<PAGE> 1
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 Quarterly Period Ended June 30, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-19756
PROTEIN DESIGN LABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3023969
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification Number)
2375 Garcia Avenue
Mountain View, CA 94043
(Address of principal executive offices)
Telephone Number (415) 903-3700
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 June 30, 1996, there were 15,612,671 shares of the Registrant's Common
Stock outstanding.
This report contains 27 pages. The index to exhibits begins on page 24.
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PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations
Three months ended June 30, 1996 and 1995
Six months ended June 30, 1996 and 1995 3
Balance Sheets
June 30, 1996 and December 31, 1995 4
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1996 and 1995 5
Notes to unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF 13
SECURITY HOLDERS
ITEM 5. OTHER INFORMATION - RISK FACTORS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
Signatures 23
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Research and development revenue under
collaborative agreements-related parties $ 3,000,000 $ 2,500,000 $ 7,000,000 $ 5,075,000
Research and development revenue under
collaborative agreements-other 500,000 - 500,000 -
Interest and other income 1,527,741 1,560,810 3,076,162 3,103,131
----------- ----------- ----------- -----------
Total revenues 5,027,741 4,060,810 10,576,162 8,178,131
Costs and expenses:
Research and development 7,155,596 5,301,793 13,626,943 9,770,600
General and administrative 1,349,721 1,196,735 2,626,324 2,323,856
----------- ----------- ----------- -----------
Total costs and expenses 8,505,317 6,498,528 16,253,267 12,094,456
----------- ----------- ----------- -----------
Net loss $(3,477,577) $(2,437,718) $(5,677,105) $(3,916,325)
=========== =========== =========== ===========
Net loss per share $(0.22) $(0.16) $(0.37) $(0.26)
=========== =========== =========== ===========
Shares used in computation of net loss
per share 15,597,000 15,338,000 15,552,000 15,297,000
=========== =========== =========== ===========
</TABLE>
See accompanying notes
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PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- --------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,345,127 $ 4,686,259
Short-term investments 61,651,889 41,743,675
Other current assets 926,097 648,536
------------ ------------
Total current assets 67,923,113 47,078,470
Property and equipment, net 7,841,000 7,850,485
Long-term investments 35,738,652 60,635,550
Other assets 927,891 847,891
------------ ------------
$112,430,656 $116,412,396
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 636,705 $ 637,637
Accrued compensation 685,105 605,127
Other accrued liabilities 1,234,374 1,313,805
Deferred revenue 1,000,000 1,000,000
------------ ------------
Total current liabilities 3,556,184 3,556,569
Stockholders' equity:
Preferred stock, par value $0.1 per share, 10,000,000
shares authorized; no shares issued and outstanding.
Common stock, par value $0.01 per share, 40,000,000
shares authorized; 15,612,671 and 15,405,761
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively. 156,127 154,058
Additional paid-in capital 138,089,791 135,616,420
Accumulated deficit (29,388,161) (23,711,056)
Unrealized loss on investments 16,715 796,405
------------ ------------
Total stockholders' equity 108,874,472 112,855,827
------------ ------------
$112,430,656 $116,412,396
============ ============
</TABLE>
See accompanying notes
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PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,677,105) $(3,916,325)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,568,703 1,180,358
Other 28,509 (1,280,954)
Changes in assets and liabilities:
Other current assets (277,561) (421,453)
Accounts payable (932) (157,122)
Accrued compensation 79,978 128,816
Other accrued liabilities (79,430) (369,569)
Deferred revenue - (75,000)
----------- -----------
Total adjustments 1,319,267 (994,924)
----------- -----------
Net cash used in operating activities (4,357,838) (4,911,249)
Cash flows from investing activities:
Purchases of short and long term investments (20,965,288) (51,339,086)
Maturities of short and long term investments 25,000,000 26,000,000
Sales of short and long term investments - 36,348,806
Capital expenditures (1,413,446) (1,851,212)
Increase in other assets (80,000) (25,800)
----------- -----------
Net cash provided by (used in) investing
activities 2,541,266 9,132,708
Cash flows from financing activities:
Principal payments on capital lease obligations - (24,971)
Net proceeds from issuance of common stock 2,475,440 1,156,210
----------- -----------
Net cash provided by financing activities 2,475,440 1,131,239
----------- -----------
Net decrease in cash and cash equivalents 658,868 5,352,698
Cash and cash equivalents at beginning of period 4,686,259 5,440,065
----------- -----------
Cash and cash equivalents at end of period $ 5,345,127 $10,792,763
=========== ===========
</TABLE>
See accompanying notes
5
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PROTEIN DESIGN LABS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND BUSINESS.
Protein Design Labs, Inc. (the "Company") is a biotechnology company
incorporated in the State of Delaware on July 24, 1986. The Company is engaged
in the research and development of human therapeutic products based on the
concept of protein engineering.
2. BASIS OF PRESENTATION AND RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS.
The balance sheet as of June 30, 1996 and the statements of operations and cash
flows for the six month periods ended June 30, 1996 and 1995 are unaudited but
include all adjustments (consisting of normal recurring adjustments) which the
Company considers necessary for a fair presentation of the financial position
at such dates and the operating results and cash flows for those periods.
Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K,
filed with the Securities and Exchange Commission for the year ended December
31, 1995 and the Company's Quarterly Report on Form 10-Q, filed with the
Securities and Exchange Commission for the quarter ended March 31, 1996.
Results for any interim period are not necessarily indicative of results for
any other interim period or for the entire year.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
REVENUE RECOGNITION UNDER DEVELOPMENT CONTRACTS. Non-refundable signing fees
that are not dependent on future performance under collaborative agreements are
recognized as revenue when received. Payments for research and development
performed by the Company under contractual arrangements are recognized as
revenue ratably over the quarter in which the payment is received and the
related work is performed. Revenue from achievement of milestone events is
recognized when the funding party agrees that the scientific or clinical
results stipulated in the agreement have been met. Deferred revenue arises
principally due to timing of cash payments received under research and
development contracts.
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NET LOSS PER SHARE. Net loss per share is computed using the weighted average
number of shares of common stock outstanding. Common equivalent shares from
options are excluded in the computation because their effect is anti-dilutive.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of management's
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. These estimates and assumptions could differ
significantly from the amounts which may actually be realized.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report contains, in addition to historical information,
forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
forward-looking statements. Factors that might cause such a difference
include, but are not limited to those discussed in "Risk Factors" as well as
those discussed elsewhere in this document and the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 and the Company's Quarterly
Report on Form 10-Q for the period ended March 31, 1996.
Overview
Since the Company's founding in 1986, a primary focus of its
operations has been research and development. Achievement of successful
research and development and commercialization of products derived from such
efforts is subject to high levels of risk and significant resource commitments.
The Company has a history of operating losses and expects to incur substantial
additional expenses over at least the next few years, as it continues to
develop its proprietary products and devote significant resources to
preclinical studies, clinical trials, and manufacturing. To date, revenues
have been generated primarily by amounts earned under license agreements and
interest income. These revenues may vary considerably from quarter to quarter
and from year to year and revenues in any period may not be predictive of
revenues in any subsequent period. The Company believes that increases in
expenses in the coming years will exceed increases in non-royalty revenues
under existing license agreements and that, as a result, in the absence of
other sources of significant revenue, losses will increase from year to year.
Three months ended June 30, 1996 and 1995
The Company's total revenues for the three months ended June 30, 1996
were approximately $5.0 million, an increase from approximately $4.1 million
for the comparable period in 1995. Research and development revenues increased
by $1.0 million and interest income approximately equaled the year-earlier
quarter.
The Company's research and development revenues under collaborative
agreements primarily consist of up-front licensing and signing fees, research
and development reimbursement funding and milestone payments. The amount of
revenue, if any, earned from each of these components is expected to vary from
quarter to quarter and from year to year, and variations may be significant
depending on the terms of the particular agreements. Related party research
and development revenues for the three months ended June 30, 1996 reflected
amounts earned under the Company's joint development, marketing and licensing
agreement with Boehringer Mannheim GmbH ("Boehringer Mannheim"), which
increased by $0.5 million from the comparable period in 1995. This increase is
attributable to increased efforts under the agreement by the Company. The
Company expects that the current research and development
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reimbursement funding arrangement with Boehringer Mannheim will expire as
scheduled in October 1996. In addition, the Company earned research and
development revenues of $0.5 million for the three months ended June 30, 1996
under the Company's development and licensing agreement with an unrelated third
party compared to no revenues from unrelated third parties in the comparable
period in 1995.
Interest and other income for the three months ended June 30, 1996 in
the amount of $1.5 million approximately equaled that in the comparable period
of 1995. Although cash and investments were lower, interest rates for the three
month period ended June 30, 1996 were higher than the comparable period in
1995.
Total costs and expenses for the three months ended June 30, 1996
increased to approximately $8.5 million from approximately $6.5 million in the
comparable period of 1995. The increase in costs and expenses was due
primarily to increases in research and development efforts and related
expenses.
Research and development expenses for the three months ended June 30,
1996 increased to approximately $7.2 million from approximately $5.3 million in
the comparable period of 1995, primarily as a result of the Company's
conducting additional development efforts independently and under its
agreements with its collaborative partner Boehringer Mannheim. These expenses
included the continuation of clinical trials, costs of conducting preclinical
tests, expansion of pharmaceutical development capabilities including support
for both clinical development and manufacturing process development, higher
costs in the expanded operation of the manufacturing facility and the addition
of staff. The Company anticipates that expenses for research and development
will continue to increase as its initial products move into later stage
clinical development, as additional potential products are selected as clinical
candidates for further development activities and as the Company expands its
manufacturing capabilities in support of ongoing and planned clinical trials
and potential commercial supplies.
General and administrative expenses for the three months ended June
30, 1996 increased to approximately $1.3 million from approximately $1.2
million in the comparable period of 1995. These increases are primarily the
result of increased staffing and associated expenses necessary to manage and
support the Company's expanding operations. The Company believes that its
general and administrative expenses will continue to increase as the Company
increases its staffing, enhances its administrative capabilities and expands
its patent activities.
Six months ended June 30, 1996 and 1995
The Company's total revenues for the six months ended June 30, 1996
were approximately $10.6 million, an increase from approximately $8.2 million
for the comparable period in 1995. Research and development revenues increased
by approximately $2.4 million and interest income approximately equaled the
year-earlier period.
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Related party research and development revenues for the six months
ended June 30, 1996 reflected amounts earned under the Company's agreement with
Boehringer Mannheim, which increased by $2.0 million from the comparable period
in 1995. This increase is attributable to increased efforts under the
agreement by the Company as well as receipt of a milestone payment in January
1996. Increased funding from Boehringer Mannheim during the six months ended
June 30, 1996 was partially offset by reduced funding from Hoffmann-La Roche
Inc. and its parent Roche Holding Ltd. (collectively, "Roche"), which funding
arrangement expired in January 1995. In addition, the Company earned research
and development revenues of $0.5 million for the six months ended June 30, 1996
under the Company's development and licensing agreement with an unrelated third
party compared to no revenues from unrelated third parties in the comparable
period in 1995.
Interest and other income for the six months ended June 30, 1996 in
the amount of $3.1 million approximately equaled that in the comparable period
of 1995. Although cash and investments were lower, interest rates for the six
month period ended June 30, 1996 were higher than the comparable period in
1995.
Total costs and expenses for the six months ended June 30, 1996
increased to approximately $16.3 million from approximately $12.1 million in
the comparable period of 1995. The increase in costs and expenses was due
primarily to increases in research and development efforts and related
expenses.
Research and development expenses for the six months ended June 30,
1996 increased to approximately $13.6 million from approximately $9.8 million
in the comparable period of 1995, primarily as a result of the Company's
conducting additional development efforts independently and under its
agreements with its collaborative partner Boehringer Mannheim. These expenses
included the continuation of clinical trials, costs of conducting preclinical
tests, expansion of pharmaceutical development capabilities including support
for both clinical development and manufacturing process development, higher
costs in the expanded operation of the manufacturing facility and the addition
of staff. The Company anticipates that expenses for research and development
will continue to increase as its initial products move into later stage
clinical development, as additional potential products are selected as clinical
candidates for further development activities, as the Company expands its
manufacturing capabilities in support of ongoing and planned clinical trials
and potential commercial supplies.
General and administrative expenses for the six months ended June 30,
1996 increased to approximately $2.6 million from approximately $2.3 million in
the comparable period of 1995. These increases are primarily the result of
increased staffing and associated expenses necessary to manage and support the
Company's expanding operations. The Company believes that its general and
administrative expenses will continue to increase as the Company increases its
staffing, enhances its administrative capabilities and expands its patent
activities.
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The Company believes that total costs and expenses will rise
significantly over the coming quarters and years as the Company continues to
invest in research, pharmaceutical development, manufacturing, preclinical, and
clinical activities and as additional potential products enter human clinical
trials or progress to more advanced stages of clinical development. The
Company believes that revenues from research and development reimbursement
funding from Boehringer Mannheim will be essentially unchanged in 1996,
compared to 1995. The Company expects that the current research and development
reimbursement funding arrangement with Boehringer Mannheim will expire as
scheduled in October 1996. The Company further believes that research and
development revenues under existing agreements with collaborative partners will
terminate or decline over time, as fewer milestones remain unearned, as
products covered by such agreements proceed through clinical trials, and before
such products receive marketing approval from appropriate authorities, if ever,
and begin to generate royalty payments. Overall, the Company believes that
increases in expenses over the next several years will more than offset any
increases in non-royalty revenues under existing agreements.
Liquidity and Capital Resources
To date the Company has financed its operations primarily through
public and private placements of equity, receipt of contract revenue and
research and development funding under licensing agreements, capital lease
financing and interest income on invested capital. At June 30, 1996, the
Company had cash, cash equivalents and investments, both short and long term, in
the aggregate of approximately $102.7 million as compared to approximately
$107.1 million at December 31, 1995. The Company expects that its existing
capital resources will enable the Company to maintain current and planned
operations beyond 1997.
Net cash used in operating activities was approximately $4.4 million
for the six months ended June 30, 1996 compared to approximately $4.9 million in
the comparable period of 1995. The Company expects to incur substantial
additional costs in the future, including costs related to ongoing research and
development activities, conducting preclinical and clinical trials, operation of
its manufacturing facility and expansion of manufacturing capabilities,
development of marketing and sales capabilities, increases in patent activities
and continued expansion of general and administrative resources. These
activities will require substantial additional financial resources before the
Company can expect to realize significant revenue from product sales, if such
revenues are ever achieved. There can be no assurance that additional funds
will be available, when required on terms acceptable to the Company, if at all.
Accounting Changes
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" ("FAS 123") which will be effective for the Company's 1996 fiscal
year. FAS 123 allows companies which have stock-based compensation
arrangements with employees to
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adopt a new fair-value basis of accounting for stock options and other equity
instruments, or to continue to apply the existing accounting principles under
APB Opinion 25, "Accounting for Stock Issued to Employees" but with additional
financial statement disclosure. The Company expects to continue to account for
stock-based compensation arrangements with employees under APB Opinion 25, and
therefore does not expect FAS 123 to have a material impact on its financial
position, results of operations and cash flows.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on June 27, 1996
at its principal offices in Mountain View, California. Of the 15,579,435
shares outstanding as of the record date, 10,923,164 shares were present at the
meeting or represented by proxies, representing approximately 70% of the total
votes eligible to be cast.
At the meeting, the stockholders voted to elect two (2) Class I
directors of the Company to serve for a three-year term and until their
successors are duly elected and qualified. The name of each Class I director
elected at the Annual Meeting and the votes cast with respect to each such
individual are set forth below.
<TABLE>
<CAPTION>
For Withheld
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<S> <C> <C>
George M. Gould, Esq. 10,803,282 119,882
Jon S. Saxe, Esq. 10,803,317 119,847
</TABLE>
In addition, the stockholders voted to ratify the appointment of Ernst
& Young LLP as the independent auditors of the Company for the fiscal year
ending December 31, 1996. This proposal received 10,909,067 affirmative votes
and 9,047 negative votes. There were 5,050 abstentions.
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ITEM 5. OTHER INFORMATION.
RISK FACTORS
This Quarterly Report contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this section as well as those discussed elsewhere in this
document and the Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and Quarterly Report on Form 10-Q for the Quarter ended March
31, 1996.
History of Losses; Future Profitability Uncertain.
As of June 30, 1996, the Company had accumulated net losses of
approximately $29.4 million. To date, the Company has not received regulatory
approval to distribute any products nor generated any significant revenues from
product sales. The Company's research efforts have focused on the development
of humanized and human antibodies and other novel proteins to prevent or treat
certain disease conditions, including viral infections, autoimmune diseases,
cancer and cardiovascular conditions. PDL's revenues to date have consisted,
and for the near future are expected to consist, principally of research and
development funding, licensing and signing fees and milestone payments from
pharmaceutical companies under collaborative research and development
agreements. No significant revenues have been generated from product sales or
royalties from licenses to the Company's technology, and potential products
that may be marketed by the Company, if any, are not expected to be approved
for marketing for several years. The time and resource commitment required to
achieve market success for any individual product is extensive and uncertain.
No assurance can be given that the Company's or its collaborative partners'
product development efforts will be successful, that required regulatory
approvals can be obtained, that potential products can be manufactured at
acceptable cost and with appropriate quality, or that any approved products can
be successfully marketed. In the absence of revenues from new corporate
collaborations or other sources, the Company expects to incur substantial
operating losses in the foreseeable future as earlier stage products move into
later stage clinical development, as additional potential products are selected
as clinical candidates for further development and as the Company invests in
additional manufacturing capacity. Moreover, the Company believes that its
general and administrative expenses will continue to increase as the Company
increases its staffing, enhances its administrative capabilities and expands
its patent activities. The amount of net losses and the time required to reach
sustained profitability are highly uncertain. To achieve sustained profitable
operations, the Company, alone or with its collaborative partners, must
successfully discover, develop, manufacture, introduce and market its products.
No assurances can be given that the Company will be able to achieve or sustain
profitability.
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Uncertainty of Clinical Trial Results.
Before obtaining regulatory approval for the commercial sale of any of
its products under development, the Company must demonstrate through
preclinical studies and clinical trials that the product is safe and
efficacious for use in the clinical indication for which approval is sought.
While the Company has certain preclinical and clinical evidence supporting
further research and development of its potential products, there can be no
assurance that the Company will be permitted to undertake further clinical
trials for any of its products or, if permitted, that such products will be
demonstrated to be safe and efficacious. The results from preclinical studies
and early clinical trials may not be predictive of results that will be
obtained in later-stage clinical trials and there can be no assurance that the
Company's future clinical trials will demonstrate the safety and efficacy of
any products or will result in approval to market products. In any particular
situation numerous factors may be involved that may lead to different results
in larger later-stage trials from those obtained in earlier stage trials. For
example, early stage trials usually involve a small number of patients and thus
may not accurately reflect the actual results regarding safety and efficacy
that may be demonstrated with a large number of patients in a later-stage
trial. Also, differences in the clinical trial design between an early-stage
and late-stage trial may cause different results regarding the safety and
efficacy of a product to be obtained. In addition, many early stage trials are
unblinded and based on qualitative evaluations by clinicians involved in the
performance of the trial whereas later stage trials are generally required to
be blinded in order to provide more objective data for assessing the safety and
efficacy of the product.
The Company and a number of other companies in the biotechnology
industry have suffered significant setbacks in advanced clinical trials,
even after promising results in earlier-stage trials. For example, in
June 1995, Roche and the Company announced the results of a Phase II/III
clinical trial using the Company's SMART(TM) Anti-Tac Antibody, Zenapax, for
the prevention of graft-versus-host disease. The analysis of this data by
Roche led Roche to conclude that Zenapax was not effective in reducing the
incidence of GvHD in the patient population studied. Roche is currently
conducting two large, multinational Phase III trials of Zenapax for the
reduction in the number of patients who experience kidney transplant rejection
episodes within six months of transplantation. Enrollment has been completed
and results are expected to be available in the third or fourth quarter of
1996. Although results of a Phase I trial in this indication were positive,
the number of patients in that study was small and may not reflect the actual
results that will be achieved when tested in a large number of patients.
Moreover, no Phase II trial in this indication was conducted to obtain
additional information about the use of Zenapax in patients prior to advancing
to Phase III trials. Additionally, differences exist between the Phase I and
Phase III trial designs, including, without limitation, the fact that most of
the patients in the Phase I trial received kidney transplants from living
related donors, whereas the Phase III trials only include patients who have
received cadaverous transplants. Various factors, such as these, could lead to
different results than those observed in the Phase I trial. Therefore, there
can be no assurance that the results of the Phase III trials will be positive.
If not, there would be a
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material adverse effect on the Company's business and on the price of the
Company's stock.
PDL is also conducting potentially pivotal trials of its PROTOVIR(TM)
human anti-CMV antibody, both for treatment of CMV retinitis in AIDS patients
and for the prevention of CMV infections in recipients of bone marrow
transplants. Earlier stage trials were limited to small numbers of patients
and had significant differences in design from the larger Phase II and Phase
II/III trials currently being conducted. For example, both the Phase II and
the Phase II/III trial for the treatment of CMV retinitis will allow additional
types of background treatment (i.e., the other drugs used to treat CMV
retinitis) in the placebo and treatment groups than were available and used in
the Phase I/II trial. These trials will also utilize a more sensitive means of
measuring progression (i.e., relapse) of CMV retinitis than was used in the
Phase I/II trial. These or other differences in trial designs between the
later stage and earlier stage clinical trials might lead to different results
regarding the safety and efficacy of PROTOVIR in these later stage trials.
There can be no assurance that the results of these trials will show PROTOVIR
to be safe and efficacious and, if not, there would be a material adverse
effect on the Company's business and on the price of the Company's stock.
Dependence on Collaborative Partners.
The Company has collaborative agreements with several pharmaceutical
companies for the development, manufacturing and marketing of certain potential
products, which include the most advanced products under development by the
Company. The Company has granted to its collaborative partners certain
exclusive rights to commercialize the products developed under these
collaborative agreements. In some cases, the Company is relying on its
collaborative partners to conduct clinical trials, to obtain regulatory
approvals and, if approved, to manufacture and market these licensed products.
For example, Roche controls the development of Zenapax, the most
advanced of the Company's products in development, and the Company is dependent
upon the resources and activities of Roche to pursue further commercialization
of Zenapax in order for the Company to achieve milestones or royalties from the
development of this product. There can be no assurance that Roche will
continue with additional or ongoing trials, that these trials will be
successful or even if successful, that the results will be sufficient for
regulatory approval, that Roche will proceed to bring this product to market in
a rapid and timely manner, that Zenapax can be manufactured by Roche according
to cGMP in a consistent and cost-effective manner or, once marketed, that other
independently developed products of Roche or others will not compete with or
prevent Zenapax from achieving meaningful sales.
In addition, because the Company expects, in some cases, to rely on
its contractual rights to access data collected by its collaborative partners
in various phases of its clinical development efforts, the Company is dependent
on the continued satisfaction by such parties of their contractual obligations
to provide such access and cooperate with the Company in the preparation and
submission of appropriate filings
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with the FDA and equivalent foreign government regulatory agencies. For
example, the Company is currently relying on and may continue to rely on
Boehringer Mannheim for the manufacturing and clinical development of OST 577,
the Company's Human Anti-Hepatitis B Virus Antibody. Boehringer Mannheim has
marketing rights to this antibody in most countries, but not in North America.
There can be no assurance that Boehringer Mannheim will provide timely access
to the manufacturing and clinical data, that the FDA will permit the Company to
rely on that data or that the trials conducted by Boehringer Mannheim will
produce data appropriate for approval by the FDA. If the Company is unable to
rely on the clinical data collected by Boehringer Mannheim or its other
collaborative partners, the Company may be required to repeat clinical trials
or perform supplemental clinical trials in order to achieve regulatory approval
in North America. Compliance with these requirements could significantly delay
commercialization efforts and require substantially greater investment by the
Company.
The Company's collaborative research agreements are generally
terminable by its partners on short notice. Continued funding and
participation by collaborative partners will depend not only on the timely
achievement of research and development objectives by PDL and the successful
achievement of clinical trial goals, neither of which can be assured, but also
on each collaborative partner's own financial, competitive, marketing and
strategic considerations. Such considerations include the commitment of
management of the collaborative partners to the continued development of the
licensed products, the relationships among the individuals responsible for the
implementation and maintenance of the collaborative efforts, the relative
advantages of alternative products being marketed or developed by others,
including their relative patent and proprietary technology positions, and the
ability to manufacture successfully. For example, with respect to its
continuing relationship with Boehringer Mannheim, the Company has experienced
difficulty in the relationship due to a number of factors, including
disagreements regarding the timing of the initiation of and design of certain
proposed clinical trials involving the development of certain products licensed
to Boehringer Mannheim, particularly OST 577. In addition, certain
collaborative partners may be developing competitive products that may result
in delay or a relatively smaller resource commitment to product launch and
support efforts than might otherwise be obtained if the potentially competitive
product were not under development or being marketed. Suspension or
termination of any of the Company's current collaborative research agreements
could have a material adverse effect on the Company's operations and could
significantly delay the development of the affected products. While the
Company is seeking additional collaborative arrangements to develop and
commercialize its products in the future, there can be no assurance it will be
able to do so on acceptable terms.
Limited Experience in, and Unpredictability of, Conducting Clinical
Trials.
Although certain of the officers and employees of the Company have
significant previous experience in the pharmaceutical industry, the Company
itself has conducted only a limited number clinical trials to date. There can
be no assurance that the Company will be able to successfully commence and
complete all of its planned clinical
17
<PAGE> 18
trials without significant additional resources and expertise. In addition,
there can be no assurance that the Company will meet its contemplated
development schedule for any of its products in development. Certain of the
Company's more advanced trials are being conducted with or by third party
organizations, such as two trials of PROTOVIR, which are being conducted in
collaboration with government-sponsored organizations. Certain of these
relationships involve PDL surrendering significant control over some or all of
the conduct of the clinical trial. There can be no assurance that surrendering
or sharing control in certain of these trials will not result in delays due to
factors such as changes in funding, reduction in the number of clinical sites
participating in the trial or more limited patient accrual efforts than might
otherwise be undertaken if PDL had sponsored the trial independently. If the
Company or its collaborative partners are unable to commence or continue
clinical trials as currently planned, complete the clinical trials on a timely
basis or demonstrate the safety and efficacy of its potential products, the
Company's business and financial condition would be materially and adversely
affected. In addition, even if a potential product is successfully developed
according to plans, there can be no assurance that the FDA or other regulatory
authorities will approve the potential product on a timely basis or at all.
The rate of completion of the Company's clinical trials is
significantly dependent upon, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors, including the
size of the patient population, perceived risks and benefits of the drug under
study, availability of competing therapies, access to reimbursement from
insurance companies, design of the protocol, proximity of and access by
patients to clinical sites, patient referral practices, eligibility criteria
for the study in question and efforts of the sponsor of and clinical sites
involved in the trial to facilitate timely enrollment in the trial. Delays in
the planned rate of patient enrollment may result in increased costs and
expenses in completion of the trial or in potentially requiring the Company to
undertake additional studies in order to obtain regulatory approval in the
event that the applicable standard of care changes in the therapeutic
indication under study. Any such delays or additional studies could have a
material adverse effect on the business and financial condition of the Company.
For example, the recent FDA approvals of Vitrasert(TM), a ganciclovir implant
developed by Chiron Corporation to treat CMV retinitis, and VISTIDE(TM), a drug
developed by Gilead Sciences, Inc., for the systemic treatment of CMV retinitis
in patients with AIDS, may adversely impact the accrual of patients or the
interpretation of the clinical data resulting from the current clinical trials
of PROTOVIR. Also, patient accrual in the Company's ongoing Phase II/III trial
of the SMART M195 Antibody in myeloid leukemia has been negatively affected by
changes in referral patterns, with such patients now more commonly being
treated in local hospitals rather than being referred to tertiary care
hospitals. While the Company is exploring various possible actions to
accelerate accrual in these trials, there can be no assurance that any such
actions, if taken, will be successful.
In addition, the Company is relying and intends to rely on CROs and
other third parties under the management of the Company's clinical department
for the conduct of clinical trials. There can be no assurance that PDL will be
able to negotiate
18
<PAGE> 19
arrangements with third parties for the conduct of PDL's clinical trials on
acceptable terms in the future or that such arrangements will be successful.
Uncertainties Resulting From Manufacturing Changes.
Manufacturing of antibodies for use as therapeutics in compliance with
regulatory requirements is typically complex, time-consuming and expensive.
When certain changes are made in the manufacturing process, it is necessary to
demonstrate that the changes have not caused the resulting drug material to
differ significantly from the drug material previously produced (if results of
prior preclinical and clinical studies performed using the previously produced
drug material are to be relied upon in regulatory filings). Such changes could
include, for example, changing the cell line used to produce the antibody,
changing the fermentation or purification process or moving the production
process to a new manufacturing plant. Depending upon the types and degree of
differences between the newer and older drug material, various studies could be
required to demonstrate that the newly produced drug material is sufficiently
similar to the previously produced drug material, possibly including additional
animal studies or human clinical trials. Manufacturing changes have been made
or are likely to be made for the production of PDL's products currently in
clinical development. There can be no assurance that such changes will not
result in delays in development or regulatory approvals or, if occurring after
regulatory approval, in reduction or interruption of commercial sales. Such
delays could have an adverse effect on the competitive position of those
products and could have a material adverse effect on the business and financial
condition of the Company.
Specifically, with respect to two of the antibodies in clinical
development licensed from Sandoz, MSL 109 (PROTOVIR) and OST 577 (Human
Anti-Hepatitis B Antibody), the cell lines developed by PDL for both antibodies
and the production processes developed by PDL and Boehringer Mannheim for
PROTOVIR and OST 577, respectively, are different from those utilized by Sandoz
for the manufacture of the antibody supplies used in earlier clinical trials.
With respect to the development of PROTOVIR, a decision to change the cell line
and manufacturing procedure requires demonstration to the FDA that the new drug
substance is acceptable. Although PDL has been permitted to enter new MSL 109
antibody material into ongoing U.S. clinical trials based on various laboratory
tests, there can be no assurance that this new material, when used in humans,
will have the same characteristics or produce results similar to the antibody
material originally developed and used by Sandoz in earlier clinical trials.
If not, the Company may be required to conduct additional laboratory or
clinical testing, which could result in significant delays or additional
expenses and could have an adverse effect on the competitive position of
PROTOVIR and a material adverse effect on the business and financial condition
of the Company.
With respect to the development of OST 577, the Company has been
advised that Boehringer Mannheim will be permitted to enter OST 577
manufactured by a new process into planned U.S. clinical trials. However,
there can be no assurance that this new material, when used in humans, will
have the same characteristics or produce
19
<PAGE> 20
results similar to the antibody material originally developed and used by
Sandoz in earlier clinical trials. If not, Boehringer Mannheim or the Company
may be required to conduct additional laboratory or clinical testing, which
could result in significant delays or additional expenses and could have an
adverse effect on the competitive position of OST 577 and a material adverse
effect on the business and financial condition of the Company.
In addition, the Company is aware that Roche has constructed a new
manufacturing plant that could be used to produce Zenapax. If Roche decides to
change the site of its production of Zenapax to that or another facility or to
make other manufacturing changes, then there can be no assurance that such
changes by Roche would not cause delays in the development or commercialization
of Zenapax. Such delays could have an adverse effect on the competitive
position of Zenapax and could have a material adverse effect on the business
and financial condition of the Company.
Absence of Manufacturing Experience; Human Anti-HBV Antibody
Manufacturing by Boehringer Mannheim.
Of the products developed by the Company which are currently in
clinical development, Roche is responsible for manufacturing Zenapax and
Boehringer Mannheim is responsible for manufacturing OST 577. The Company
intends to manufacture the SMART M195 Antibody, PROTOVIR and some of its other
products in preclinical development. PDL currently leases approximately 45,000
square feet housing its manufacturing facility in Plymouth, Minnesota. PDL
intends to continue to manufacture potential products for use in preclinical
and clinical trials using this manufacturing facility in accordance with
standard procedures that comply with cGMP and appropriate regulatory standards.
The manufacture of sufficient quantities of antibody products in accordance
with such standards is an expensive, time-consuming and complex process and is
subject to a number of risks that could result in delays. Production delays, if
they occur, could significantly delay clinical development of potential
products, reduce third party or clinical researcher interest and support of
proposed clinical trials, and possibly delay commercialization of such products
and impair their competitive position.
PDL has no experience in manufacturing commercial quantities of its
potential products and currently does not have sufficient capacity to
manufacture its potential products on a commercial scale. In order to obtain
regulatory approvals and to expand its capacity to produce its products for
commercial sale at an acceptable cost, PDL will need to improve and expand its
existing manufacturing capabilities. PDL is evaluating plans to improve and
expand the capacity of its current manufacturing facility. Such plans, if
instituted, may require a suspension of manufacturing operations during
construction. Moreover, there can be no assurance that construction delays
would not occur and, if so, such delays could impair the Company's ability to
produce adequate supplies of its potential products for clinical use or
commercial sale on a timely basis. There can be no assurance that PDL will
successfully improve and expand its manufacturing capability sufficiently to
obtain necessary regulatory approvals and to
20
<PAGE> 21
produce adequate commercial supplies of its potential products on a timely
basis. Failure to do so could delay commercialization of such products and
impair their competitive position and thus could have a material adverse effect
on the Company.
In addition, as part of the arrangement between PDL and Boehringer
Mannheim, the parties have agreed to negotiate additional agreements in the
future under which each company could manufacture and supply the other with
certain of the antibodies covered by the agreement. There can be no assurance
that the parties will enter into an agreement that will provide for the
Company's potential product requirements to be met in a consistent, timely and
cost effective manner. Specifically, with respect to OST 577, the Company
currently does not manufacture this product internally and currently has no
alternative manufacturing sources for this product. In the event that
Boehringer Mannheim and the Company are unable to reach an acceptable agreement
or if material is not supplied in accordance with such an agreement, there can
be no assurance that the Company could make alternative manufacturing
arrangements on a timely basis, if at all.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Number Page
- - ------ ----
<S> <C> <C>
10.1 Amendment No. 3 to the Joint Development, Marketing and 24
License Agreement between the Company and Boehringer
Mannheim GmbH dated and effective as of May 31, 1996 (with certain
confidential information deleted and marked by brackets surrounding
such information).
</TABLE>
(b) No Reports on Form 8-K were filed during the quarter ended June 30, 1996.
22
<PAGE> 23
SIGNATURE
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: August 13, 1996
PROTEIN DESIGN LABS, INC.
(Registrant)
/S/ Laurence Jay Korn
---------------------------------------
Laurence Jay Korn
Chief Executive Officer,
Chairperson of the Board of Directors
(Principal Executive Officer)
/s/ Fred Kurland
---------------------------------------
Fred Kurland
Chief Financial Officer
(Chief Accounting Officer)
23
<PAGE> 1
CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
AMENDMENT NO. 3 TO JOINT DEVELOPMENT, MARKETING AND LICENSE AGREEMENT
This AMENDMENT NO. 3 TO JOINT DEVELOPMENT, MARKETING AND LICENSE AGREEMENT (the
"Amendment"), is made as of May 31, 1996 by and between Protein Design Labs,
Inc., a corporation organized and existing under the laws of the State of
Delaware and having its principal office at 2375 Garcia Avenue, Mountain View,
CA 94043 USA (hereinafter "PDL"), and Boehringer Mannheim GmbH, a German
company having offices at Sandhofer Strasse 116 D-688298, Mannheim, Germany
(hereinafter "BM") and amends that certain Joint Development, Marketing and
License Agreement dated October 28, 1993, as amended December 5, 1994 and
November 7, 1995 (the "Agreement"). Except as expressly provided herein,
capitalized terms shall have the meaning set forth in the Agreement.
RECITALS
A. WHEREAS, PDL and BM are parties to the Agreement; and
B. WHEREAS, BM's rights to the [ ] Antibodies licensed
under the Agreement have lapsed; and
C. WHEREAS, PDL and BM desire to amend certain provisions of the
Agreement to provide for, among other matters, the reinstatement of certain
rights and obligations of BM related solely to the [ ]
antibody.
AGREEMENT
NOW THEREFORE, the parties agree as follows:
Except as expressly set forth herein, capitalized terms and references to
Sections, Exhibits and Articles shall be deemed references to the Agreement.
1. AMENDMENTS OF AGREEMENT.
1.1 AMENDMENT OF DEFINITION OF [ ] ANTIBODY.
Effective upon the execution of this Amendment, all BM rights to any human or
humanized antibody that binds to the [ ] [
]
1.2 REINSTATEMENT OF RIGHTS AND OBLIGATIONS TO [ ]
ANTIBODY. Effective upon execution of this Amendment, the [ ]
Antibody will be reinstated
25
<PAGE> 2
CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
as a Pharmaceutical Product under the Agreement, provided that the Milestones
set forth in Exhibit C related to "Each Human or Humanized Antibody to [ ]"
shall be amended to refer solely to "Each Humanized Antibody to [ ]."
1.3 EXTENSION OF NON-AFFILIATE ASIAN RELATIONSHIPS TO INCLUDE [ ]
ANTIBODY. Section 9.9 of the Agreement is amended and restated in its
entirety as follows:
"9.9 NON-AFFILIATE ASIAN RELATIONSHIPS. Notwithstanding any other
provision of this Agreement, for any Licensed Product directed against
HBV or the [ ] receptor, if BM decides to sublicense
rights to a non-Affiliate to develop, manufacture, market or sell such Licensed
Product in any country in Asia or if BM decides to co-promote such a Licensed
Product with any non-Affiliate or use a non-Affiliate as a distributor of such
a Licensed Product, in any country in Asia, then PDL shall have the right, but
not the obligation, to be present, at PDL's own expense, during face-to-face
discussions and negotiations with such non-Affiliate (but shall not actively
participate in such negotiations except to the extent requested by BM) and
shall receive the royalty it would receive under this Agreement on Net Sales of
such Licensed Product in such countries in Asia plus [ ] of
any non-royalty consideration received by BM and its Affiliates from such
arrangement with the non-Affiliate."
2. ADDITIONAL PDL DISCLOSURE RIGHTS FOR BM TECHNICAL INFORMATION FOR THE
[ ] ANTIBODY. In addition to the disclosure rights of PDL
pertaining to all data and BM Technical Information related to the
[ ] Antibody in PDL's Territory (as provided in Section 2
of Amendment No. 2 to the Agreement), BM hereby consents to the further
disclosure by PDL of all data and other BM Technical Information related to the
[ ] Antibody to prospective potential Asian partners for a
possible collaboration with BM involving the [ ] Antibody;
provided that such disclosure is made pursuant to a confidentiality agreement.
3. STUDIES OF [ ] ANTIBODY. In the event that the
currently planned [ ] study testing the [ ] Antibody in
a [ ] is not negative, BM hereby agrees that it will promptly
(and in any event within three months of the [ ] results), at
its sole expense, initiate and complete a [ ] study of the
[ ] Antibody in a [ ]; provided that BM and PDL do not conclude that
[ ] should preclude further development of the [ ]
Antibody.
4. NO OTHER CHANGES. On and after the date hereof, each reference in the
Agreement to "this Agreement," "hereunder," "hereof," or words of like import
referring to the Agreement, shall mean and be a reference to the Agreement as
amended hereby. Except as specifically amended above, the Agreement is and
shall continue to be in full force and effect and is hereby in all respects
ratified and confirmed.
IN WITNESS WHEREOF, the parties have executed this Amendment through their duly
authorized representatives as of the date first set forth above.
26
<PAGE> 3
CERTAIN CONFIDENTIAL MATERIAL CONTAINED IN THIS DOCUMENT
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND
EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
PDL: BM:
Protein Design Labs, Inc. Boehringer Mannheim GmbH
By /s/ Douglas O. Ebersole By /s/ Dr. Claus-Jorg Rutsch
Vice President, Licensing Vice President Intl. Legal Affairs
and General Counsel Therapeutics
By /s/ Dr. Lothar Wieczorek
Vice President Project Development
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STATEMENT OF
OPERATIONS AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10Q.
</LEGEND>
<CIK> 0000882104
<NAME> PROTEIN DESIGN LABS, INC.
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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