
into common stock upon completion of the Company's initial public
offering (using the as-if-converted method) from the original date of
issuance.
A reconciliation of shares used in calculation of basic and
diluted and pro forma net loss per share follows (in thousands except
per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net loss ...................... ($3,305) ($7,979) ($12,301) ($28,600)
========== ========== ========== ===========
Basic:
Weighted-average shares of
common stock outstanding
used in computing basic
and diluted net loss
per share .......... 10,716 21 3,767 11
========== ========== ========== ===========
Basic net loss per share ...... ($0.31) ($383.88) ($3.27) ($2,576.11)
========== ========== ========== ===========
Pro forma:
Shares used in computing
basic net loss per share
(from above) ............. 10,716 21 3,767 11
Adjusted to reflect the
effect of the assumed
conversion of preferred
stock from the date of
issuance ................. 171 3,750 5,280 3,750
---------- ---------- ---------- -----------
Weighted-average shares
used in computing pro
forma net loss per share . 10,886 3,771 9,047 3,761
========== ========== ========== ===========
Pro forma net loss per share .. ($0.30) ($2.12) ($1.36) ($7.60)
========== ========== ========== ===========
</TABLE>
Diluted net loss per share has not been presented separately
as, due to the Company's net loss position, it is antidilutive.
3. COLLABORATION AGREEMENT WITH XENOTECH
In 1991, Cell Genesys, Inc. and JT America, Inc. formed
Xenotech, L.P. ("Xenotech") to develop genetically modified strains of
mice which can produce human monoclonal antibodies and to commercialize
products generated from these mice. Upon the creation of Abgenix, Cell
Genesys, Inc.'s rights in the joint venture were assigned to the
Company. Xenotech funds its research, which is generally conducted by
Abgenix, through capital contributions from the partners. The Company
paid and expensed as research and development $0, $45,000, $195,000 and
$45,000 related to licensing the rights to this technology from
Xenotech for the three months ended September 30, 1998 and 1997 and the
nine months ended September 30, 1998 and 1997,respectively.
The Company is obligated to pay 50% of all Xenotech's funding
requirements. The Company accounts for its investment in Xenotech under
the equity method; 50% of Xenotech's net loss up to the Company's
investment amount. Details are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Abgenix's share of
Xenotech losses ............. $208 $4,221 $520 $8,315
Losses associated with
cross-license and settlement. -- (3,750) -- (7,500)
Unabsorbed losses ............. 2 -- -- --
Difference due to timing and
change in deferred revenue .. -- (128) -- 175
---------- ---------- ---------- -----------
Equity in losses of Xenotech .. $210 $343 $520 $990
========== ========== ========== ===========
</TABLE>
The Company recognized revenue of $212,000, $345,000, $710,000
and $1,109,000 for the three months ended September 30, 1998 and 1997
and the nine months ended September 30, 1998 and 1997, respectively,
net of its own payments to the joint venture related to this revenue.
Summary unaudited financial information for Xenotech is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Research and license revenues
from partners ............... $ -- $47 $310 $72
Expenses:
Research and development .... 415 981 1,273 1,648
General and administrative .. 1 12 77 64
Cross-license and settlement
expense ................... -- 7,500 -- 15,000
---------- ---------- ---------- -----------
Total expenses ................ 416 8,493 1,350 16,712
Interest income ............... -- 3 -- 9
---------- ---------- ---------- -----------
Net loss ...................... ($416) ($8,443) ($1,040) ($16,631)
========== ========== ========== ===========
</TABLE>
4. Stockholders' Equity
In July 1998, the Company completed its initial public offering
and issued 2,500,000 shares of its common stock to the public at a
3price of $8.00 per share. The Company received cash of $18.6 million,
after deducting underwriting discounts and commissions and before
deducting expenses payable by the Company. Upon the closing of the
initial public offering, each outstanding share of the Company's then
outstanding convertible redeemable preferred stock was automatically
converted into one share of common stock. On July 27, 1998 the
Company's underwriters exercised an option to purchase an additional
375,000 shares of common stock at a price of $8.00 per share to cover
over-allotments. The Company received cash of approximately $2.8
million, net of underwriting discounts and commissions.
5. SUBSEQUENT EVENT
In October 1998, Abgenix established its second research
collaboration with Millennium BioTherapeutics, Inc. ("Millennium
BioTherapeutics")in which Millennium BioTherapeutics will make payments
to the Company for performance of research activities. In addition, the
agreement provides Millennium BioTherapeutics with an option, for a
limited time, to enter into a research license and option agreement
that provides Millennium BioTherapeutics with an option to obtain a
license to develop, make, use and sell antibody products derived from
the research collaboration. If the option is exercised, the research
license and option agreement may provide Abgenix with up to
approximately $7.5 million in license fees and milestone payments to be
made in the future upon completion of certain milestones, including
completion of research, clinical trials and the receipt of regulatory
approvals. Additionally, if a product receives marketing approval from
the FDA or equivalent foreign agency, the Company is entitled to
receive royalties on future product sales by Millennium
BioTherapeutics.
Also, in October 1998, Pfizer has exercised its option to expand its
research collaboration with the Company to include a second undisclosed
antigen target in the field of cancer and has an option for a third
antigen target. After the exercise of an option by Pfizer, the Company
could receive potential license fees and milestone payments of up to
approximately $8.0 million per antigen upon the completion of certain
milestones, including preclinical and clinical trials and receipt of
regulatory approval. Additionally, if a product receives marketing
approval from the FDA or an equivalent foreign agency, the Company is
entitled to receive royalties on future product sales by Pfizer.
Pfizer will be responsible for manufacturing, product development and
marketing of any products developed through this collaboration.
ABGENIX, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements include the statements in paragraph two under
"Overview", as amended, regarding the Company's commercialization
strategy, the statements in paragraph four under "Overview" regarding
future revenues from current and potential future collaborative
arrangements, the statements in paragraph five under "Overview"
regarding the expectation and fluctuation of operating losses in future
periods, the statements in paragraph eight and paragraph nine under
"Results of Operations" regarding future increases in research and
development and general and administrative expenses, respectively, the
statements in paragraph four under "Liquidity and Capital Resources"
regarding the Company's use of available resources during future
periods, the statements in paragraph five under "Liquidity and Capital
Resources" regarding the sufficiency of the Company's available
resources to meet working capital and capital expenditure requirements,
the statements under "Year 2000" regarding the impact of computer
system failures on the Company's business and the statements below
under "Additional Factors Affecting Future Operating Results", among
others. These forward-looking statements are based on current
expectations and entail various risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Such risks and uncertainties are set forth
in this Management's Discussion and Analysis of Financial Condition and
Results of Operations and below under "Additional Factors Affecting
Future Operating Results".
OVERVIEW
The business and operations of Abgenix commenced in 1989 and
were initially conducted within Cell Genesys, Inc. ("Cell Genesys"). On
June 24, 1996, Abgenix was incorporated and subsequently on July 15,
1996 was organized pursuant to a Stock Purchase and Transfer Agreement
between the Company and Cell Genesys. The agreement set forth the terms
and conditions for the transfer of the antibody business unit within
Cell Genesys to Abgenix.
Abgenix develops and intends to commercialize antibody
therapeutic products for the prevention and treatment of a variety of
disease conditions, including transplant-related diseases, inflammatory
and autoimmune disorders, and cancer. The Company has developed
XenoMouse technology; a proprietary technology that it believes enables
it to quickly generate high affinity, fully human antibody product
candidates to essentially any disease target appropriate for antibody
therapy. Abgenix intends to use its XenoMouse technology to build and
commercialize a large and diversified product portfolio through the
establishment of corporate collaborations and internal product
development programs. The Company has established collaborative
arrangements with Pfizer Inc. ("Pfizer"), Schering-Plough Research
Institute ("Schering-Plough"), Genentech, Inc. ("Genentech") and
Millennium BioTherapeutics, Inc. ("Millennium BioTherapeutics"). In
certain instances, the Company intends to commercialize select products
on its own in niche markets such as Graft Versus Host Disease ("GVHD").
In addition, the Company has four proprietary antibody product
candidates that are under development internally, two of which are in
human clinical trials.
In 1991, Cell Genesys and JT America, Inc. ("JT America")
formed Xenotech, L.P. ("Xenotech"), an equally owned joint venture, to
develop genetically modified strains of mice which can produce human
monoclonal antibodies and to commercialize products generated from
these mice. Upon the organization of Abgenix, Cell Genesys assigned its
rights in Xenotech to Abgenix. Xenotech funds its research and
development activities through capital contributions from the Company
and JT America and the Company is obligated to fund 50% of all Xenotech
expenses. Pursuant to contractual arrangements, the Company performs
research for the joint venture and receives payments for such research.
The Company accounts for its investment in Xenotech under the equity
method of accounting.
The Company expects that substantially all of its revenues for
the foreseeable future will result from payments under collaborative
arrangements, including fees upon signing, reimbursement for research
and development and milestone payments. The Company has established
collaborative arrangements with Pfizer, Schering-Plough, Genentech and
Millennium BioTherapeutics.
Pursuant to the Company's research collaboration with Pfizer,
Pfizer may make additional payments to the Company upon completion of
certain research milestones. Pfizer has exercised its option to expand
the research collaboration to include a second undisclosed antigen
target in the field of cancer and has an option for one additional
antigen target. After the exercise of an option by Pfizer, the Company
could receive potential license fees and milestone payments of up to
approximately $8.0 million per antigen target upon the completion of
certain milestones. Additionally, if a product receives marketing
approval from the United States Food and Drug Administration ("FDA") or
an equivalent foreign agency, the Company is entitled to receive
royalties on future product sales by Pfizer.
Pursuant to the Company's research collaboration with Schering-
Plough, Schering-Plough will be obligated to make additional payments
to the Company upon completion of the research. In addition, the
agreement provides Schering-Plough with an option, for a limited time,
to enter into a research, option and license agreement. If the option
is exercised, the research, option and license agreement may provide
the Company with up to approximately $8.0 million in additional
research fees and milestone payments upon the completion of certain
milestones. Additionally, if a product receives marketing approval from
the FDA or an equivalent foreign agency, the Company is entitled to
receive royalties on future product sales by Schering-Plough.
Pursuant to the Company's research collaboration with Genentech,
Genentech is obligated to make payments to the Company for performance
of research activities. In addition, the agreement provides Genentech
with options, for a limited time, to enter into product license
agreements with respect to each of two antigens. If an option is
exercised, a product license agreement may provide Abgenix with up to
approximately $5.5 million per antigen target in license fees and
milestone payments to be made upon completion of certain milestones.
Additionally, if a product receives marketing approval from the FDA or
an equivalent foreign agency, the Company is entitled to receive
royalties on future product sales by Genentech.
Pursuant to the Company's research collaboration with Millennium
BioTherapeutics entered into in July 1998, Millennium BioTherapeutics
will make payments to the Company for performance of research
activities. In addition, the agreement provides Millennium
BioTherapeutics with an option, for a limited time, to enter into a
research license and option agreement that provides Millennium
BioTherapeutics with an option to obtain a license to develop, make,
use and sell antibody products derived from the research collaboration.
If the option is exercised, the research license and option agreement
may provide Abgenix with up to approximately $7.5 million in license
fees and milestone payments to be made in the future upon completion of
certain milestones, including completion of research, clinical trials
and the receipt of regulatory approvals. Additionally, if a product
receives marketing approval from the FDA or equivalent foreign agency,
the Company is entitled to receive royalties on future product sales by
Millennium BioTherapeutics. Payments under these collaborative
arrangements will be subject to significant fluctuation in both timing
and amount and therefore the Company's revenues and results of
operations for any period may not be comparable to the revenues or
results of operations for any other period. To date, all of the
Company's revenues have resulted primarily from research and
development funding and milestone payments and may not be indicative of
the Company's future performance or the ability of the Company to
continue to achieve such milestones.
Since inception, the Company has funded its research and
development activities primarily through contributions from Cell
Genesys, revenues from collaborative arrangements, private placements
of preferred stock, equipment leaseline financings and loan facilities
and most recently through an initial public offering in July 1998
yielding $21.4 million, net of underwriting fees. The Company has
incurred operating losses in each of the last three years of operation,
including net losses of approximately $8.3 million, $7.1 million, $35.9
million and $12.3 million in the years ended December 31, 1995, 1996
and 1997 and the nine months ended September 30, 1998, respectively,
and as of September 30, 1998, had an accumulated deficit of
approximately $64.8 million. The Company's losses have resulted
principally from costs incurred in performing research and development
to develop its XenoMouse technology and subsequent antibody product
candidates, from the non-recurring cross-license and settlement charge
(described below) and from general and administrative costs associated
with the Company's operations. The Company expects to incur additional
operating losses until at least the year 2000 as a result of its
expenditures for research and product development, including costs
associated with conducting preclinical testing and clinical trials. The
Company expects the amount of such losses will fluctuate significantly
from quarter to quarter as a result of increases or decreases in the
Company's research and development efforts, the execution or
termination of collaborative arrangements, or the initiation, success
or failure of clinical trials.
In 1994, Cell Genesys and GenPharm International, Inc., a
subsidiary of Medarex, Inc. ("GenPharm"), and, beginning in 1996,
Abgenix became involved in litigation primarily related to intellectual
property rights associated with a method for inactivating a mouse's
antibody genes and technology pertaining to transgenic mice capable of
producing human antibodies. Rather than endure the cost and business
interruption of protracted litigation, on March 27, 1997, Cell Genesys
announced, along with Abgenix, Xenotech and Japan Tobacco, that it had
signed a comprehensive patent cross-license and settlement agreement
with GenPharm that resolved all related litigation and claims between
the parties. Under the cross-license and settlement agreement, the
Company has licensed on a non-exclusive basis certain patents, patent
applications, third party licenses and inventions pertaining to the
development and use of certain transgenic rodents including mice that
produce fully human antibodies. The Company uses its XenoMouse
technology to generate fully human antibody products and has not
licensed the use of, and does not use, any transgenic rodents developed
or used by GenPharm. As initial consideration for the cross-license and
settlement agreement, Cell Genesys issued a note to GenPharm due
September 30, 1998 for $15.0 million payable by Cell Genesys and
convertible into shares of Cell Genesys common stock. Of this note,
approximately $3.8 million satisfied certain of Xenotech's obligations
under the agreement. Japan Tobacco also made an initial payment. During
1997, two patent milestones were achieved and Xenotech was obligated to
pay $7.5 million for each milestone. Xenotech paid $7.5 million to
satisfy the first milestone and has recorded a payable to GenPharm for
the remaining $7.5 million. The Company has recorded a liability of
approximately $3.8 million in its balance sheet representing its share
of the Xenotech obligation. The payable is due in November 1998. No
additional payments will accrue under this agreement. The Company has
recognized, as a non-recurring charge for cross-license and settlement,
a total of $22.5 million. The Company concluded that the cost of the
cross-license and settlement agreement was properly expensed under
Statement of Financial Accounting Standards No. 2, "Accounting for
Research and Development Costs" because the cross-license received by
the Company from GenPharm is non-exclusive and has no alternative
future uses for the Company. The Company does not have any future
financial obligations under the cross-license and settlement agreement.
In connection with the grant of stock options since the
Company's organization on July 15, 1996, the Company has recorded
aggregate deferred compensation of approximately $2.3 million through
September 30, 1998, representing the difference between the deemed fair
value of the common stock for accounting purposes and the option
exercise price at the date of grant. These amounts are presented as a
reduction of stockholders' equity and are amortized ratably over the
vesting period of the applicable options, generally four years. These
valuations resulted in charges to operations of $528,000 and $448,000
in the year ended December 31, 1997 and the nine months ended September
30, 1998, respectively.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Revenue under collaborative agreements from related parties
consists of revenue derived principally from performing research for
Xenotech. See "Nine Months Ended September 30, 1998 and 1997." Revenues
from Xenotech decreased from $345,000 in the three months ended
September 30, 1997 to $212,000 in the three months ended September 30,
1998. Revenues from Xenotech decreased because Xenotech's research
related to developing the genetically modified mice was essentially
completed during 1996.
Contract revenue of $175,000 in the three months ended
September 30, 1998 consisted of fees paid for the achievement of
research milestones under collaborative agreements.
Research and development expenses consist primarily of
compensation and other expenses related to research and development
personnel, costs associated with preclinical testing and planned
clinical trials of the Company's product candidates and facilities
expenses. Research and development expenses decreased from $3.7 million
in the three months ended September 30, 1997 to $3.1 million in the
three months ended September 30, 1998. The decrease in research and
development expenses reflected decreased expenses primarily for the
manufacture of antibody products in connection with the preparation for
and the initiation of clinical trials of ABX-CBL and ABX-IL8.
General and administrative expenses include compensation and
other expenses related to finance and administrative personnel,
professional services expenses and facilities expenses. General and
administrative expenses increased from $692,000 in the three months
ended September 30, 1997 to $782,000 in the three months ended
September 30, 1998. The increase in general and administrative
expenses reflected the hiring of two additional finance and
administration employees and increased financing activity, primarily
related to the Company's initial public offering.
Other income and expenses consist of interest income from cash,
cash equivalents and short-term investments and interest expense
incurred in connection with equipment lease line financing and loan
facilities maintained by the Company. Interest income increased due to
higher average balances of short-term investments and interest expense
declined due to lower average balances of debt.
Nine Months Ended September 30, 1998 and 1997
Revenue under collaborative agreements from related parties
consists of revenue derived principally from performing research for
Xenotech. Revenues from the Xenotech joint venture are recognized when
earned, net of the Company's cash contributions to Xenotech, under the
terms of the related agreements. Research and development funding
received in advance under these agreements is recorded as deferred
revenue. Revenues from the achievement of milestone events are
recognized when the milestones have been achieved. Revenues from
Xenotech decreased from $1.1 million in the nine months ended September
30, 1997 to $0.7 million in the nine months ended September 30, 1998.
Revenues from Xenotech decreased because Xenotech's research related to
developing the genetically modified mice was essentially completed
during 1996.
Contract revenues of $1.3 million in the nine months ended
September 30, 1998 consisted principally of non-refundable signing fees
paid in connection with the execution of collaborative agreements and
fees paid for the achievement of research milestones under existing
collaborative agreements.
Research and development expenses consist primarily of
compensation and other expenses related to research and development
personnel, costs associated with preclinical testing and planned
clinical trials of the Company's product candidates and facilities
expenses. Research and development expenses increased from $8.8
million in the nine months ended September 30, 1997 to $12.0 million in
the nine months ended September 30, 1998. The increase in research and
development expenses reflected increased expenses primarily for the
manufacture of antibody products in connection with the preparation for
and the initiation of clinical trials of two of the Company's antibody
product candidates under development, ABX-CBL and ABX-IL8, in addition
to the expenses of conducting these trials. The Company anticipates
that research and development expenses will increase in future periods
as it expands research and development efforts and clinical trials.
General and administrative expenses include compensation and
other expenses related to finance and administrative personnel,
professional services expenses and facilities expenses. General and
administrative expenses increased from $2.0 million in the nine months
ended September 30, 1997 to $2.6 million in the nine months ended
September 30, 1998. The increase in general and administrative expenses
reflected the hiring of four finance personnel to take over the
administrative functions formerly performed for the Company by Cell
Genesys and increased financing activity, primarily related to the
Company's initial public offering. The Company anticipates that general
and administrative expenses will increase in the future as additional
personnel are added to support the Company's operations.
The aggregate nonrecurring charge for cross-license and
settlement of $18.8 million in the nine months ended September 30, 1997
relates to the initial payment of $15.0 million and one additional $3.8
million payment under the comprehensive patent cross-license and
settlement agreement. The Company recorded the initial settlement
amount of $15.0 million in March 1997 and the additional $3.8 million
payment in September 1997. The remaining $3.8 million was recorded in
December 1997. See "Overview".
Other income and expenses consist of interest income from cash,
cash equivalents and short-term investments and interest expense
incurred in connection with equipment leaseline financing and loan
facilities maintained by the Company. Interest income increased due to
higher average balances of short-term investments and interest expense
declined due to lower average balances of debt.
LIQUIDITY AND CAPITAL RESOURCES
Since formation, the Company has financed its operations
primarily through capital contributions by, and borrowings from Cell
Genesys, revenue from collaborative arrangements, private placements of
preferred stock, equipment leaseline financings and loan facilities and
an initial public offering of its common stock. Through September 30,
1998, the Company has received net cash of $77.1 million from financing
activities, consisting principally of approximately $14.3 million from
contributions by Cell Genesys, $31.1 million from private placements of
Preferred Stock, $4.3 million from construction financing, $2.0 million
in lease financing, $4.0 million borrowed from Cell Genesys and
converted to Preferred Stock and $21.4 million from the Company's
initial public offering in July 1998. Cell Genesys is not obligated to
provide any future funding to the Company.
The Company's net cash used in operating activities was $12.5
million and $11.8 million for the nine months ended September 30, 1998
and 1997, respectively. The cash used for operations was primarily to
fund research and development expenses and manufacturing costs related
to the development of new products.
As of September 30, 1998, the Company had cash, cash
equivalents and short-term investments of $24.6 million. The Company
has an agreement with a financing company under which the Company has
financed purchases of about $2.0 million of its laboratory and office
equipment. The lease term is 48 months and bears interest at rates
ranging from 12.5% to 13.0%, which are based on the change in the five
year U.S. Treasury rate. The Company also has a construction financing
line with a bank in the amount of $4.3 million that was used to finance
construction of leasehold improvements at its current facility. The
line matures in January 2001, bears interest at a rate of prime plus
one percent (9.25% at September 30, 1998). As of September 30, 1998, no
further borrowings were available under the construction financing
line.
Over the next 15 months, the Company intends to use the net
proceeds of its initial public offering, together with the Company's
previous cash balances, cash equivalents, short term investments and
cash generated from collaborative arrangements as follows: (i)
approximately $24.0 million for research and development, including the
performance of preclinical and clinical trials; and (ii) approximately
$3.75 million for the final cross-license and settlement payment
reflected as a short-term payable to related party on the Company's
balance sheet as of September 30, 1998. The balance of the net proceeds
from the initial public offering, together with the Company's previous
cash balances, cash equivalents, short term investments and cash
generated from collaborative arrangements will be used for working
capital and for other general corporate purposes over such 15 month
period and thereafter. The amounts actually expended for each purpose
and the timing of such expenditures may vary significantly depending
upon numerous factors, including the results of clinical trials and
preclinical testing, the achievement of milestones under collaborative
arrangements, the ability of the Company to maintain existing and
establish additional collaborative arrangements, the timing and outcome
of regulatory actions regarding the Company's potential products, the
costs and timing of expansion of marketing, sales and manufacturing
activities, the costs involved in preparing, filing, protecting,
maintaining and enforcing patent claims and other intellectual property
rights and competing technological and market developments. Pending the
foregoing uses, the Company has invested the net proceeds of the
initial public offering in short-term, interest-bearing, investment
grade securities.
The Company plans to continue to expend substantial resources
for the expansion of research and development, including costs
associated with conducting preclinical testing and clinical trials. The
Company may be required to expend greater-than-anticipated funds if
unforeseen difficulties arise in the course of completing required
additional development of product candidates, manufacturing of product
candidates, performing preclinical testing and clinical trials of such
product candidates, obtaining necessary regulatory approvals or other
aspects of the Company's business. The Company's future liquidity and
capital requirements will depend on many factors, including continued
scientific progress in its research and development programs, the size
and complexity of these programs, the scope and results of preclinical
testing and clinical trials, the time and expense involved in obtaining
regulatory approvals, if any, competing technological and market
developments, the establishment of further collaborative arrangements,
if any, the time and expense of filing and prosecuting patent
applications and enforcing patent claims, the cost of establishing
manufacturing capabilities, conducting commercialization activities and
arrangements, product in-licensing and other factors not within the
Company's control. Although the Company believes that the proceeds from
the initial public offering, together with the Company's previous cash
balances, cash equivalents, short-term investments and cash generated
from collaborative arrangements will be sufficient to meet the
Company's operating and capital requirements through 1999, there can be
no assurance that the Company will not require additional financing
within this timeframe. The Company may be required to raise additional
funds through public or private financing, collaborative relationships
or other arrangements. There can be no assurance that such additional
funding, if needed, will be available on terms attractive to the
Company, if at all. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to
raise additional funds, may require the Company to relinquish its
rights to certain of its technologies, products or marketing
territories. The failure of the Company to raise capital when needed
could have a material adverse effect on the Company's business,
financial condition and results of operations.
As of December 31, 1997, the Company had federal net operating
loss carryforwards of approximately $15.4 million. The Company's net
operating loss carryforwards exclude losses incurred prior to the
organization of Abgenix in July 1996. Further, the amounts associated
with the cross-license and settlement have been expensed for financial
statement accounting purposes and have been capitalized and amortized
over a period of approximately fifteen years for tax purposes. The net
operating loss and credit carryforwards will expire in the years 2011
through 2012, if not utilized. Utilization of the net operating losses
and credits may be subject to a substantial annual limitation due to
the "change in ownership" provisions of the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in
the expiration of net operating losses and credits before utilization.
YEAR 2000
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable
year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to receive
supplies from our venders, or operate our accounting systems covering
the general ledger, options and payroll.
The Company's plan to resolve the Year 2000 Issue is based on a
recently completed assessment of its exposure. All of the Company's
time-sensitive software is widely used and purchased from major
vendors, all of whom have announced that their software is either
currently Year 2000 compliant or will be made so with upgrades before
the end of 1999. The Company has already purchased the Year 2000-
compliant upgrade of its accounting system. The Company will be
testing each of its 60 personal computers over the next three months
and will replace the BIOS of those that are non-compliant. In
addition, the Company will be gathering information about the Year 2000
compliance status of its significant suppliers. None of the Company's
systems interface with third parties.
Upgrading the accounting system was already planned in order to
acquire the benefits of its improved features, and was not accelerated
by Year 2000 issues. The replacement of the BIOS of personal
computers, if needed, will be done by current employees, and the cost
will not be material, even if all computers are affected.
Management of the Company believes it has an effective program
in place to resolve the Year 2000 issue in a timely manner. However,
should our software vendors be wrong about the Year 2000 compliance of
their products, or our suppliers' operations be disrupted by the Year
2000 issue, then the Company's ability to serve its customers and
develop its products may be materially and adversely impacted. The
Company's contingency plans for minimizing the impact include
increasing inventories, establishing accounts with alternative vendors,
and temporarily employing manual accounting systems until alternative
systems can be installed.
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS
Since Abgenix became a public company in July 1998, included
here are risk factors as updated from the Company's Prospectus dated
July 2, 1998, as amended. The following factors represent current
challenges to the Company which create risk and uncertainty. Failure to
adequately overcome any of the following challenges, either singularly
or in combination, could have a material adverse effect on the
Company's results of operations, business, or financial position.
UNCERTAINTY ASSOCIATED WITH XENOMOUSE TECHNOLOGY
The Company's XenoMouse technology is a new approach to the
generation and development of antibody therapeutic products. To date,
the Company has not commercialized any antibody products based on its
XenoMouse technology. In addition, the Company is not aware of any
commercialized antibody therapeutic product that has been generated or
developed from any transgenic technologies. Current antibody product
candidates based on, utilizing or derived from XenoMouse technology are
at a very early stage of development. To date, the Company has begun
clinical trials with respect to only one such antibody product
candidate. While to date XenoMouse technology has been able to generate
antibodies against the antigens to which it had been exposed, there can
be no assurance that it will be able to do so with respect to all
future antigens. Failure of the Company's XenoMouse technology to
generate antibody product candidates that lead to the successful
development and commercialization of products would have a material
adverse effect on the Company's business, financial condition and
results of operations. Although the Company believes that its XenoMouse
technology offers certain advantages, there can be no assurance that
these advantages will be realized or, if realized, that XenoMouse
technology will result in any meaningful benefits to current or
potential collaborative partners or patients. There can be no assurance
that the Company's XenoMouse technology will enable the Company or any
of its collaborative partners to identify, generate, develop or
commercialize antibody therapeutic products or product candidates in an
efficient and timely manner, if at all.
EARLY STAGE OF DEVELOPMENT; HISTORY OF LOSSES AND UNCERTAINTY OF FUTURE
PROFITABILITY
The Company is at an early stage of development and must be
evaluated in light of the uncertainties and complexities present in an
early stage biopharmaceutical company. The product candidates under
development by the Company are in the research or preclinical
development stage or are in the early stage of clinical trials.
Significant investment in additional research and development,
preclinical and clinical testing, regulatory and sales and marketing
activities will be necessary in order for the Company to commercialize
its current and any future product candidates. There can be no
assurance that the Company's product candidates under development will
be successfully developed or that such product candidates, if
successfully developed, will generate sufficient or sustainable
revenues to enable the Company to be profitable.
Since inception, the Company has funded its research and
development activities primarily through contributions from Cell
Genesys, revenues from collaborative arrangements, private placements
of preferred stock, equipment leaseline financings and loan facilities
and most recently through an initial public offering in July 1998
yielding $21.4 million, net of underwriting fees. The Company has
incurred net losses in each of the last three years of operation,
including net losses of approximately $8.3 million, $7.1 million, $35.9
million and $12.3 million in the years ended December 31, 1995, 1996
and 1997 and the nine months ended September 30, 1998, respectively,
and as of September 30, 1998, had an accumulated deficit of
approximately $64.8 million. The Company's losses have resulted
principally from costs incurred in performing research and development
to develop its XenoMouse technology and subsequent antibody product
candidates, from the non-recurring cross-license and settlement charge
and from general and administrative costs associated with the Company's
operations. The Company expects to incur additional operating losses
until at least the year 2000 as a result of increases in its
expenditures for research and product development, including costs
associated with conducting preclinical testing and clinical trials. The
Company expects that the amount of such losses will fluctuate
significantly from quarter to quarter as a result of increases or
decreases in the Company's research and development efforts, the
execution or termination of collaborative arrangements, or the
initiation, success or failure of clinical trials.
The Company expects that substantially all of its revenues for
the foreseeable future will result from payments under collaborative
arrangements, including fees upon signing, reimbursement for research
and development and milestone payments. To date, all of the Company's
revenues have resulted primarily from research and development funding
and milestone payments and may not be indicative of the Company's
future performance or of the ability of the Company to continue to
achieve such milestones. The Company's ability to generate revenue or
achieve profitability depends in part on its ability to enter into
further collaborative or licensing arrangements, successfully complete
preclinical or clinical trials, obtain regulatory approval for its
product candidates and develop the capacity, either alone or through
third parties, to manufacture, market and sell its products. Payments
under the Company's existing and any future collaborative arrangements
will be subject to significant fluctuation in both timing and amount
and therefore the Company's revenues and results of operations for any
period may not be comparable to the revenues or results of operations
for any other period. There can be no assurance that the Company will
enter into further collaborative arrangements, successfully complete
preclinical or clinical trials, obtain required regulatory approvals,
or successfully develop, manufacture and market product candidates.
Failure to do so will have a material adverse effect on the Company's
business, financial condition, and results of operations. There can be
no assurance that the Company will ever achieve product revenues or
profitability.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
All of the Company's product candidates are in the early stages
of research and development and only ABX-CBL and ABX-IL8 have been used
in human clinical trials. All of the Company's product candidates will
require significant additional preclinical or clinical testing prior to
obtaining regulatory approval for commercial use. In addition, the
Company must file a product approval application with the United States
Food and Drug Administration (the "FDA") prior to commercialization of
any of the Company's products. The Company currently does not expect to
file a product approval application with the FDA or corresponding
regulatory filings in Europe for its product candidates prior to at
least 1999 and does not expect to have any products commercially
available prior to at least 2000, if at all.
In addition, the Company's strategy includes building a large
and diversified product portfolio, including a mix of out-licensed and
internally developed product candidates. There can be no assurance that
the Company will be able to implement this strategy or that current or
future product candidates will ever result in viable commercial
products. In order to develop a single product, the Company must
develop and test multiple product candidates. Development of the
Company's current and any future product candidates are subject to the
risks of failure inherent in the development of new pharmaceutical
products and products based on new technologies. These risks include
the possibility that the Company will experience delays in development,
manufacturing, testing or marketing, that such development, testing or
marketing will result in unplanned expenditures or in expenditures
above those anticipated by the Company, that the Company's products
will not be proven safe or effective, that the Company's product
candidates will not be easy to use or cost-effective, that third
parties will develop and market superior or equivalent products, that
any or all of the Company's product candidates will fail to receive any
necessary regulatory approvals, that such product candidates will be
difficult or uneconomical to manufacture on a commercial scale, that
proprietary rights of third parties will preclude the Company or its
collaborative partners from marketing such products and that the
Company's products will not achieve market acceptance. As a result of
these risks, there can be no assurance that research and development
efforts conducted by the Company or its collaborative partners will
result in any commercially viable products. If a significant portion of
the Company's development programs are not successfully completed,
required regulatory approvals are not obtained, or any approved
products are not commercially successful, there will be a material
adverse effect on Company's business, financial condition and results
of operations.
DEPENDENCE ON COLLABORATIVE ARRANGEMENTS
The Company's strategy for the development and
commercialization of antibody therapeutic products depends, in large
part, upon the formation and maintenance of collaborative and licensing
arrangements with several corporate partners. In order to successfully
develop and commercialize new products and product candidates, the
Company must enter into such collaborations, including collaborations
with pharmaceutical and biotechnology companies, academic institutions
and other entities to access proprietary antigens, to fund and complete
its research and development activities, preclinical and clinical
testing and manufacturing, to seek and obtain regulatory approvals and
to achieve successful commercialization of existing and future product
candidates. The Company has entered into collaborative arrangements
with Pfizer, Schering-Plough, Genentech and Millennium BioTherapeutics
to generate fully human antibodies to specific antigens in the fields
of cancer, inflammation, growth factor modulation, cardiovascular
disease and autoimmune disease, respectively. To date, only a limited
number of antibody product candidates have been generated pursuant to
such collaborations, and there can be no assurance that any such
collaboration will be successful. There can also be no assurance that
the Company will be able to establish additional collaborative or
licensing arrangements, that any such arrangements or licenses will be
on terms favorable to the Company, that any such collaborative
arrangements or licenses will result in commercially successful
products or that the current or any future collaborative or licensing
arrangements will ultimately be successful. Failure of the Company to
maintain its significant collaborative arrangements or enter into
additional collaborative arrangements would have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's dependence on collaborative and licensing
arrangements with third parties subjects it to a number of risks.
Agreements with collaborative partners typically allow such partners
significant discretion in electing whether to pursue any of the planned
activities. The Company cannot control the amount and timing of
resources its collaborative partners may devote to the product
candidates, and there can be no assurance that such partners will
perform their obligations as expected. Business combinations or
significant changes in a corporate partner's business strategy may
adversely affect such partner's ability to complete its obligations
under the arrangements. If any collaborative partner were to terminate
or breach its agreement with the Company, or otherwise fail to complete
its obligations in a timely manner, such conduct could have a material
adverse effect on the Company's business, financial condition and
results of operations. To the extent that the Company is not able to
establish further collaborative arrangements or that any or all of the
Company's existing collaborative arrangements are terminated, the
Company would be required to seek new collaborative arrangements or to
undertake product development and commercialization at its own expense,
which could significantly increase the Company's capital requirements,
place additional strain on its human resource requirements and limit
the number of product candidates which the Company would be able to
develop and commercialize. In addition, there can be no assurance that
existing and future collaborative partners will not pursue alternative
technologies or develop alternative products either on their own or in
collaboration with others, including the Company's competitors. There
can also be no assurance that disputes will not arise in the future
with respect to the ownership of rights to any technology or products
developed with any future collaborative partner. Lengthy negotiations
with potential new collaborative partners or disagreements between
established collaborative partners and the Company could lead to delays
or termination in the research, development or commercialization of
certain product candidates or result in litigation or arbitration,
which would be time consuming and expensive. Failure by any
collaborative partner to develop or commercialize successfully any
product candidate to which it has obtained rights from the Company or
the decision by a collaborative partner to pursue alternative
technologies or develop alternative products, either on their own or in
collaboration with others, could have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company has an option to obtain licenses from Xenotech to commercialize
antibody products generated by XenoMouse technology. Such option is for
a certain number of targets each year. There can be no assurance that
in any year the Company will exercise its rights for the full number of
targets subject to such option or that such option will not limit the
Company's ability to fully realize the commercial potential of its
XenoMouse technology. In addition, disputes with Japan Tobacco could
result in the loss of the right to commercialize a product candidate by
either party.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale
of any products, the Company must demonstrate through preclinical
testing and clinical trials that its product candidates are safe and
effective for use in the target disease indication. With the exception
of the multi-center confirmatory Phase II trial in Graft Versus Host
Disease ("GVHD"), clinical trials of the Company's ABX-CBL product
candidate were conducted by third parties prior to the Company
obtaining license rights to technologies related to this product
candidate. As of September 30, 1998, ABX-CBL had only been administered
to a total of 121 patients in GVHD and organ transplant rejection
indications, and Phase I clinical trials for ABX-IL8 in psoriasis
commenced in April 1998. As a result, patient follow up has been
limited and clinical data obtained thus far have been insufficient to
demonstrate safety and efficacy under applicable FDA guidelines to
support an application for regulatory approval. In addition, the
results from preclinical testing and early clinical trials may not be
predictive of results obtained in later clinical trials. A number of
new drugs and biologics have shown promising results, even in later
stage clinical trials, but subsequently failed to establish sufficient
safety and efficacy data to obtain necessary regulatory approvals in
advanced clinical trials. There can be no assurance that clinical
trials conducted by the Company or by third parties on behalf of the
Company will demonstrate sufficient safety and efficacy to obtain the
requisite regulatory approvals for ABX-CBL or ABX-IL8. In addition, the
Company's other two product candidates are still in preclinical
development. The Company has not submitted investigational new drug
applications ("IND") nor begun clinical trials for these two product
candidates. No assurance can be given that any of the Company's
preclinical or clinical development programs will be successfully
completed, that any further IND will be filed or become effective, that
additional clinical trials will be allowed by the FDA or other
regulatory authorities, or that clinical trials will commence as
planned.
The commencement and rate of completion of clinical trials
conducted by the Company may be delayed by many factors, including
inability to manufacture sufficient quantities of materials used for
clinical trials, slower than expected rate of patient recruitment,
inability to adequately follow patients after treatment, unforeseen
safety issues or any other adverse event reported during the clinical
trials. The Company has limited experience in conducting or managing
clinical trials and relies, and will continue to rely, on third parties
to assist the Company in managing and monitoring clinical trials.
Dependence on such third parties may result in delays in completing, or
failure to complete, such trials if such third parties fail to perform
under their agreements with the Company. Completion of trials may take
several years or more, and the length of time generally varies
substantially with the type, complexity, novelty and intended use of
the product candidate. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations, which could
delay, limit or prevent regulatory approval. In addition, delays or
rejections by regulatory authorities may be encountered as a result of
many factors, including changes in regulatory policy during the period
of product development. There can be no assurance that the Company will
be permitted by regulatory authorities to undertake any additional
clinical trials for its potential products or, if such additional
trials are conducted, that any of the Company's product candidates will
prove to be safe and efficacious or will receive regulatory approvals.
In addition, the Company's clinical trials are often conducted with
patients who have failed conventional treatments and, in the case of
GVHD, patients are often in the most advanced stages of the disease.
During the course of treatment, these patients can die or suffer
adverse medical effects for reasons that may not be related to the
pharmaceutical agent being tested but which can nevertheless adversely
affect the interpretation of clinical trial results. Failure of the
Company's product candidates to demonstrate safety and efficacy in
clinical trials could result in delays in developing other product
candidates and conducting related preclinical testing and clinical
trials, as well as a potential need for additional financing, any or
all of which would have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore,
any delays in, or termination of, the Company's clinical trials would
also have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no
assurance that the Company will be permitted by regulatory authorities
to undertake any additional clinical trials for its product candidates
or, if such additional trials are conducted, that any of the Company's
product candidates will prove to be safe and efficacious or will
receive regulatory approvals.
UNCERTAINTY OF PATENT POSITION AND DEPENDENCE ON PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain
patents, protect trade secrets, operate without infringing upon the
proprietary rights of others and prevent others from infringing on the
proprietary rights of the Company. The Company's policy is to seek to
protect its proprietary position by, among other methods, filing United
States and foreign patent applications related to its proprietary
technology, inventions and improvements that are important to the
development of its business. Proprietary rights relating to the
Company's technologies will be protected from unauthorized use by third
parties only to the extent that they are covered by valid and
enforceable patents or are effectively maintained as trade secrets.
There can be no assurance that any patents owned by, or licensed to,
the Company will afford protection against competitors or that any
pending patent applications now or hereafter filed by, or licensed to,
the Company will result in patents being issued. In addition, the laws
of certain foreign countries do not protect the Company's intellectual
property rights to the same extent as do the laws of the United States.
The patent position of biopharmaceutical companies involves complex
legal and factual questions and, therefore, their enforceability cannot
be predicted with certainty. There can be no assurance that any of the
Company's patents or patent applications, if issued, will not be
challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection or competitive
advantages to the Company against competitors with similar technology.
Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology
developed by the Company.
While the Company has multiple patent applications pending in
the United States, to date, the Company has no United States patents
relating to XenoMouse technology. One issued European Patent owned by
the Company relating to XenoMouse technology is currently undergoing
opposition proceedings within the European Patent Office, and no
assurance can be given regarding the outcome of this opposition. The
Company intends to continue to file patent applications as appropriate
for patents covering both its product candidates and processes. There
can be no assurance that patents will issue from any of these
applications, that any patent will issue on technology arising from
additional research or that patents that may issue from such
applications will be sufficient to protect the Company's technologies.
Pursuant to the cross-license and settlement agreement with
GenPharm, the Company entered into a cross-license agreement with Cell
Genesys, Xenotech, Japan Tobacco and GenPharm, whereby the Company has
licensed on a non-exclusive basis certain patents, patent applications,
third party licenses, and inventions pertaining to the development and
use of certain transgenic rodents including mice that produce fully
human antibodies that are integral to the Company's products and
business. The Company uses its XenoMouse technology to generate fully
human antibody products and has not licensed the use of, and does not
use, any transgenic rodents developed or used by GenPharm. Breach of
the cross-license agreement would have a material adverse effect on the
Company's business, financial condition and results of operations.
Research has been conducted for many years in the antibody
field. This has resulted in a substantial number of issued patents and
an even larger number of patent applications. Patent applications in
the United States are, in most cases, maintained in secrecy until
patents issue, and publication of discoveries in the scientific or
patent literature frequently occurs substantially later than the date
on which the underlying discoveries were made. The commercial success
of the Company depends significantly on its ability to operate without
infringing the patents and other proprietary rights of third parties.
There can be no assurance that the Company's technologies do not and
will not infringe the patents or violate other proprietary rights of
third parties. In the event of such infringement or violation, the
Company and its corporate partners may be enjoined from pursuing
development or commercialization of their products. Such action would
have a material adverse affect on the Company's business, financial
condition and results of operations.
The biotechnology and pharmaceutical industries have been
characterized by extensive litigation regarding patents and other
intellectual property rights, and the Company, together with Cell
Genesys, Xenotech and Japan Tobacco, recently settled litigation with
GenPharm regarding certain patents and other intellectual property
rights. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations", paragraph six under the caption
`Overview'. The defense and prosecution of intellectual property suits,
United States Patent and Trademark Office ("USPTO") interference
proceedings and related legal and administrative proceedings in the
United States and internationally involve complex legal and factual
questions. As a result, such proceedings are costly and time-consuming
to pursue and their outcome is uncertain. Litigation may be necessary
to enforce patents issued or licensed to the Company, to protect trade
secrets or know-how owned by or licensed by the Company or to determine
the enforceability, scope and validity of the proprietary rights of
others. Any litigation, interference or other administrative
proceedings will result in substantial expense to the Company and
significant diversion of effort and resources by the Company's
technical and management personnel. An adverse determination in such
proceedings to which the Company may become a party could subject the
Company to significant liabilities to third parties or require the
Company to seek licenses which may not be available from third parties
or prevent the Company from selling its products in certain markets, if
at all. Although patent and intellectual property disputes are often
settled through licensing or similar arrangements, costs associated
with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that the necessary
licenses would be available to the Company on satisfactory terms, if at
all. Adverse determinations in a judicial or administrative proceeding
or failure to obtain necessary licenses could restrict or prevent the
Company from manufacturing and selling its products, if any, which
would have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition to patents, the Company relies on trade secrets and
proprietary know-how, which it seeks to protect, in part, through
confidentiality and proprietary information agreements. There can be no
assurance that such confidentiality or proprietary information
agreements will provide meaningful protection or adequate remedies for
the Company's technology in the event of unauthorized use or disclosure
of such information, that the parties to such agreements will not
breach such agreements or that the Company's trade secrets will not
otherwise become known to or be independently developed by competitors.
INTENSE COMPETITION; RAPID TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are highly
competitive and subject to significant and rapid technological change.
The Company is aware of several pharmaceutical and biotechnology
companies, which are actively engaged in research and development in
areas related to antibody therapy, that have commenced clinical trials
of antibody therapeutics products or have successfully commercialized
antibody products. Many of these companies are addressing diseases and
disease indications that are being targeted by the Company or its
collaborative partners. Certain of these competitors have specific
expertise or technology related to antibody development, such as
Centocor, Inc., Protein Design Labs, Inc., IDEC Pharmaceuticals
Corporation, Cambridge Antibody Technology Group, Inc. and GenPharm.
Certain of the Company's competitors are developing or testing product
candidates that may be directly competitive with the Company's product
candidates. For example, the Company is aware that several companies,
including Genentech, Inc., have potential product candidates that may
inhibit the activity of interleukin-8 ("IL-8"). Furthermore, the
Company is aware that ImClone Systems, Inc., has a potential product
candidate in clinical development that may inhibit the activity of
epidermal growth factor ("EGF"). Many of these companies and
institutions, either alone or together with their corporate partners,
have substantially greater financial resources and larger research and
development staffs than the Company. In addition, many of these
competitors, either alone or together with their corporate partners,
have significantly greater experience than the Company in developing
products, undertaking preclinical testing and human clinical trials,
obtaining FDA and other regulatory approvals of products and
manufacturing and marketing products. Accordingly, the Company's
competitors may succeed in obtaining patent protection, receiving FDA
approval or commercializing products more rapidly than the Company. If
the Company commences commercial sales of products, it will be
competing against companies with greater marketing and manufacturing
capabilities, areas in which it has limited or no experience.
In addition to biotechnology and pharmaceutical companies, the
Company faces, and will continue to face, competition from academic
institutions, government agencies and research institutions. There are
numerous competitors working on products to treat each of the diseases
for which the Company is seeking to develop therapeutic products. In
addition, any product candidate successfully developed by the Company
may compete with existing therapies that have long histories of safe
and effective use. Competition may also arise from other drug
development technologies and methods of preventing or reducing the
incidence of disease and new small molecule or other classes of
therapeutic agents. There can be no assurance that developments by
others will not render the Company's product candidates or technologies
obsolete or noncompetitive. The Company faces and will continue to face
intense competition from other companies, including Japan Tobacco, for
collaborative arrangements with pharmaceutical and biotechnology
companies, for establishing relationships with academic and research
institutions, and for licenses to proprietary technology. These
competitors, either alone or with their corporate partners, may succeed
in developing technologies or products that are more effective than
those of the Company. The Company's collaborative partners may elect to
develop other antibody products which compete with the Company's
products.
SIGNIFICANT GOVERNMENT REGULATIONS; NO ASSURANCE OF REGULATORY
APPROVALS
All new biopharmaceutical products, including the Company's
product candidates under development and anticipated future products,
are subject to extensive and rigorous regulation by the federal
government, principally the FDA, under the Federal Food, Drug and
Cosmetic Act (the "FD&C Act") and other laws including the Public
Health Service Act, and by state and local governments. Such
regulations govern, among other things, the development, testing,
manufacture, safety, efficacy, record keeping, labeling, storage,
approval, advertising, promotion, sale and distribution of such
products. If biopharmaceutical products are marketed abroad, they also
are subject to extensive regulation by foreign governments. To date,
none of the Company's product candidates has been approved for sale in
the United States or any foreign market. The regulatory review and
approval process, which includes preclinical studies and clinical
trials of each product candidate, is lengthy, expensive and uncertain.
Securing FDA approvals requires the submission of extensive preclinical
and clinical data and supporting information to the FDA for each
indication to establish the product candidates' safety and efficacy.
The approval process takes many years, requires the expenditure of
substantial resources, involves post-marketing surveillance, and may
involve ongoing requirements for post-marketing studies. Delays in
obtaining regulatory approvals could adversely affect the successful
commercialization of any drugs developed by the Company or its
collaborative partners, impose costly procedures upon the Company's or
its collaborative partners' activities, diminish any competitive
advantages that the Company or its collaborative partners may attain
and adversely affect the Company's receipt of revenues or royalties.
There can be no assurance that regulatory approval will be obtained for
any therapeutic product candidate developed by the Company or its
collaborative partners. Furthermore, regulatory approval may entail
limitations on the indicated uses of a drug. Product approvals, if
granted, can be withdrawn for failure to comply with ongoing regulatory
requirements or upon the occurrence of unforeseen problems following
initial marketing.
Certain material changes to an approved product such as
manufacturing changes or additional labeling claims are subject to
further FDA review and approval. There can be no assurance that any
approvals that are required, once obtained, will not be withdrawn or
that compliance with other regulatory requirements can be maintained.
Further, failure to comply with applicable FDA and other regulatory
requirements at any stage during the regulatory process can result in
sanctions being imposed on the Company or the manufacturers of its
products, including delays, warning letters, fines, product recalls or
seizures, injunctions, refusal of the FDA to review pending market
approval applications or supplements to approval applications, total or
partial suspension of production, civil penalties, withdrawals of
previously approved marketing applications and criminal prosecutions.
The Company may rely on its collaborative partners to file INDs and
generally direct the regulatory approval process. There can be no
assurance that the Company's collaborative partners will be able to
conduct clinical testing or obtain necessary approvals from the FDA or
other regulatory authorities for any product candidates. Failure to
obtain required governmental approvals will delay or preclude the
Company's collaborative partners from marketing drugs or diagnostic
products developed through the Company's research or limit the
commercial use of such product candidates and could have a material
adverse effect on the Company's business, financial condition and
results of operations.
Manufacturers of biopharmaceutical products also are required
to comply with the applicable FDA current good manufacturing practice
("cGMP") regulations, which include requirements relating to quality
control and quality assurance as well as the corresponding maintenance
of records and documentation. Manufacturing facilities are subject to
inspection by the FDA, including unannounced inspection, and must be
approved before they can be used in commercial manufacturing of the
Company's products. There can be no assurance that the Company or its
suppliers will be able to comply with the applicable cGMP requirements
and other FDA regulatory requirements. Such failure would have a
material adverse effect on the Company's business, financial condition
and results of operations.
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that the Company's product candidates
will gain any significant degree of market acceptance among physicians,
patients, healthcare payors and the medical community in general even
if clinical trials demonstrate safety and efficacy and necessary
regulatory and reimbursement approvals are obtained. The degree of
market acceptance of any product candidates developed by the Company
will depend on a number of factors, including the establishment and
demonstration of the clinical efficacy and safety as well as cost-
effectiveness of the product candidates, their potential advantage over
alternative treatment methods and reimbursement policies of government
and third-party payors. Physicians will not recommend therapies using
the Company's products until such time, if at all, as clinical data or
other factors demonstrate the efficacy of such procedures as compared
to conventional drug and other treatments. Even if the clinical
efficacy of therapies using the Company's products were established,
physicians may elect not to recommend the therapies for any number of
other reasons. The Company's product candidates, if successfully
developed, will compete with a number of alternative drugs and
therapies manufactured and marketed by major pharmaceutical and other
biotechnology companies, and possibly new products currently under
development by such companies and others. There can be no assurance
that physicians, patients, third-party payors or the medical community
in general will accept and utilize any product candidates that may be
developed by the Company or its collaborative partners. Failure of the
Company's products to achieve significant market acceptance would have
a material adverse effect on the Company's business, financial
condition and results of operations.
LIMITED MANUFACTURING EXPERIENCE
The Company currently has limited experience in manufacturing
its product candidates and lacks the resources or capability to
manufacture any of its products on a commercial scale. While the
Company currently manufactures limited quantities of antibody products
for preclinical testing, the Company relies on contract manufacturers
to produce ABX-CBL and ABX-IL8. With respect to products other than
ABX-CBL and ABX-IL8, the Company will either be responsible for
manufacturing or contract out manufacturing to third parties.
The Company's contract manufacturers have limited experience in
manufacturing ABX-CBL and ABX-IL8 in quantities sufficient for
conducting clinical trials. Contract manufacturers often encounter
difficulties in scaling up production, including problems involving
production yields, quality control and quality assurance and shortage
of qualified personnel. Furthermore, there are only a limited number of
other third-party contract manufacturers who have the ability and
capacity to produce the Company's product candidates. Failure by any
contract manufacturer to deliver the required quantities of the
Company's product candidates for either clinical or commercial use on a
timely basis and at commercially reasonable prices and failure by the
Company to find a replacement manufacturer would have a material
adverse affect on the Company's business, financial condition and
results of operations.
In addition, the Company and its third party manufacturers are
required to register their manufacturing facilities with the FDA and
foreign regulatory authorities. The facilities will then be subject to
inspections confirming compliance with cGMP established by the FDA or
corresponding foreign regulations. Failure to maintain compliance with
the cGMP requirements would materially adversely effect the Company's
business, financial condition and results of operations.
NO MARKETING AND SALES EXPERIENCE
The Company has no experience in marketing or selling
pharmaceutical products and currently does not have a marketing, sales
or distribution capability. The Company intends to enter into
arrangements with third parties to market and sell most of its
products. For select products, the Company may establish an internal
marketing and sales force. There can be no assurance that the Company
will be able to enter into marketing and sales arrangements with others
on acceptable terms, if at all. To the extent that the Company enters
into marketing and sales arrangements with other companies, any
revenues to be received by the Company will be dependent on the efforts
of others. There can be no assurance that such efforts will be
successful. If the Company is unable to enter into such third party
arrangements, then the Company must develop a marketing and sales
force, which may be substantial in size, in order to achieve commercial
success for any product candidate approved by the FDA. There can be no
assurance that the Company will successfully develop such experience or
have sufficient resources to do so. If the Company develops its own
marketing and sales capabilities, it will compete with other companies
that have experienced and well-funded marketing and sales operations.
The Company's failure to establish successful marketing and sales
capabilities or to enter into successful marketing arrangements with
third parties would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL; NEED TO ATTRACT AND RETAIN KEY EMPLOYEES
AND CONSULTANTS
The Company is highly dependent on the principal members of its
scientific and management staff. The loss of any of these persons could
have a material adverse effect on the Company's business, financial
condition and results of operations. In order to pursue its product
development, marketing and commercialization plans, the Company will be
required to hire additional qualified scientific personnel to perform
research and development, as well as personnel with expertise in
clinical testing, government regulation, manufacturing and marketing.
Attracting and retaining qualified personnel will be critical to the
Company's success. There can be no assurance that the Company will be
able to attract and retain personnel on acceptable terms given the
competition for such personnel among biotechnology, pharmaceutical and
healthcare companies, universities and non-profit research
institutions. In addition, the Company relies on members of its
Scientific and Medical Advisory Boards and other consultants to assist
the Company in formulating its research and development strategy. All
of the Company's consultants and the members of the Company's
Scientific and Medical Advisory Boards are employed by entities other
than the Company, and may have commitments to, or advisory or
consulting agreements with, other entities that may limit their
availability to the Company. The loss of services of any of these
personnel could impede the achievement of the Company's development
objectives and could have a material adverse effect on the Company's
business, financial condition and results of operations.
SIGNIFICANT INFLUENCE BY CELL GENESYS, INC.
Cell Genesys beneficially owns 40.5% of the outstanding capital
stock as of November 1, 1998. As a result, Cell Genesys will have
significant influence over all matters requiring the approval of the
Company's stockholders, including the election of the Company's Board
of Directors and changes in control of the Company. Cell Genesys and
the Company have entered into a governance agreement, as amended (the
"Governance Agreement"), which provides that so long as Cell Genesys or
a group to which it belongs owns (i) a majority of the outstanding
voting stock of the Company, Cell Genesys or the group shall have the
right to nominate four out of the seven directors of the Company, (ii)
less than a majority but greater than 25% of the outstanding voting
stock of the Company, then Cell Genesys or such group shall have the
right to nominate three out of the seven directors of the Company, or
(iii) less than 25% but greater than 15% of the outstanding voting
stock of the Company, then Cell Genesys or such group shall have the
right to nominate one out of the seven directors of the Company. The
Governance Agreement also provides that Cell Genesys and each officer
and director of the Company who owns voting stock shall agree to vote
for the persons nominated as set forth above. There can be no assurance
that the Company will not be adversely impacted by the significant
influence which Cell Genesys will have with respect to matters
affecting the Company.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND
AFFILIATED ENTITIES
The Company's directors, executive officers, principal
stockholders and affiliated entities, in the aggregate, beneficially
own approximately 54.1% of the Company's outstanding Common Stock as of
November 1, 1998. These stockholders, if acting together, would be able
to control substantially all matters requiring approval by the
stockholders of the Company, including the election of directors and
the approval of mergers or other business combination transactions.
There can be no assurance that the Company will not be adversely
impacted by the control which such stockholders will have with respect
to matters affecting the Company.
FUTURE CAPITAL REQUIREMENTS
The Company plans to continue to expend substantial resources
for the expansion of research and development, including costs
associated with conducting preclinical testing and clinical trials. The
Company may be required to expend greater-than-anticipated funds if
unforeseen difficulties arise in the course of completing required
additional development of product candidates, manufacturing of product
candidates, performing preclinical testing and clinical trials of such
product candidates, obtaining necessary regulatory approvals or other
aspects of the Company's business. The Company's future liquidity and
capital requirements will depend on many factors, including continued
scientific progress in its research and development programs, the size
and complexity of these programs, the scope and results of preclinical
testing and clinical trials, the time and expense involved in obtaining
regulatory approvals, if any, competing technological and market
developments, the establishment of further collaborative arrangements,
if any, the time and expense of filing and prosecuting patent
applications and enforcing patent claims, the cost of establishing
manufacturing capabilities, conducting commercialization activities and
arrangements, product in-licensing and other factors not within the
Company's control. Although the Company believes that its current cash
balances, cash equivalents, and short-term investments as well as cash
generated from collaborative arrangements will be sufficient to meet
the Company's operating and capital requirements through 1999, there
can be no assurance that the Company will not require additional
financing within this timeframe. The Company may be required to raise
additional funds through public or private financing, collaborative
relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms
attractive to the Company, if at all. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants. Collaborative
arrangements, if necessary to raise additional funds, may require the
Company to relinquish its rights to certain of its technologies,
products or marketing territories. The failure of the Company to raise
capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations.
UNCERTAINTY RELATING TO REIMBURSEMENT; UNCERTAINTY RELATING TO
HEALTHCARE REFORM
In both domestic and foreign markets, sales of the Company's
potential products will depend in part upon the availability of
reimbursement from third-party payors, such as government health
administration authorities, managed care providers, private health
insurers and other organizations. These third-party payors are
increasingly challenging the price and examining the cost effectiveness
of medical products and services. In addition, significant uncertainty
exists as to the reimbursement status of newly approved healthcare
products. The Company may need to conduct post-marketing studies in
order to demonstrate the cost-effectiveness of its products. Such
studies may require significant amount of resources to be provided by
the Company. There can be no assurance that the Company's product
candidates will be considered cost effective or that adequate third-
party reimbursement will be available to enable the Company to maintain
price levels sufficient to realize an appropriate return on its
investment in product development. Both federal and state governments
in the United States and foreign governments continue to propose and
pass legislation designed to reduce the cost of healthcare.
Accordingly, legislation and regulations affecting the pricing of
pharmaceuticals may change before the Company's proposed products are
approved for marketing. Adoption of such legislation could further
limit reimbursement for pharmaceuticals. If adequate coverage and
reimbursement rates are not provided by the government and third-party
payors for the Company's potential products, the market acceptance of
these products could be adversely affected, which would have a material
adverse effect on the Company's business, financial condition and
results of operations.
POTENTIAL PRODUCT LIABILITY EXPOSURE AND LIMITED INSURANCE COVERAGE
The use of any of the Company's product candidates in clinical
trials, and the sale of any approved products, may expose the Company
to liability claims resulting from such use or sale of its products.
These claims might be made directly by consumers, healthcare providers
or by pharmaceutical companies or others selling such products. There
can be no assurance that the Company will not experience financial
losses in the future due to product liability claims. Abgenix has
obtained limited product liability insurance coverage for its clinical
trials in the amount of $5.0 million per occurrence and $5.0 million in
the aggregate. The Company intends to expand its insurance coverage to
include the sale of commercial products if marketing approval is
obtained for product candidates in development. However, insurance
coverage is becoming increasingly expensive and no assurance can be
given that the Company will be able to maintain insurance coverage at a
reasonable cost or in sufficient amounts to protect the Company against
losses. A successful product liability claim or series of claims
brought against the Company for uninsured liabilities or in excess of
insured liabilities could have a material adverse effect on its
business, financial condition and results of operations.
HAZARDOUS AND RADIOACTIVE MATERIALS; ENVIRONMENTAL MATTERS
The Company's research and development processes involve the
controlled use of hazardous and radioactive materials, chemicals and
waste products. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and
disposal of such materials and waste products. The risk of accidental
contamination or injury from these materials and waste products cannot
be completely eliminated and the Company does not expect to make
material capital expenditures for environmental control facilities in
the near-term. There can be no assurance that the Company will not be
required to incur significant costs to comply with environmental laws
and regulations in the future, or that the operations, business or
assets of the Company will not be materially adversely affected by the
costs of compliance with current or future environmental laws or
regulations.
VOLATILITY OF COMMON STOCK PRICE
The market prices for securities of biotechnology and
pharmaceutical companies have historically been highly volatile, and
the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. Factors such as fluctuations in the Company's
operating results, announcements of technological innovations or new
therapeutic products by the Company or others, clinical trial results,
developments concerning strategic alliance agreements, government
regulation, developments in patent or other proprietary rights, public
concern as to the safety of products developed by the Company or
others, future sales of substantial amounts of Common Stock by existing
stockholders, comments by securities analysts and general market
conditions can have an adverse effect on the market price of the Common
Stock. In addition, the realization of any of the risks described in
these "ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS" could
have a dramatic and adverse impact on market price of the Company's
Common Stock.
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS AND
DELAWARE LAW
Certain provisions of the Company's Certificate of
Incorporation and Bylaws may make it more difficult for a third party
to acquire, or discourage a third party from attempting to acquire,
control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of
the Company's Common Stock. Certain of these provisions allow the
Company to issue up to 5,000,000 shares of Preferred Stock without any
vote or further action by the stockholders, eliminate the right of
stockholders to act by written consent without a meeting, specify
procedures for director nominations by stockholders and submission of
other proposals for consideration at stockholder meetings. In addition,
the Company is subject to certain provisions of Delaware law, including
Section 203, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period
of three years unless certain conditions are met. The possible issuance
of Preferred Stock, the elimination of the right of stockholders to act
by written consent without a meeting, the procedures required for
director nominations and stockholder proposals and Delaware law could
have the effect of delaying, deferring or preventing a change in
control of the Company, including without limitation, discouraging a
proxy contest or making more difficult the acquisition of a substantial
block of the Company's Common Stock. These provisions could also limit
the price that investors might be willing to pay in the future for
shares of the Company's Common Stock.
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends and
does not anticipate paying cash dividends in the foreseeable future.
PART II
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1998, the Company closed an initial public offering of
2,875,000 shares of its Common Stock at a per share price of $8.00
pursuant to a Registration Statement on Form S-1 (Registration No. 333-
49415), which was declared effective on July 2, 1998. The Company's
managing underwriters for the offering were BancAmerica Robertson
Stephens (now BancBoston Robertson Stephens) and Lehman Brothers Inc.
Of the $23,000,000 in gross proceeds raised in connection with the
offering, (i) $1,610,000 was paid to the managing underwriters in
connection with underwriting discounts and (ii) approximately
$1,359,000 was paid by the Company in connection with expenses,
including legal, printing and filing fees, in connection with the
offering. Of the remaining net proceeds, the Company has reserved
$3,750,000 for payment of the cross-license and settlement with
GenPharm. There were no direct or indirect payments to directors or
officers of the Company or to any other person or entity. None of the
proceeds from the offering have been used for the construction of
plant, building or facility or installation of machinery or equipment,
or the purchases of real estate or the acquisition of other businesses.
The Company is currently investing the remaining net proceeds from the
offering for future use as additional working capital. Such remaining
net proceeds have been invested in highly liquid instruments, such as
commercial paper and U.S. Government obligations, with an average
maturity of twelve months or less. A portion of those net proceeds may
be used for the acquisition of businesses, products and technologies
that are complimentary to those of the Company. During the three months
ended September 30, 1998, approximately $2.7 million of the net
proceeds have been spent on research and development activities.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
With respect to stockholder proposals not included in the
Company's proxy statement for the 1999 Annual Meeting of Stockholders,
the persons named in management's proxy for the 1999 Annual Meeting of
Stockholders will be entitled to exercise the discretionary voting
power conferred by such proxy under the circumstances specified in Rule
14a-4(c) under the Securities Exchange Act of 1934, as amended,
including with respect to proposals received by the Company after April
1, 1999.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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3.1 (12) Certificate of Incorporation of the Registrant, as
currently in effect.
3.2 (12) Bylaws of the Registrant, as currently in effect.
10.1 (12) Form of Indemnification Agreement between the Registrant
and each of its directors and officers.
10.2 (12) 1996 Incentive Stock Plan and form of agreement
thereunder.
10.3 (12) 1998 Employee Stock Purchase Plan and form of agreement
thereunder.
10.4 (12) 1998 Director Option Plan and form of agreement
thereunder.
10.5 (12) Warrant dated January 23, 1997 exercisable for shares of
Series A Preferred Stock.
10.6 (12) Warrant dated March 27, 1997 exercisable for shares of
Series A Preferred Stock.
+ 10.7 (1) Joint Venture Agreement dated June 12, 1991 between Cell
Genesys and JT Immunotech USA Inc.
+ 10.7A (4) Amendment No. 1 dated January 1, 1994 to Joint Venture
Agreement.
+ 10.7B (7) Amendment No. 2 dated June 28, 1996 to Joint Venture
Agreement.
+ 10.8 (1) Collaboration Agreement dated June 12, 1991 among Cell
Genesys, Xenotech, Inc. and JT Immunotech USA Inc.
+ 10.8A (3) Amendment No. 1 dated June 30, 1993 to Collaboration
Agreement.
10.8B (11) Amendment No. 2 dated January 1, 1994 to Collaboration
Agreement.
+ 10.8C (5) Amendment No. 3 dated July 1, 1995 to Collaboration
Agreement.
+ 10.8D (7) Amendment No. 4 dated June 28, 1996 to Collaboration
Agreement.
+ 10.8E (12) Amendment No. 5 dated November 1997 to Collaboration
Agreement.
+ 10.9 (1) Limited Partnership Agreement dated June 12, 1991 among
Cell Genesys, Xenotech, Inc. and JT Immunotech USA Inc.
+ 10.9A (4) Amendment No. 2 dated January 1, 1994 to Limited
Partnership Agreement.
10.9B (6) Amendment No. 3 dated July 1, 1995 to Limited Partnership
Agreement.
10.9C (8) Amendment No. 4 dated June 28, 1996 to Limited Partnership
Agreement.
10.10 (2) Field License dated June 12, 1991 among Cell Genesys, JT
Immunotech USA Inc. and Xenotech, L.P.
10.10A (8) Amendment No. 1 dated March 22, 1996 to Field License.
10.10B (8) Amendment No. 2 dated June 28, 1996 to Field License.
+ 10.11 (1) Expanded Field License dated June 12, 1991 among Cell
Genesys, JT Immunotech USA Inc. and Xenotech, L.P.
10.11A (8) Amendment No. 1 dated June 28, 1996 to Expanded Field
License.
+ 10.12 (12) Amended and Restated Anti-IL-8 License Agreement dated
March 19, 1996 among Xenotech, L.P., Cell Genesys and Japan Tobacco
Inc.
+ 10.13 (7) Master Research License and Option Agreement dated June
28, 1996 among Cell Genesys, Japan Tobacco Inc. and Xenotech, L.P.
+ 10.13A(12) Amendment No. 1 dated November 1997 to the Master Research
License and Option Agreement.
+ 10.14 (12) Stock Purchase and Transfer Agreement dated July 15, 1996
by and between Cell Genesys and the Registrant.
10.15 (12) Governance Agreement dated July 15, 1996 between Cell
Genesys and the Registrant.
10.15A(12) Amendment No. 1 dated October 13, 1997 to the Governance
Agreement.
10.15B(12) Amendment No. 2 dated December 22, 1997 to the Governance
Agreement.
10.16 (12) Tax Sharing Agreement dated July 15, 1996 between Cell
Genesys and the Registrant.
+ 10.17 (12) Gene Therapy Rights Agreement effective as of November 1,
1997 between the Registrant and Cell Genesys.
+ 10.18 (12) Patent Assignment Agreement dated July 15, 1996 by Cell
Genesys in favor of the Registrant.
10.19 (9) Lease Agreement dated July 31, 1996 between John
Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or
his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery Separate
Property Trust) as amended, and the Registrant.
10.20 (12) Loan and Security Agreement dated January 23, 1997 between
Silicon Valley Bank and the Registrant.
10.21 (12) Master Lease Agreement dated March 27, 1997 between
Transamerica Business Credit Corporation and the Registrant.
+ 10.22 (12) License Agreement dated February 1, 1997 between Ronald J.
Billing, Ph.D. and the Registrant.
+ 10.23 (10) Release and Settlement Agreement dated March 26, 1997
among Cell Genesys, the Registrant, Xenotech, L.P., Japan Tobacco Inc.
and GenPharm International, Inc.
+ 10.24 (10) Cross License Agreement effective as of March 26, 1997,
among Cell Genesys, the Registrant, Xenotech, L.P., Japan Tobacco Inc.
and GenPharm International, Inc.
+ 10.25 (10) Interference Settlement Procedure Agreement, effective as
of March 26, 1997, among Cell Genesys, the Registrant, Xenotech, L.P.,
Japan Tobacco Inc. and GenPharm International, Inc.
+ 10.26 (12) Agreement dated March 26, 1997 among Xenotech, L.P.,
Xenotech, Inc., Cell Genesys, the Registrant, Japan Tobacco Inc. and JT
Immunotech USA Inc.
+ 10.27 (12) Collaborative Research Agreement dated December 22, 1997
between Pfizer, Inc. and the Registrant.
10.28 (12) Amended and Restated Stockholder Rights Agreement dated
January 12, 1998 among the Registrant and certain holders of the
Registrant's capital stock.
+ 10.29 (12) Collaborative Research Agreement effective as of January
28, 1998 between Schering-Plough Research Institute and the Registrant.
10.30 (12) Excerpts from the Minutes of a Meeting of the Board of
Directors of the Registrant, dated October 23, 1996.
10.31 (12) Excerpts from the Minutes of a Meeting of the Board of
Directors of the Registrant, dated October 22, 1997.
+ 10.32 (12) Exclusive Worldwide Product License dated November 1997
between Xenotech, L.P. and the Registrant.
+ 10.33 (12) Research License and Option Agreement effective as of
April 6, 1998 between the Registrant and Genentech, Inc.
+ 10.33 A(12)Amendment No. 1 effective as of June 18, 1998 to Research
License and Option Agreement between the Registrant and Genentech, Inc.
++10.34 (13) Research Collaboration Agreement dated July 15, 1998
between Millennium BioTherapeutics, Inc. and the Registrant.
27.1 Financial Data Schedule.
______________
* Previously filed.
+ Confidential treatment granted for portions of these exhibits.
++ Confidential treatment requested for portions of this exhibit.
(1) Incorporated by reference to the same exhibit filed with Cell
Genesys's Registration Statement on Form S-1 (File No. 33-46452),
portions of which have been granted confidential treatment.
(2) Incorporated by reference to the same exhibit filed with Cell
Genesys's Registration Statement on Form S-1 (File No. 33-46452).
(3) Incorporated by reference to the same exhibit filed with Cell
Genesys's Quarterly Report on Form 10-Q for the quarter ended June 30,
1993, portions of which have been granted confidential treatment.
(4) Incorporated by reference to the same exhibit filed with Cell
Genesys's Annual Report on Form 10-K for the year ended December 31,
1993, portions of which have been granted confidential treatment.
(5) Incorporated by reference to the same exhibit filed with Cell
Genesys's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, portions of which have been granted confidential treatment.
(6) Incorporated by reference to the same exhibit filed with Cell
Genesys's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995.
(7) Incorporated by reference to the same exhibit filed with Cell
Genesys's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996, portions of which have been granted confidential treatment.
(8) Incorporated by reference to the same exhibit filed with Cell
Genesys's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996.
(9) Incorporated by reference to the same exhibit filed with Cell
Genesys's Quarterly report on Form 10-Q for the quarter ended September
30, 1996.
(10) Incorporated by reference to the same exhibit filed with Cell
Genesys's Annual Report on Form 10-K for the year ended December 31,
1996, as amended, portions of which have been granted confidential
treatment.
(11) Incorporated by reference to the same exhibit filed with Cell
Genesys's Annual Report on Form 10-K for the year ended December 31,
1993.
(12) Incorporated by reference to the same exhibit filed with the
Registrant's Registration Statement on Form S-1 (File No. 333-49415).
(13) Incorporated by reference to the same exhibit filed with the
Registrant's Current Report on Form 8-K filed with the Commission on
July 17, 1998.
(b) Reports on Form 8-K
The Company filed a report on form 8-K on July 17, 1998 relating
to the agreement between the Company and Millennium BioTherapeutics,
Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: November 13, 1998
ABGENIX, INC.
(Registrant)
/S/ R. SCOTT GREER
- -----------------------------------
R. Scott Greer
President and Chief Executive
Officer
(Principal Executive Officer)
/S/ KURT LEUTZINGER
- -----------------------------------
Kurt Leutzinger
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
INDEX TO EXHIBITS
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
- - --------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE
STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,283
<SECURITIES> 22,290
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,943
<PP&E> 5,418
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,781
<CURRENT-LIABILITIES> 7,087
<BONDS> 2,710
0
0
<COMMON> 55,506
<OTHER-SE> (34,522)
<TOTAL-LIABILITY-AND-EQUITY> 30,781
<SALES> 0
<TOTAL-REVENUES> 2,008
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (229)
<INCOME-PRETAX> (12,301)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,301)
<EPS-PRIMARY> (3.27)
<EPS-DILUTED> (3.27)
</TABLE>
