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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
----------------------
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 APRIL 30,1999 THERE WERE 14,902,327 SHARES OF THE REGISTRANT'S COMMON
STOCK OUTSTANDING.
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ABGENIX, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
Condensed Balance Sheets - March 31, 1999 and December 31, 1998 ..... 3
Condensed Statements of Operations - Three months ended March 31, 1999
and March 31, 1998 ................................................ 4
Condensed Statements of Cash Flows - Three months ended March 31, 1999
and March 31, 1998 ................................................ 5
Notes to Condensed Financial Statements .............................. 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .......................................... 8
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS .............................................. 25
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS ...................... 25
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES ................................ 26
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 26
ITEM 5 - OTHER INFORMATION............................................... 26
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................ 26
SIGNATURES............................................................... 27
</TABLE>
2
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ABGENIX, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 22,977 $ 1,415
Marketable Securities 39,338 15,329
Prepaid expenses and other current assets 705 1,438
--------- ---------
Total current assets 63,020 18,182
Property and equipment, net 5,304 5,435
Deposits and other assets 590 603
--------- ---------
$ 68,914 $ 24,220
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,192 $ 439
Deferred revenue 425 425
Accrued product development costs 775 1,225
Other accrued liabilities 1,481 1,293
Current portion of long-term debt 1,714 1,699
--------- ---------
Total current liabilities 5,587 5,081
Long-term debt 1,746 2,180
Commitments
Stockholders' equity:
Preferred Stock, $.0001 par value; 5,000,000 shares authorized,
none outstanding
Common Stock, $.0001 par value; 50,000,000 shares authorized,
14,684,953 and 11,120,293 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively, at
amount paid in 105,566 55,842
Additional paid-in capital 31,759 31,588
Deferred compensation (1,046) (1,170)
Accumulated deficit (74,698) (69,301)
--------- ---------
Total stockholders' equity 61,581 16,959
--------- ---------
$ 68,914 $ 24,220
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
3
<PAGE>
ABGENIX, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Revenue from collaborative agreements from related
parties (net of related contributions to Xenotech of
$117 for the three months ended March 31, 1998) $ - $ 291
Contract revenue - 600
-------- --------
Total revenues - 891
Operating expenses:
Research and development 4,567 5,366
General and administrative 1,084 918
Equity in losses from the Xenotech joint venture 8 -
-------- --------
Total operating expenses 5,659 6,284
-------- --------
Operating loss (5,659) (5,393)
Other income and expenses:
Interest income (395) (197)
Interest expense 133 149
-------- --------
Net loss $ (5,397) $ (5,345)
-------- --------
-------- --------
Net loss per share $ (0.44) $ (0.67)
-------- --------
-------- --------
Shares used in computing net loss per share 12,137 7,953
-------- --------
-------- --------
</TABLE>
See accompanying notes.
4
<PAGE>
ABGENIX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net loss $(5,397) $(5,345)
Adjustments to reconcile net loss to net
cash used by operating activities:
Equity in losses of Xenotech 8 115
Depreciation and amortization 408 445
Stock options issued to consultants 171
Changes for certain assets and liabilities:
Prepaid expenses and other current assets 733 (236)
Deposits and other assets (98)
Accounts payable 753 (402)
Accrued product development costs (450)
Other accrued liabilities 188 137
-------- --------
Net cash used in operating activities (3,586) (5,384)
-------- --------
Investing activities:
Purchases of marketable securities (26,730) (3,643)
Sales of marketable securities 2,721 1,978
Capital expenditures (148) (54)
Contributions to Xenotech (117)
-------- --------
Net cash used in investing activities (24,157) (1,836)
-------- --------
Financing activities:
Net proceeds from issuances of common stock 49,724 46
Net proceeds from issuances of redeemable
convertible preferred stock 3,936
Principal payments on long-term debt and
capital lease obligations (419) (408)
-------- --------
Net cash provided in financing activities 49,305 3,574
-------- --------
Net increase (decrease) in cash and cash equivalents 21,562 (3,646)
Cash and cash equivalents at the beginning of
the period 1,415 4,617
-------- --------
Cash and cash equivalents at the end of the period $22,977 $ 971
-------- --------
-------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
ABGENIX, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31,1999
1. BASIS OF PRESENTATION
The unaudited condensed financial statements of Abgenix, Inc. (the "Company" or
"Abgenix") included herein have 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, 1998 and accompanying notes included in the Company's Annual Report as
filed on Form 10-K with the Securities and Exchange Commission on March 18,
1999. The results of operations for the quarter ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year or for
any other future period.
2. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common stock
outstanding. Potentially dilutive securities have been excluded from the
computation, as their effect is antidilutive.
3. FOLLOW-ON PUBLIC OFFERING
On March 4, 1999, the Company completed a follow-on public offering and issued
3,000,000 shares of its common stock to the public at a price of $15.00 per
share. The Company received cash of $42.3 million, after deducting underwriting
discounts and commissions and before deducting expenses payable by the Company.
On April 7, 1999 the Company's underwriters exercised an option to purchase an
additional 208,000 shares of common stock at a price of $15.00 per share to
cover over-allotments. The Company received cash of approximately $2.9 million,
net of underwriting discounts and commissions.
4. COLLABORATION AND LICENSE AGREEMENTS
In January 1999, the Company entered into a research license and option
agreement with AVI BioPharma ("AVI") to generate fully human antibodies to a
specified antigen. This agreement allows AVI to conduct research and provides
the partner with an option, for a limited time, to enter into a product license
agreement at a future date. If the product license agreement is signed, it may
provide the Company with additional license fees, milestone payments and
royalties.
In January 1999, the Company entered into a multi-antigen research license and
option agreement with Genentech. Under the agreement, the Company granted
Genentech a license to utilize XenoMouse technology in its antibody product
research efforts and an option to obtain product licenses for up to ten antigen
targets, but not more than two in any one year, over the agreement's six year
term. Included in the ten are the two previously identified antigen targets
under the now superceded research license and option agreement at the new
option, license fee and milestone payment levels. The agreement can be renewed
by Genentech for up to an additional four targets over a subsequent three year
period. Genentech acquired 495,356 shares of the Company's common stock for an
aggregate purchase price of $8,000,000. To renew the agreement at the end of the
sixth year, Genentech must purchase an additional $2,500,000 of the Company's
common stock at a 50% premium to the then current market price.
6
<PAGE>
In March 1999, the Company entered into a research collaboration agreement with
BASF Bioresearch Corporation ("BASF"). Under the agreement, BASF can utilize
Abgenix's XenoMouse technology to develop fully human antibodies to an
undisclosed antigen target. In return, Abgenix will receive an upfront research
payment, and could receive additional fees and milestone payments plus royalties
on future product sales by BASF, if any. BASF will be responsible for product
development, manufacturing and marketing of any products developed through the
collaboration.
5. SUBSEQUENT EVENT
In April 1999 the Company entered into a research, option and license agreement
with Amgen, Inc. ("Amgen"). Under the agreement, the Company will use its
XenoMouse-TM- technology to generate for Amgen fully human monoclonal antibodies
to an undisclosed antigen. In return, Abgenix will receive an upfront research
payment and could receive additional fees and milestone payments plus royalties
on future product sales by Amgen, if any. Amgen will be responsible for product
development, manufacturing, and marketing of any products developed through the
collaboration.
7
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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 AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE THE
STATEMENTS IN PARAGRAPH TWO UNDER "OVERVIEW" REGARDING OUR COMMERCIALIZATION
STRATEGY, THE STATEMENTS IN PARAGRAPH THREE UNDER "OVERVIEW" REGARDING FUTURE
REVENUES FROM CURRENT AND POTENTIAL FUTURE COLLABORATIVE ARRANGEMENTS, THE
STATEMENTS IN PARAGRAPH SIX UNDER "OVERVIEW" REGARDING ADVANTAGES TO
GENENTECH OF EARLY IMPLEMENTATION OF XENOMOUSE TECHNOLOGY, THE STATEMENTS IN
PARAGRAPH SEVEN UNDER "OVERVIEW" REGARDING THE RESULTS FROM ABX-CBL CLINICAL
TRIALS, THE STATEMENTS IN PARAGRAPH FIVE UNDER "LIQUIDITY AND CAPITAL
RESOURCES" REGARDING EXPANSION OF RESEARCH AND DEVELOPMENT USE OF AVAILABLE
RESOURCES DURING FUTURE PERIODS, THE STATEMENTS IN PARAGRAPH SIX UNDER
"LIQUIDITY AND CAPITAL RESOURCES" REGARDING THE SUFFICIENCY OF OUR AVAILABLE
RESOURCES TO MEET WORKING CAPITAL AND CAPITAL EXPENDITURE REQUIREMENTS, 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
HEREIN AND BELOW UNDER "ADDITIONAL FACTORS AFFECTING FUTURE OPERATING
RESULTS".
OVERVIEW
We are a biopharmaceutical company that develops and intends to commercialize
antibody therapeutic products for the treatment of a variety of disease
conditions, including transplant-related diseases, inflammatory and autoimmune
disorders, and cancer. We have developed XenoMouse technology, a proprietary
technology, which we believe enables quick generation of high affinity, fully
human antibody product candidates to essentially any disease target appropriate
for antibody therapy. We intend to use XenoMouse technology to build a large and
diversified product portfolio that we plan to commercialize either through
corporate collaborations or internal product development programs.
We have established collaborative arrangements to use XenoMouse technology to
produce fully human antibodies with ten companies covering at least 13 antigen
targets. Pursuant to these collaborations, we and our partners intend to
generate antibody product candidates for the treatment of cancer, inflammation,
transplant rejection, cardiovascular disease and growth factor modulation. Our
collaborative partners include Cell Genesys, Inc., Pfizer, Inc., Schering-Plough
Research Institute, Genentech, Inc., Millennium BioTherapeutics, Inc., Research
Corporation Technologies, Inc., Centocor, Inc., AVI BioPharma, Inc., BASF
Bioresearch Corporation and Amgen, Inc. Among our ten collaborative partners,
Pfizer, Genentech and Millennium BioTherapeutics have each entered into
additional collaborations with us specifying additional antigens for XenoMouse
antibody development. We expect that substantially all of our revenues for the
foreseeable future will result from payments under collaborative arrangements.
The terms of the collaboration arrangements vary, reflecting the value we add to
the development of any particular product candidate. These collaborations
typically provide our collaborative partners with access to XenoMouse technology
for the purpose of generating fully human antibody product candidates to one or
more specific antigen targets provided by the collaborative partner. In most
cases, we provide our mice to collaborative partners who then carry out
immunizations with their specific antigen target. In other cases, we may
immunize the mice with the collaborative partner's antigen target for additional
compensation. As an extension of this concept, we may grant multi-antigen
research licenses to select collaborative partners, allowing them to incorporate
XenoMouse technology into early stages of their antibody product research
efforts without specifically knowing the antigens that they intend to target for
XenoMouse antibody generation. These collaborative partners will need to execute
product licenses for any antibody product they wish to develop and
commercialize.
The financial terms of our existing collaborations typically include upfront
payments, potential license fees and milestone payments paid to us by the
collaborative partner. Based on our collaborative agreements entered into, these
payments and fees may approximate $8.0 million per antigen target assuming our
collaborative partner takes the antibody product candidate to commercialization.
In certain instances, the collaborative partner could make reimbursement
payments to us for research that we conduct on its behalf. Additionally, if a
product receives marketing
8
<PAGE>
approval from the FDA or an equivalent foreign agency, we are entitled to
receive royalties on any future product sales by the collaborative partner.
Furthermore, the collaborative partner will be responsible for worldwide
manufacturing, product development and marketing of any product developed
through the collaboration.
Our dependence on collaborative and licensing arrangements with third parties
subjects us to a number of risks. Agreements with collaborative partners
typically allow them significant discretion in electing whether to pursue any of
the planned activities. We cannot control the amount and timing of resources our
collaborative partners may devote to the product candidates. Even if we fulfill
our obligations under a collaborative agreement, the collaborative partner can
terminate the agreement at any time following proper written notice. If any
collaborative partner were to terminate or breach its agreement with us, or
otherwise fail to complete its obligations in a timely manner, our business,
financial condition and results of operations may be materially adversely
affected.
We also have four antibody product candidates that are under development
internally. Our lead product candidate, ABX-CBL, is an in-licensed mouse
antibody. We recently completed a multi-center confirmatory Phase II clinical
trial for ABX-CBL for the treatment of a transplant-related disease known as
graft versus host disease. Our other three product candidates were generated
using XenoMouse technology. We completed a Phase I clinical trial for our fully
human antibody product candidate in psoriasis, ABX-IL8, and began a Phase I/II
clinical trial in November 1998. In addition, we entered a Phase I clinical
trial for ABX-IL8 in rheumatoid arthritis in January 1999. We are in preclinical
development with two other fully human antibody product candidates: ABX-EGF for
use in the treatment of cancer; and ABX-RB2 for use in the treatment of chronic
immunological disorders. We expect to initiate Phase I clinical trials with
ABX-EGF in mid-1999.
In January 1999, we entered into a multi-antigen research license and option
agreement with Genentech. Under the agreement, we granted Genentech a license to
utilize XenoMouse technology in its antibody product research efforts and an
option to obtain product licenses for up to ten antigen targets. Included in the
ten are two previously identified antigen targets under previous collaboration
arrangements with Genentech. We believe that this license will allow Genentech
to integrate the use of XenoMouse technology much earlier in its research and
development efforts, allowing a more complete realization of the advantages of
XenoMouse technology. We plan to pursue similar multi-antigen research licenses
with new or existing collaborative partners.
In February 1999, we reported the preliminary results of our multi-center
confirmatory Phase II clinical trial for ABX-CBL in graft versus host disease.
This trial supports the safety and efficacy data seen in previously published
clinical trials conducted by third parties. The trial was conducted at nine
sites on 27 patients. Data from 23 of the 27 patients was evaluated for efficacy
at four dosing levels. A response rate of 73% was reported among the 15 patients
in the three highest dose groups. The remaining eight patients reported a 25%
response at the lowest dose. We believe the treatment was safe and well
tolerated except for temporary muscle pain. We will submit the complete report
to the FDA and, if approved, expect to commence a pivotal Phase III clinical
trial for ABX-CBL in mid-1999.
In 1991, Cell Genesys and Akros Pharma, Inc., (formerly JT America, Inc.),
formed Xenotech, an equally owned joint venture, to develop XenoMouse technology
and to commercialize products generated from XenoMouse technology. 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 Abgenix and Akros Pharma, Inc., and Abgenix is obligated to
fund 50% of all Xenotech expenses. During 1995, 1996 and 1997, Abgenix derived
revenues principally from performing research for Xenotech for the continued
development of XenoMouse technology.
In connection with the grant of stock options since our organization on July 15,
1996, we have recorded aggregate deferred compensation of approximately $2.3
million through December 31, 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 $125,000 and $149,000 in three months ended March 31, 1999 and
1998, respectively.
9
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenue under collaborative agreements from related parties for the three months
ended March 31,1998 consisted of revenue derived principally from performing
research for Xenotech. The development of XenoMouse technology was substantially
completed in 1996 with modest ongoing research activities in 1997 and 1998.
Therefore, we do not expect to recognize significant revenues from research
performed on behalf of Xenotech in the future.
Contract revenue of $600,000 in the three months ended March 31, 1998 consisted
of a nonrefundable signing fee paid in connection with the execution in January
1998 of a collaboration agreement and the achievement of a milestone under an
existing collaborative agreement. In the three months ended March 31, 1999, no
contract revenues were recognized.
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 our product candidates and
facilities expenses. Research and development expenses decreased from $5.4
million in the three months ended March 31,1998 to $4.6 million in the three
months ended March 31, 1999. The decrease in research and development expenses
reflects decreased expenses primarily for the manufacture of antibody products
in 1998 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 slightly
from $916,000 in the three months ended March 31, 1998 to $1,084,000 in the
three months ended March 31, 1999. The increase in general and administrative
expenses reflects additional investor relation costs due to being a publicly
traded company and increased financing activity, primarily related to our
follow-on 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. Interest income increased
due to higher average balances of short-term investments as a result of our
initial and follow-on public offerings.
LIQUIDITY AND CAPITAL RESOURCES
Since formation, we have financed our operations primarily through capital
contributions by, and borrowings from Cell Genesys, revenue from collaborative
arrangements, private placements of preferred stock, an initial public offering
of common stock in 1998 and a follow-on public offering of common stock in the
first quarter of 1999, and equipment leaseline financings and loan facilities.
During the three months ended March 31, 1999 we received net cash of $49.7
million from financing activities, consisting principally of $42.3 million from
the sale of 3,000,000 shares of common stock in a follow-on public offering in
March 1999, $8.0 million from the sale of 495,356 shares of common stock to
Genentech in January 1999 and issuance of common stock for the exercise of stock
options, less offering costs.
We have incurred operating losses in each of the last three years of operation,
including net losses of approximately $7.1 million in 1996, $35.9 million in
1997 and $16.8 million in 1998 and $5.4 million in the three months ended March
31, 1999. As of March 31, 1999, we had an accumulated deficit of approximately
$74.7 million. Our losses have resulted principally from costs incurred in
performing research and development for our XenoMouse technology and antibody
product candidates, from the non-recurring cross-license and settlement charge
(described in the Company's 1998 Annual Report) and from general and
administrative costs associated with our operations. See our Annual Report
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Overview" for a description of the cross-license and settlement. We
expect to incur additional operating losses until at least the year 2000 as a
result of our expenditures for research and product development, including costs
associated with conducting preclinical testing and clinical trials. We expect
the amount of such losses will fluctuate significantly from quarter to quarter
as a result of increases or decreases in our research and development efforts,
the execution or termination of collaborative arrangements, or the initiation,
success or failure of clinical trials.
10
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The Company's net cash used in operating activities was $3.6 million and $5.4
million for the three months ended March 31, 1999 and 1998, 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 March 31,1999, we had cash, cash equivalents and marketable securities
of $62.3 million. We have invested the net proceeds of our initial and follow
on public offering in highly liquid, interest-bearing, investment grade
securities. We have an agreement with a financing company under which we have
financed purchases of about $2.0 million of our 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. We also have a construction financing line with a bank in the
amount of $4.3 million that was used to finance construction of leasehold
improvements at our current facility. The line matures in January 2001, bears
interest at a rate of prime plus one percent (8.75% at March 31, 1999 and
December 31, 1998). As of March 31, 1999, no further borrowings were
available under the construction financing line.
We plan to continue to expend substantial resources for the expansion of
research and development, including costs associated with conducting preclinical
testing and clinical trials. We may be required to expend substantial 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 our business. Our
future liquidity and capital requirements will depend on many factors,
including:
- - continued scientific progress in our research and development programs;
- - size and complexity of these programs;
- - scope and results of preclinical testing and clinical trials;
- - time and expense involved in obtaining regulatory approvals;
- - competing technological and market developments;
- - establishment of further collaborative arrangements;
- - maintaining current collaborations;
- - time and expense of filing and prosecuting patent applications and enforcing
patent claims;
- - cost of establishing manufacturing capabilities, conducting commercialization
activities and arrangements;
- - product in-licensing; and
- - other factors not within our control.
We believe that our current cash balances, cash equivalents, marketable
securities and the cash generated from our collaborative arrangements will be
sufficient to meet our operating and capital requirements for at least the next
two years. However, we may need additional financing within this timeframe. We
may need 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 favorable to
us. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve restrictive
covenants. Collaborative arrangements may require us to relinquish our rights to
certain of our technologies, products or marketing territories. Our failure to
raise capital when needed may have a material adverse effect on our business,
financial condition and results of operations.
As of December 31, 1998 we had federal net operating loss carryforwards of
approximately $36.5 million. Our net operating loss carryforwards exclude losses
incurred prior to the organization of Abgenix in July 1996. Further, the
11
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amounts associated with the cross-license and settlement that have been
expensed for financial statement accounting purposes have been capitalized
and are being 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 2018, 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 our 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 may
result in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to receive supplies from
our vendors, or operate our accounting and other internal systems.
Our plan to resolve the Year 2000 issue is based on a recently completed
assessment of our exposure. All of our 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. We have already purchased the Year 2000-compliant upgrade of
our accounting system. We have determined that each of our 60 personal computers
is compliant. We have determined that our telephone, voicemail and network
equipment is not compliant and will be upgraded. In addition, we will be
gathering information about the Year 2000 compliance status of third parties
with whom we have significant relationships to determine the extent to which our
operations are vulnerable to these third parties' failure to solve their own
Year 2000 issue. None of our systems interface with those of third parties.
Upgrading the accounting system was already planned in order to acquire the
benefits of its improved features, and was not accelerated by the Year 2000
issue. We believe that the total cost of our compliance with the Year 2000 issue
will be less than $50,000.
We believe we have an effective program in place to resolve the Year 2000 issue
in a timely manner. However, should our software vendors be unable to address
the Year 2000 compliance of their products, or should our suppliers' operations
be disrupted by the Year 2000 issue, then our ability to serve our collaborative
partners and develop products may be materially and adversely impacted. Our
contingency plans for minimizing the impact include increasing supplies of
materials used in clinical trials, establishing accounts with alternative
vendors, and temporarily employing manual accounting systems until alternative
systems can be installed.
ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS
Abgenix became a public company in July 1998. Included here are risk factors as
updated from the Company's Annual Report. The following factors represent
current challenges that we face which create risk and uncertainty. Failure to
adequately overcome any of the following challenges, either singly or in
combination, could materially adversely effect our results of operations,
business, or financial position.
OUR XENOMOUSE TECHNOLOGY MAY NOT PRODUCE SAFE, EFFICACIOUS OR COMMERCIALLY
VIABLE PRODUCTS
Our XenoMouse technology is a new approach to the generation of antibody
therapeutic products. We have not commercialized any antibody products based on
XenoMouse technology. We are not aware of any commercialized, fully human
antibody therapeutic products that have been generated from any technologies
similar to ours. Our antibody product candidates are still at a very early stage
of development. We have begun clinical trials with respect to only one fully
human antibody product candidate, ABX-IL8. We cannot be certain that XenoMouse
technology will generate antibodies against all the antigens to which it is
exposed in an efficient and timely manner, if at all. Furthermore, XenoMouse
technology may not result in any meaningful benefits to our current or potential
collaborative partners or be safe and efficacious for patients. If XenoMouse
technology fails to generate antibody product candidates that lead to the
successful development and commercialization of products, our business,
financial condition and results of operations will be materially adversely
affected.
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CLINICAL TRIALS FOR OUR PRODUCT CANDIDATES WILL BE EXPENSIVE AND THEIR OUTCOME
IS UNCERTAIN
Conducting clinical trials is a lengthy, time-consuming and expensive process.
Before obtaining regulatory approvals for the commercial sale of any products,
we must demonstrate through preclinical testing and clinical trials that our
product candidates are safe and effective for use in humans. We will incur
substantial expense for, and devote a significant amount of time to, preclinical
testing and clinical trials.
Historically, the results from preclinical testing and early clinical trials
have often not been predictive of results obtained in later clinical trials. A
number of new drugs and biologics have shown promising results in clinical
trials, but subsequently failed to establish sufficient safety and efficacy data
to obtain necessary regulatory approvals. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations, which may delay,
limit or prevent regulatory approval. In addition, regulatory delays or
rejections may be encountered as a result of many factors, including changes in
regulatory policy during the period of product development.
Only two of our product candidates, ABX-CBL and ABX-IL8, are currently in
clinical trials. Patient follow-up for these clinical trials has been limited.
To date, data obtained from these clinical trials has been insufficient to
demonstrate safety and efficacy under applicable FDA guidelines. As a result,
such data will not support an application for regulatory approval without
further clinical trials. Clinical trials conducted by Abgenix or by third
parties on our behalf may not demonstrate sufficient safety and efficacy to
obtain the requisite regulatory approvals for ABX-CBL, ABX-IL8 or any other
potential product candidates. Regulatory authorities may not permit us to
undertake any additional clinical trials for our product candidates.
In addition, our other product candidates are in preclinical development, and we
have not submitted investigational new drug applications nor begun clinical
trials for such product candidates. Our preclinical or clinical development
efforts may not be successfully completed. We may not file further
investigational new drug applications. Our clinical trials may not commence as
planned.
Completion of clinical trials may take several years or more. The length of time
generally varies substantially according to the type, complexity, novelty and
intended use of the product candidate. Our commencement and rate of completion
of clinical trials 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;
- - lack of efficacy during the clinical trials; or
- - government or regulatory delays.
We have limited experience in conducting and managing clinical trials. We rely
on third parties, including our collaborative partners, to assist us in managing
and monitoring clinical trials. Our reliance on such third parties may result in
delays in completing, or failing to complete, such trials if they fail to
perform under our agreements with them.
Our product candidates may fail to demonstrate safety and efficacy in clinical
trials. Such failure may delay development of other product candidates, and
hinder our ability to conduct related preclinical testing and clinical trials.
As a result of such failures, we may also be unable to obtain additional
financing. Our business, financial condition and results of operations will be
materially adversely affected by any delays in, or termination of, our clinical
trials.
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THE CLINICAL SUCCESS OF ABX-CBL IS UNCERTAIN
We recently completed a multi-center confirmatory Phase II trial in graft
versus host disease, or GVHD. As of March 31, 1999, ABX-CBL had been
administered to a total of only 151 patients for GVHD and organ transplant
rejection indications. ABX-CBL was administered to a total of 85 of these 151
patients by third parties prior to Abgenix obtaining an exclusive license to
ABX-CBL. In our clinical trials, we administered ABX-CBL to only 66 of these
patients, 27 of which were used for our preliminary Phase II report submitted
to the FDA. We cannot rely on data obtained from patients studied prior to
our obtaining an exclusive license to ABX-CBL to support the efficacy of
ABX-CBL in an application for regulatory approval. In addition, our clinical
trials are being conducted with patients who have failed conventional
treatments and who are in the most advanced stages of GVHD. During the course
of treatment, these patients can die or suffer adverse medical effects for
reasons that may not be related to ABX-CBL. Such adverse effects may affect
the interpretation of clinical trial results.
As an extension to the original Phase II trial protocol, we filed for and
received permission from the FDA to enroll additional patients at a single
dose. This protocol remains open and continues to enroll patients. Our
application to the FDA for approval to advance to Phase III clinical trials
will contain the original Phase II data plus all additional data then
available from the extension protocol. There can be no assurance that the
results of the extension protocol will be favorable or will extend the
findings of the original Phase II study. In addition, the FDA may view our
application as insufficient and require additional clinical trials before
allowing us to commence a Phase III clinical trial. Additional clinical
trials will be extensive, expensive and time-consuming. If ABX-CBL fails to
receive regulatory approval, our business, financial condition and results of
operations may be materially adversely affected.
SUCCESSFUL DEVELOPMENT OF OUR PRODUCTS IS UNCERTAIN
Our development of current and future product candidates is subject to the risks
of failure inherent in the development of new pharmaceutical products and
products based on new technologies. These risks include:
- - delays in product development, clinical testing or manufacturing;
- - unplanned expenditures in product development, clinical testing or
manufacturing;
- - failure in clinical trials or failure to receive regulatory approvals;
- - emergence of superior or equivalent products;
- - inability to manufacture product candidates on a commercial scale;
- - inability to market products due to third-party proprietary rights;
- - election by our collaborative partners not to pursue product development;
- - failure by our collaborative partners to successfully develop products; and
- - failure to achieve market acceptance.
Because of these risks, our research and development efforts or those of our
collaborative partners may not result in any commercially viable products. To
date, none of our collaborative partners has exercised its right to obtain a
product license. If a significant portion of these development efforts is not
successfully completed, required regulatory approvals are not obtained, or any
approved products are not commercially successful, our business, financial
condition and results of operations will be materially adversely affected.
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WE ARE AN EARLY STAGE COMPANY
You must evaluate us in light of the uncertainties and complexities present in
an early stage biopharmaceutical company. Our product candidates are in early
stages of development. We will require significant additional investment in
research and development, preclinical testing and clinical trials, regulatory
and sales and marketing activities to commercialize current and future product
candidates. We cannot assure you that such product candidates, if successfully
developed, will generate sufficient or sustainable revenues to enable us to be
profitable.
WE HAVE A HISTORY OF LOSSES
We have incurred net losses in each of the last four years of operation,
including net losses of approximately $8.3 million in 1995, $7.1 million in
1996, $35.9 million in 1997 and $16.8 million in 1998. We have also incurred
net losses of approximately $5.4 million in the three months ended March 31,
1999. As of March 31, 1999, our accumulated deficit was approximately $74.7
million. Our losses have resulted principally from:
- - research and development costs relating to the development of our XenoMouse
technology and antibody product candidates;
- - cross-license and settlement costs relating to our patent portfolio; and
- - general and administrative costs relating to our operations.
We expect to incur additional operating losses until at least the year 2000 as a
result of increases in our research and development costs, including costs
associated with conducting preclinical testing and clinical trials. We expect
that the amount of operating losses will fluctuate significantly from quarter to
quarter as a result of increases or decreases in our research and development
efforts, the execution or termination of collaborative arrangements, or the
initiation, success or failure of clinical trials. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
OUR FUTURE PROFITABILITY IS UNCERTAIN
Prior to June 1996, our business was owned by Cell Genesys and operated as a
business unit. Since that time, we have funded our research and development
activities primarily from contributions from Cell Genesys, private placements of
preferred stock, the initial public offering of our common stock, the follow-on
public offering of our common stock, revenues generated from our collaborative
arrangements, equipment leaseline financings and loan facilities. We expect that
substantially all of our revenues for the foreseeable future will result from
payments under collaborative arrangements. To date, such payments have been in
the form of upfront payments, reimbursement for research and development
expenses and milestone payments, but may include license fees in the future.
Payments under our existing and any future collaborative arrangements will be
subject to significant fluctuation in both timing and amount. Our revenues may
not be indicative of our future performance or of our ability to continue to
achieve such milestones. Our revenues and results of operations for any period
may also not be comparable to the revenues or results of operations for any
other period. We cannot assure you that we will:
- - enter into further collaborative arrangements;
- - successfully complete preclinical or clinical trials;
- - obtain required regulatory approvals;
- - successfully develop, manufacture and market product candidates; or
- - generate additional revenues or profitability.
If we fail to achieve any of the above goals, our business, financial condition
and results of operations will be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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WE WILL NEED TO FIND COLLABORATIVE PARTNERS TO DEVELOP MANY OF OUR PRODUCT
CANDIDATES
Our strategy for the development and commercialization of antibody therapeutic
products depends, in large part, upon the formation of collaborative
arrangements with several collaborative partners. Potential collaborative
partners include pharmaceutical and biotechnology companies, academic
institutions and other entities. We must enter into these collaborations to
successfully develop and commercialize product candidates. Such collaborations
are necessary in order for us to:
- - access proprietary antigens for which we can generate fully human antibody
products;
- - fund our research and development activities;
- - fund preclinical testing, clinical trials and manufacturing;
- - seek and obtain regulatory approvals; and
- - successfully commercialize existing and future product candidates.
Only a limited number of fully human antibody product candidates have been
generated pursuant to our collaborations. None of these collaborative product
candidates has entered clinical testing and may not result in commercially
successful products. Current or future collaborative arrangements may not be
successful. If we fail to maintain our existing collaborative arrangements or to
enter into additional collaborative arrangements, our business, financial
condition and results of operations will be materially adversely affected.
Our dependence on collaborative arrangements with third parties subjects us to a
number of risks. Such collaborative arrangements may not be on terms favorable
to Abgenix. Agreements with collaborative partners typically allow partners
significant discretion in electing whether to pursue any of the planned
activities. We cannot control the amount and timing of resources our
collaborative partners may devote to the product candidates. Our partners may
not perform their obligations as expected. Business combinations or significant
changes in a collaborative partner's business strategy may adversely affect a
partner's willingness or ability to complete its obligations under the
arrangement. Even if we fulfill our obligations under a collaborative agreement,
our partner can terminate the agreement at any time following proper written
notice. If any collaborative partner were to terminate or breach our agreement
with it, or otherwise fail to complete its obligations in a timely manner, our
business, financial condition and results of operations may be materially
adversely affected. If we are not able to establish further collaborative
arrangements or any or all of our existing collaborative arrangements are
terminated, we may be required to seek new collaborative arrangements or to
undertake product development and commercialization at our own expense. Such an
undertaking may:
- - limit the number of product candidates that we will be able to develop and
commercialize;
- - reduce the likelihood of successful product introduction;
- - significantly increase our capital requirements; and
- - place additional strain on management's time.
Existing or future collaborative partners may pursue alternative technologies,
including those of our competitors. Disputes may arise with respect to the
ownership of rights to any technology or products developed with any current or
future collaborative partner. Lengthy negotiations with potential new
collaborative partners or disagreements between Abgenix and our collaborative
partners may lead to delays or termination in the research, development or
commercialization of product candidates or result in time consuming and
expensive litigation or arbitration. If our collaborative partners pursue
alternative technologies or fail to develop or commercialize successfully any
product candidate to which they have obtained rights from us, our business,
financial condition and results of operations may be materially adversely
affected.
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OUR JOINT VENTURE WITH AKROS PHARMA, INC. MAY LIMIT OUR ABILITY TO DEVELOP
PRODUCT CANDIDATES
In 1991, Cell Genesys and Akros Pharma, Inc., (formerly JT America, Inc.),
formed Xenotech, L.P., an equally-owned joint venture, to develop genetically
modified strains of mice which can produce fully human monoclonal antibodies,
called XenoMouse technology, and to commercialize products generated from
XenoMouse technology. Upon our organization, Cell Genesys assigned its rights in
Xenotech to us.
We must obtain licenses from Xenotech to commercialize antibody products
generated by XenoMouse technology. We have the right to license the use of
XenoMouse technology from Xenotech to develop a certain number of antigen
targets each year. If we have used our yearly allotment of licenses to develop
antigen targets and desire to acquire a license to develop additional antigen
targets, we may have to negotiate with Akros Pharma, Inc. or others to acquire
such rights. Disputes with Akros Pharma, Inc., or its parent company Japan
Tobacco, Inc., may result in the loss of the right to commercialize a product
candidate by either party. Limits on our ability to acquire additional licenses
to develop antigen targets, or disputes with Akros Pharma, Inc. or Japan
Tobacco, Inc. will limit our ability to establish collaborations and fully
realize the commercial potential of XenoMouse technology.
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE
The biotechnology and pharmaceutical industries are highly competitive and
subject to significant and rapid technological change. We are aware of several
pharmaceutical and biotechnology companies that are actively engaged in research
and development in areas related to antibody therapy. These companies have
commenced clinical trials of antibody products or have successfully
commercialized antibody products. Many of these companies are addressing the
same diseases and disease indications as Abgenix or our collaborative partners.
Also, we compete with companies that offer antibody generation services to
companies that have antigens. These competitors have specific expertise or
technology related to antibody development. These companies include GenPharm
International, Inc., a wholly-owned subsidiary of Medarex, Inc., Cambridge
Antibody Technology Group plc, Protein Design Labs, Inc. and MorphoSys AG.
Some of our competitors have received regulatory approval or are developing or
testing product candidates that may compete directly with our product
candidates. Recently, Sangstat Medical Corp. received approval for an organ
transplant rejection product that may compete with ABX-CBL, which is in clinical
trials. We are also aware that several companies, including Genentech, Inc.,
have potential product candidates that may compete with ABX-IL8. Furthermore, we
are aware that ImClone Systems, Inc., Medarex and OSI Pharmaceuticals, Inc. have
potential antibody and small molecule product candidates already in clinical
development that may compete with ABX-EGF, which is in preclinical development.
We may also compete with Japan Tobacco in supplying XenoMouse technology or
antibody product candidates to potential collaborative partners.
Many of these companies and institutions, either alone or together with their
collaborative partners, have substantially greater financial resources and
larger research and development staffs than we do. In addition, many of these
competitors, either alone or together with their collaborative partners, have
significantly greater experience than we do in:
- - developing products;
- - undertaking preclinical testing and human clinical trials;
- - obtaining FDA and other regulatory approvals of products; and
- - manufacturing and marketing products.
Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing products before us. If we commence
commercial product sales, we will be competing against companies with greater
marketing and manufacturing capabilities, areas in which we have limited or no
experience.
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We also face, 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 we are seeking to
develop therapeutic products. In addition, any product candidate that we
successfully develop 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;
- - new small molecules; or
- - other classes of therapeutic agents.
Developments by competitors may render our product candidates or technologies
obsolete or noncompetitive. We face and will continue to face intense
competition from other companies 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 collaborative partners, may
succeed in developing technologies or products that are more effective than
ours.
MARKET ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN
Our product candidates may not gain market acceptance among physicians,
patients, healthcare payors and the medical community. We may not achieve market
acceptance even if clinical trials demonstrate safety and efficacy, and the
necessary regulatory and reimbursement approvals are obtained. The degree of
market acceptance of any product candidates that we develop will depend on a
number of factors, including:
- - establishment and demonstration of clinical efficacy and safety;
- - cost-effectiveness of our product candidates;
- - their potential advantage over alternative treatment methods;
- - reimbursement policies of government and third-party payors; and
- - marketing and distribution support for our product candidates.
Physicians will not recommend therapies using our products until such time as
clinical data or other factors demonstrate the safety and efficacy of such
procedures as compared to conventional drug and other treatments. Even if the
clinical safety and efficacy of therapies using our antibody products is
established, physicians may elect not to recommend the therapies for any number
of other reasons, including whether the mode of administration of our antibody
products is effective for certain indications. For example, antibody products
are typically administered by infusion or injection, which requires substantial
cost and inconvenience to patients. Our product candidates, if successfully
developed, will compete with a number of drugs and therapies manufactured and
marketed by major pharmaceutical and other biotechnology companies. Our products
may also compete with new products currently under development by others.
Physicians, patients, third-party payors and the medical community may not
accept and utilize any product candidates that Abgenix or our collaborative
partners develop. If our products do not achieve significant market acceptance,
our business, financial condition and results of operations will be materially
adversely affected.
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OUR PATENT POSITION IS UNCERTAIN AND OUR SUCCESS DEPENDS ON OUR PROPRIETARY
RIGHTS
Our success depends in part on our ability to:
- - obtain patents;
- - protect trade secrets;
- - operate without infringing upon the proprietary rights of others; and
- - prevent others from infringing on our proprietary rights.
We will be able to protect our proprietary rights from unauthorized use by third
parties only to the extent that our proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. While we
have pending patent applications in the United States relating to XenoMouse
technology, no patents have been issued. We try to protect our proprietary
position by filing United States and foreign patent applications related to our
proprietary technology, inventions and improvements that are important to the
development of our business. The patent position of biopharmaceutical companies
involves complex legal and factual questions and, therefore, enforceability
cannot be predicted with certainty. Patents, if issued, may be challenged,
invalidated or circumvented. Thus, any patents that we own or license from third
parties may not provide any protection against competitors. Our pending patent
applications, those we may file in the future, or those we may license from
third parties, may not result in patents being issued. Also, patent rights may
not provide us with proprietary protection or competitive advantages against
competitors with similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology that we have developed.
The laws of certain foreign countries do not protect our intellectual property
rights to the same extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary know-how. We
seek protection, in part, through confidentiality and proprietary information
agreements. These agreements may not provide meaningful protection or adequate
remedies for our technology in the event of unauthorized use or disclosure of
confidential and proprietary information. The parties may breach such
agreements. Furthermore, our trade secrets may otherwise become known to, or be
independently developed by, our competitors.
WE MAY FACE CHALLENGES FROM THIRD PARTIES REGARDING THE VALIDITY OF OUR PATENTS
AND PROPRIETARY RIGHTS
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. The publication of discoveries
in the scientific or patent literature frequently occurs substantially later
than the date on which the underlying discoveries were made. Our commercial
success depends significantly on our ability to operate without infringing the
patents and other proprietary rights of third parties. Our technologies may
infringe the patents or violate other proprietary rights of third parties. In
the event of infringement or violation, Abgenix and our collaborative partners
may be prevented from pursuing product development or commercialization. Such a
result will materially adversely affect our business, financial condition and
results of operations.
In March 1997, we entered into a cross-license and settlement agreement with
GenPharm to avoid protracted litigation. Under the cross-license, we 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 our products and business. Our business, financial condition and
results of operations will be materially adversely affected if any of the
parties breaches the cross-license agreement. We have one issued European patent
relating to XenoMouse technology that is currently undergoing opposition
proceedings within the European Patent Office and the outcome of this opposition
is uncertain.
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The biotechnology and pharmaceutical industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
The defense and prosecution of intellectual property suits, United States Patent
and Trademark Office 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 our issued and licensed patents;
- - protect trade secrets or know-how that we own or license; or
- - determine the enforceability, scope and validity of the proprietary rights
of others.
If we become involved in any litigation, interference or other administrative
proceedings, we will incur substantial expense and the efforts of our technical
and management personnel will be significantly diverted. An adverse
determination may subject us to significant liabilities or require us to seek
licenses that may not be available from third parties. We may be restricted or
prevented from manufacturing and selling our products, if any, in the event of
an adverse determination in a judicial or administrative proceeding or if we
fail to obtain necessary licenses. Costs associated with these arrangements may
be substantial and may include ongoing royalties. Furthermore, we may not be
able to obtain the necessary licenses on satisfactory terms, if at all. These
outcomes will materially adversely affect our business, financial condition and
results of operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATIONS AND WE MAY NOT BE ABLE TO
OBTAIN REGULATORY APPROVALS
Our product candidates under development are subject to extensive and
rigorous domestic government regulation. The FDA regulates, among other
things, the development, testing, manufacture, safety, efficacy,
record-keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biopharmaceutical products. If our products are marketed
abroad, they also are subject to extensive regulation by foreign governments.
None of our 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 approval
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. For example, we have not received FDA
approval to commence Phase III clinical trials for ABX-CBL. 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 may:
- - adversely affect the successful commercialization of any drugs that Abgenix
or our collaborative partners develop;
- - impose costly procedures on Abgenix or our collaborative partners;
- - diminish any competitive advantages that Abgenix or our collaborative
partners may attain; and
- - adversely affect our receipt of revenues or royalties.
Certain material changes to an approved product such as manufacturing changes or
additional labeling claims are subject to further FDA review and approval. Any
required approvals, once obtained, may be withdrawn. Compliance with other
regulatory requirements may not be maintained. Further, if we fail to comply
with applicable FDA and other regulatory requirements at any stage during the
regulatory process, Abgenix or our contract manufacturers may be subject to
sanctions, including:
- - delays;
- - warning letters;
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- - 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.
We expect to rely on our collaborative partners to file investigational new drug
applications and generally direct the regulatory approval process for many of
our products. Our collaborative partners may not be able to conduct clinical
testing or obtain necessary approvals from the FDA or other regulatory
authorities for any product candidates. If we fail to obtain required
governmental approvals, our collaborative partners will experience delays in or
be precluded from marketing products developed through our research. In
addition, the commercial use of our products will be limited. Delays and
limitations may materially adversely affect our business, financial condition
and results of operations.
Abgenix and our contract manufacturers also are required to comply with the
applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations 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. Such facilities must be approved before we can use them in commercial
manufacturing of our products. Abgenix or our contract manufacturers may not be
able to comply with the applicable good manufacturing practice requirements and
other FDA regulatory requirements. If Abgenix or our contract manufacturers
fails to comply, our business, financial condition and results of operations
will be materially adversely affected.
WE RELY ON A SOLE SOURCE THIRD-PARTY MANUFACTURER AND DO NOT HAVE COMMERCIAL
SCALE MANUFACTURING EXPERIENCE
We lack the resources and capability to manufacture our products on a commercial
scale. We currently manufacture only limited quantities of antibody products for
preclinical testing. While we maintain a limited inventory of antibody products,
we depend on a sole source contract manufacturer to produce ABX-CBL, ABX-IL8 and
ABX-EGF under good manufacturing practice regulations for use in our clinical
trials. Our contract manufacturer has a limited number of facilities in which
our product candidates can be produced. Our contract manufacturer has limited
experience in manufacturing ABX-CBL, ABX-IL8 and ABX-EGF in quantities
sufficient for conducting clinical trials or for commercialization.
There are, on a worldwide basis, a limited number of contract facilities in
which our product candidates can be produced under good manufacturing practice
regulations for use in pharmaceutical drugs. It can also take a substantial
period of time for a contract facility to begin producing antibodies under good
manufacturing practice regulations. Accordingly, we depend on our contract
manufacturer to produce our product candidates under good manufacturing practice
regulations which meet acceptable standards for our 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. Our contract manufacturer may not
perform as agreed or may not remain in the contract manufacturing business for
the time required by us to successfully produce and market our product
candidates. If our contract manufacturer fails to deliver the required
quantities of our
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product candidates for clinical use on a timely basis and at commercially
reasonable prices, and we fail to find a replacement manufacturer or develop
our own manufacturing capabilities, our business, financial condition and
results of operations will be materially adversely affected.
In addition, Abgenix and our third-party manufacturer are required to register
manufacturing facilities with the FDA and foreign regulatory authorities. The
facilities will then be subject to inspections confirming compliance with good
manufacturing practice requirements established by the FDA or corresponding
foreign regulations. If Abgenix or our third-party manufacturer fails to
maintain compliance with the good manufacturing practice requirements, our
business, financial condition and results of operations will be materially
adversely affected.
WE DO NOT HAVE MARKETING AND SALES EXPERIENCE
We do not have a marketing, sales or distribution capability. For certain
products, we may establish an internal marketing and sales force. We intend to
enter into arrangements with third parties to market and sell most of our
products. We may not be able to enter into marketing and sales arrangements with
others on acceptable terms, if at all. To the extent that we enter into
marketing and sales arrangements with other companies, our revenues, if any,
will depend on the efforts of others. These efforts may not be successful. If we
are unable to enter into third-party arrangements, then we must develop a
marketing and sales force, which may need to be substantial in size, in order to
achieve commercial success for any product candidate approved by the FDA. We may
not successfully develop marketing and sales experience or have sufficient
resources to do so. If we do develop such capabilities, we will compete with
other companies that have experienced and well-funded marketing and sales
operations. If we fail to establish successful marketing and sales capabilities
or fail to enter into successful marketing arrangements with third parties, our
business, financial condition and results of operations will be materially
adversely affected.
WE DEPEND ON KEY PERSONNEL AND MUST CONTINUE TO ATTRACT AND RETAIN KEY EMPLOYEES
AND CONSULTANTS
We are highly dependent on the principal members of our scientific and
management staff. If we lose any of these persons, our business, financial
condition and results of operations may be materially adversely affected. For us
to pursue product development, marketing and commercialization plans, we will
need to hire additional qualified scientific personnel to perform research and
development. We will also need to hire personnel with expertise in clinical
testing, government regulation, manufacturing, marketing and finance. Attracting
and retaining qualified personnel will be critical to our success. We may not 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, we rely on members of our Scientific and Medical Advisory Boards
and other consultants to assist us in formulating our research and development
strategy. All of our consultants and the members of our Scientific and Medical
Advisory Boards are employed by other entities. They may have commitments to, or
advisory or consulting agreements with, other entities that may limit their
availability to us. If we lose the services of these personnel, the achievement
of our development objectives may be impeded. Such impediments may materially
adversely affect our business, financial condition and results of operations.
DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED ENTITIES
OWN A SIGNIFICANT PERCENTAGE OF OUR CAPITAL STOCK
Our directors, executive officers, principal stockholders and affiliated
entities beneficially own, in the aggregate, approximately 28.7% of our
outstanding common stock as of March 31, 1999. These stockholders, if acting
together, will be able to significantly influence all matters requiring approval
by our stockholders. Such matters include the election of directors and the
approval of mergers or other business combination transactions. We may be
adversely impacted by the control that such stockholders will have with respect
to matters affecting us.
22
<PAGE>
WE MAY REQUIRE ADDITIONAL FINANCING
We will continue to expend substantial resources for the expansion of research
and development, including costs associated with conducting preclinical testing
and clinical trials. We will be required to expend substantial funds in the
course of completing required additional development, preclinical testing and
clinical trials of and regulatory approval for product candidates. Our future
liquidity and capital requirements will depend on many factors, including:
- - the scope and results of preclinical testing and clinical trials;
- - the retention of existing and establishment of further collaborative
arrangements, if any;
- - continued scientific progress in our research and development programs;
- - the size and complexity of these programs;
- - the time and expense involved in obtaining regulatory approvals, if any;
- - competing technological and market developments;
- - 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 and product in-licensing; and
- - other factors not within our control.
We believe that our current cash balances, cash equivalents, short-term
investments and cash generated from our collaborative arrangements will be
sufficient to meet our operating and capital requirements for at least the next
two years. However, we may need additional financing within this timeframe. We
may need to raise additional funds through public or private financing,
collaborative arrangements or other arrangements. Additional funding may not be
available to us on favorable terms, if at all. Furthermore, any additional
equity financing may be dilutive to stockholders, and debt financing, if
available, may involve restrictive covenants. Collaborative arrangements may
require us to relinquish our rights to certain of our technologies, product
candidates or marketing territories. If we fail to raise additional funds when
needed, our business, financial condition and results of operations will be
materially adversely affected.
CELL GENESYS EXERCISES SIGNIFICANT INFLUENCE OVER US
As of March 31,1999 Cell Genesys beneficially owns 22.9% of our outstanding
capital stock. As a result, Cell Genesys will have significant influence over
all matters requiring the approval of our stockholders. Such matters include the
election of our Board of Directors and changes in control of Abgenix. We have
entered into a governance agreement with Cell Genesys which provides that so
long as Cell Genesys or a group to which it belongs owns a specific percentage
of our outstanding voting stock, Cell Genesys or the group shall have the right
to nominate a fixed number of directors to serve on our Board. The details of
this arrangement are set forth in the table below:
<TABLE>
<CAPTION>
NUMBER OF
PERCENTAGE OWNERSHIP DIRECTORS
-------------------- ---------
<S> <C>
50% or more 4 out of 7
Less than 50% but greater than 25% 3 out of 7
Less than 25% but greater than 15% 1 out of 7
</TABLE>
23
<PAGE>
The governance agreement also provides that Cell Genesys and each of our
officers and directors who owns voting stock shall agree to vote for the persons
nominated as set forth above. We may be adversely impacted by the significant
influence which Cell Genesys will have with respect to matters affecting us.
WE FACE UNCERTAINTY OVER REIMBURSEMENT AND HEALTHCARE REFORM
In both domestic and foreign markets, sales of our product candidates will
depend in part upon the availability of reimbursement from third-party payors.
Such third-party payors include 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. We may need to conduct post-marketing studies in order to demonstrate
the cost-effectiveness of our products. Such studies may require us to provide a
significant amount of resources. Our product candidates may not be considered
cost-effective. Adequate third-party reimbursement may not be available to
enable us to maintain price levels sufficient to realize an appropriate return
on our investment in product development. Domestic 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 our proposed products are approved for
marketing. Adoption of such legislation could further limit reimbursement for
pharmaceuticals. If the government and third-party payors fail to provide
adequate coverage and reimbursement rates for our product candidates, the market
acceptance of our products may be adversely affected. If our products do not
receive market acceptance, our business, financial condition and results of
operations will be materially adversely affected.
WE FACE PRODUCT LIABILITY RISKS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE INSURANCE
The use of any of our product candidates in clinical trials, and the sale of any
approved products, may expose us to liability claims resulting from such use or
sale of our products. These claims might be made directly by consumers,
healthcare providers or by pharmaceutical companies or others selling such
products. We may experience financial losses in the future due to product
liability claims. We have obtained limited product liability insurance coverage
for our clinical trials. Our insurance coverage limits are $5.0 million per
occurrence and $5.0 million in the aggregate. We intend to expand our 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. We may not be able to maintain insurance
coverage at a reasonable cost or in sufficient amounts to protect us against
losses. If a successful product liability claim or series of claims is brought
against us for uninsured liabilities or in excess of insured liabilities, our
business, financial condition and results of operations may be materially
adversely affected.
OUR OPERATIONS INVOLVE HAZARDOUS MATERIALS
Our research and manufacturing activities involve the controlled use of
hazardous materials. We cannot eliminate the risk of accidental contamination or
injury from these materials. In the event of an accident or environmental
discharge, we may be held liable for any resulting damages, which may exceed our
financial resources and may materially adversely affect our business, financial
condition and results of operations.
OUR STOCK PRICE IS HIGHLY VOLATILE
The market price of our common stock has been highly volatile and is likely to
continue to be volatile. Factors affecting our stock price include:
- - fluctuations in our operating results;
- - announcements of technological innovations or new commercial therapeutic
products by us or our competitors;
- - published reports by securities analysts;
- - progress with clinical trials;
24
<PAGE>
- - governmental regulation;
- - changes in reimbursement policies;
- - developments in patent or other proprietary rights;
- - developments in our relationship with collaborative partners;
- - public concern as to the safety and efficacy of our products; and
- - general market conditions.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS
Our Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws contain provisions which may discourage takeover attempts, including
transactions in which stockholders might receive a premium for their shares.
This may limit stockholders' ability to approve a transaction that they may
think is in their best interest. Our Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws require that any action required
or permitted to be taken by our stockholders must be taken at a properly called
meeting of stockholders that may be called only by the Board of Directors, the
Chairman of the Board or the President. In addition, the Board of Directors has
the authority, without stockholder action, to fix the rights and preferences of
and issue shares of preferred stock, which may have the effect of delaying or
preventing a change in control.
WE DO NOT INTEND TO PAY DIVIDENDS
We intend to retain any future earnings to finance the growth and development of
our business and we do not plan to pay cash dividends in the foreseeable future.
WE FACE UNCERTAINTY WITH YEAR 2000 COMPLIANCE
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 our 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 may
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 and other internal systems. If our
software vendors are unable to address the Year 2000 compliance of their
products, or should our suppliers' operations be disrupted by the Year 2000
Issue, then our ability to serve collaborative partners and develop products may
be materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART II
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
In July 1998, we closed an initial public offering of 2,875,000
shares of our 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
managing underwriters for our offering were BancAmerica Robertson
Stephens (now BancBoston Robertson Stephens Inc.) and Lehman
Brothers Inc. Of the $23,000,000 in gross proceeds
25
<PAGE>
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 us in connection with
expenses, including legal, printing and filing fees, in connection
with the offering. Of the remaining net proceeds, we have paid
$3,750,000 pursuant to the cross-license and settlement with
GenPharm and through the nine month period ended March 31, 1999,
approximately $13.2 million of the net proceeds have been spent on
research and development activities. There were no direct or
indirect payments to any of our directors or officers or to any
other person or entity. No material amount 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.
We are 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 fifteen 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 Abgenix.
RECENT SALES OF UNREGISTERED SECURITIES
On January 27, 1999, we issued 495,356 shares of our common stock
to Genentech at a per share purchase price of $16.15, or an
aggregate purchase price of $8.0 million. This issuance was in
connection with a collaborative arrangement we entered into with
Genentech.
The sale and issuance of our common stock to Genentech was deemed
to be exempt from registration under the Securities Act Regulation
D promulgated thereunder, as a transaction by an issuer not
involving any public offering. Genentech represented its intention
to acquire the common stock for investment only and not with a view
to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the certificates for the common
stock. Genentech had adequate access, through its relationship
with Abgenix, to information about Abgenix.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on form 8-K on March 30, 1999 relating
to the agreement between the Company and BASF Bioresearch
Corporation.
26
<PAGE>
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: May 14, 1999.
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)
27
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
--------
27.1 Financial Data Schedule
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND THE STATEMENTS OF OPERATIONS AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 22,977
<SECURITIES> 39,338
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,020
<PP&E> 7,536
<DEPRECIATION> 2,232
<TOTAL-ASSETS> 68,914
<CURRENT-LIABILITIES> 5,587
<BONDS> 1,746
0
0
<COMMON> 105,566
<OTHER-SE> (43,985)
<TOTAL-LIABILITY-AND-EQUITY> 68,914
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,659
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 133
<INCOME-PRETAX> (5,397)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,397)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,397)
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.44
</TABLE>
