<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 September 30, 1997
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 September 30, 1997, there were 18,216,787 shares of the Registrant's
Common Stock outstanding.
<PAGE> 2
PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations 3
Three months ending September 30, 1997 and 1996
Nine months ending September 30, 1997 and 1996
Balance Sheets 4
September 30, 1997 and December 31, 1996
Statements of Cash Flows 5
Nine months ending September 30, 1997 and 1996
Notes to Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION - RISK FACTORS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
Signatures 26
</TABLE>
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ending September 30, Nine months ending September 30,
1997 1996 1997 1996
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Research and development revenue
under agreements with third parties
(includes related party revenue of
$0.0M for the three and nine month
periods ending September 30, 1997, and
$3.0M and $10.0M for the three
and nine month periods ending
September 30, 1996) $ 4,550,000 $ 4,000,000 $ 9,341,074 $ 11,500,000
Interest and other income 2,485,425 1,553,310 6,607,549 4,629,472
------------ ------------ ------------ ------------
Total revenues 7,035,425 5,553,310 15,948,623 16,129,472
Costs and expenses:
Research and development 6,311,140 8,492,291 19,123,686 22,119,234
General and administrative 1,629,373 1,366,343 4,650,699 3,992,667
------------ ------------ ------------ ------------
Total costs and expenses 7,940,513 9,858,634 23,774,385 26,111,901
------------ ------------ ------------ ------------
Net loss $ (905,088) $ (4,305,324) $ (7,825,762) $ (9,982,429)
============ ============ ============ ============
Net loss per share $ (0.05) $ (0.28) $ (0.45) $ (0.64)
============ ============ ============ ============
Weighted average common shares
outstanding 18,170,000 15,632,000 17,433,000 15,578,000
============ ============ ============ ============
</TABLE>
See accompanying notes
2
<PAGE> 4
PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,966,044 $ 14,141,184
Short-term investments 47,892,473 64,050,165
Other current assets 1,706,117 1,249,772
------------- -------------
Total current assets 86,564,634 79,441,121
Property and equipment, net 8,924,228 8,589,555
Long-term investments 76,962,879 21,475,483
Other assets 1,057,861 825,246
------------- -------------
$ 173,509,602 $ 110,331,405
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 491,024 $ 1,029,157
Accrued compensation 780,562 635,729
Accrued clinical trials 1,443,390 1,843,206
Other accrued liabilities 1,611,185 1,711,663
------------- -------------
Total current liabilities 4,326,161 5,219,755
Stockholders' equity:
Preferred stock, par value $0.01 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; 18,216,787
and 15,759,089 issued and outstanding
at September 30, 1997 and
December 31, 1996, respectively 182,168 157,591
Additional paid-in capital 211,635,609 140,328,297
Accumulated deficit (43,332,917) (35,507,154)
Unrealized loss on investments 698,581 132,916
------------- -------------
Total stockholders' equity 169,183,441 105,111,650
------------- -------------
$ 173,509,602 $ 110,331,405
============= =============
</TABLE>
See accompanying notes
3
<PAGE> 5
PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
<TABLE>
<CAPTION>
Nine months ending September 30,
1997 1996
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,825,762) $ (9,982,429)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,392,293 2,398,830
Other (879,337) 278,566
Changes in assets and liabilities:
Other current assets (476,345) (1,248,976)
Accounts payable (538,133) (9,163)
Accrued liabilities (355,460) 1,455,937
------------- ------------
Total adjustments 143,018 2,875,194
------------- ------------
Net cash used in operating activities (7,682,744) (7,107,235)
Cash flows from investing activities:
Purchases of short- and long-term investments (230,724,034) (24,458,022)
Maturities of short- and long-term investments 192,758,144 32,900,000
Capital expenditures (2,645,780) (2,301,923)
Increase in other assets (212,615) (135,000)
------------- ------------
Net cash provided by (used in) investing (40,824,285) 6,005,055
activities
Cash flows from financing activities:
Net proceeds from issuance of common stock 71,331,889 3,150,934
------------- ------------
Net cash provided by financing activities 71,331,889 3,150,934
Net increase in cash and cash equivalents 22,824,860 2,048,754
Cash and cash equivalents at beginning of period 14,141,184 4,686,259
------------- ------------
Cash and cash equivalents at end of period $ 36,966,044 $ 6,735,013
============= ============
</TABLE>
See accompanying notes
4
<PAGE> 6
PROTEIN DESIGN LABS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. Summary of Significant Accounting Policies
Organization and Business
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. The Company's revenues to date have consisted, and for the near
future are expected to consist, principally of research and development funding,
signing and licensing fees, milestone payments and royalties from pharmaceutical
companies under collaborative research and development agreements and patent
licensing agreements. These revenues may vary considerably from quarter to
quarter and from year to year. Revenues in any period may not be predictive of
revenues in any subsequent period, and variations may be significant depending
on the terms of the particular agreements. For example, revenues for the first
nine months of 1997, which included several non-recurring payments in connection
with new humanization and patent licensing agreements, may not be indicative of
revenues in future periods.
While the Company historically has received significant revenue pursuant to
certain of its research and development agreements, the Company has recognized
substantially all of the research and development and milestone revenue due
under these agreements. Although the Company anticipates entering into new
relationships from time to time, the Company presently does not anticipate
continuing to realize non-royalty revenue from its new and proposed
collaborations at levels commensurate with the non-royalty revenue historically
recognized under its older collaborations. Moreover, the Company anticipates
that its operating expenses will continue to increase significantly as the
Company increases its research and development, manufacturing, preclinical and
clinical activities, and administrative and patent activities. Accordingly, in
the absence of substantial revenues from new corporate collaborations or
licensing arrangements, royalties on Zenapax(R) sales or sales of other licensed
products under the Company's patents, if any, or other sources, the Company
expects to incur substantial and increased operating losses in the foreseeable
future as certain of its earlier stage potential products move into later stage
clinical development, as additional potential products are selected as clinical
candidates for further development, as the Company invests in new research
programs, new headquarters and additional laboratory and manufacturing
facilities or capacity, as the Company defends or prosecutes its patents and
patent applications and as the Company invests in continuing research or
acquires additional technologies, product candidates or businesses.
Basis of Presentation and Responsibility for Interim Financial Statements
The balance sheet as of September 30, 1997 and the statements of operations and
cash flows for the nine month periods ending September 30, 1997 and 1996 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
5
<PAGE> 7
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, 1996. Results for any
interim period are not necessarily indicative of results for any other interim
period or for the entire year.
Cash Equivalents, Investments and Concentration of Credit Risk
The Company considers all highly liquid investments purchased with a maturity of
three months or less at the date of acquisition to be cash equivalents. The
Company places its cash and short-term and long-term investments with
high-credit-quality financial institutions and in securities of the United
States ("U.S.") government and U.S. government agencies, and by policy, limits
the amount of credit exposure in any one financial instrument. To date, the
Company has not experienced credit losses on investments in these instruments.
Revenue Recognition Under Development Contracts
Nonrefundable signing or licensing fee payments that are not dependent on future
performance under agreements with third parties 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 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.
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 included in
the computation (using the treasury stock method) when their effect is dilutive.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the old
and new requirements, there would be no change with respect to primary earnings
per share and fully diluted earnings per share for the quarters ending September
30, 1997 and September 30, 1996 since the Company had losses in those periods
and the dilutive effects of stock options under these methods do not apply.
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. For example, the Company has a policy of recording expenses for clinical
trials based upon pro rating estimated total costs of a clinical trial over the
estimated length of the clinical trial and the number of patients anticipated to
be enrolled in the trial.
6
<PAGE> 8
Expenses related to each patient are recognized ratably beginning upon entry
into the trial and over the course of the trial. In the event of early
termination of a clinical trial, management accrues an amount based on its
estimate of the remaining non-cancelable obligations associated with the winding
down of the clinical trial. These estimates and assumptions could differ
significantly from the amounts which may actually be realized.
The Company recently received a notice from Boehringer Mannheim GmbH
("Boehringer Mannheim") invoking the dispute resolution provisions under its
collaborative research agreement to address the reimbursement of up to $2.0
million for the Phase II study of OST 577 for the treatment of CHB being
conducted by Boehringer Mannheim. The Company is unable to predict the outcome
of this proceeding but in any event has estimated and recorded a liability with
respect to this matter.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 "Risk
Factors" as well as those discussed elsewhere in this document and the Company's
Annual Report on Form 10-K, as amended, for the year ending December 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. The Company'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, milestone payments
and royalties from pharmaceutical companies under collaborative research and
development and licensing agreements. These revenues may vary considerably from
quarter to quarter and from year to year. Revenues in any period may not be
predictive of revenues in any subsequent period, and variations may be
significant depending on the terms of the particular agreements. For example,
revenues for the first nine months of 1997, which included several non-recurring
payments in connection with new humanization and patent licensing agreements,
may not be indicative of revenues in future periods.
THREE MONTHS ENDING SEPTEMBER 30, 1997 AND 1996
The Company's total revenues for the three months ending September 30,
1997 were $7.0 million compared with total revenues of $5.6 million for the
three months ending September 30, 1996. Research and development revenues from
agreements with third parties were $4.6 million in the third quarter in 1997. In
the comparable period of 1996, the Company received research and development
reimbursement funding and upfront licensing and signing fees totaling $4.0
million. In the third quarter of 1997 no research and development reimbursement
funding was received. Interest and other income for the third quarter of 1997
were $2.5 million compared to $1.6 million in the comparable period in 1996.
This increase is primarily attributable to the increased interest earned on the
Company's cash, cash equivalents and investment balances as a result of the
Company's follow-on public offering which was completed during the first quarter
of 1997.
The Company's research and development revenues under agreements with
third parties consisted of research and development reimbursement funding,
licensing and signing fees and milestone payments. Research and development
revenues from unrelated parties of $4.6 million for the three months ending
September 30, 1997 consisted of licensing and signing fees and milestone
payments earned under licensing agreements compared to a $1.0 million licensing
and signing fee received from an unrelated party in the same period in 1996. In
the third quarter of 1996, research and development revenues from related
parties consisted of $3.0 million solely from Boehringer Mannheim GmbH
("Boehringer Mannheim") under a research and development funding commitment that
expired as scheduled in October 1996.
8
<PAGE> 10
Total costs and expenses for the three months ending September 30, 1997
decreased to $7.9 million from $9.9 million in the comparable period in 1996.
The decrease in costs and expenses was primarily due to reduced clinical trial
expenses associated with PROTOVIR(TM), a product candidate.
Research and development expenses for the three months ending September
30, 1997 decreased to $6.3 million from $8.5 million in the comparable period of
1996. Excluding clinical trial costs for PROTOVIR (which included a $1.1 million
one-time charge for expenses associated with the halting of one clinical trial),
the Company's 1997 ongoing expenses increased as a result of the addition of
staff, the continuation of other clinical trials, costs of conducting
preclinical tests, expansion of pharmaceutical development capabilities,
including support for both clinical development and manufacturing process
development, and increased manufacturing operations.
General and administrative expenses for the three months ending
September 30, 1997 increased to $1.6 million from $1.4 million in the comparable
period in 1996. These increases were primarily the result of increased staffing
and associated expenses necessary to manage and support the Company's expanding
operations.
NINE MONTHS ENDING SEPTEMBER 30, 1997 AND 1996
The Company's total revenues for the nine months ending September 30,
1997 were $15.9 million compared to $16.1 million in the same period in 1996.
Research and development revenues from licensing and signing fees and milestone
payments were $9.3 million for the nine months ending September 30, 1997. In the
comparable period of 1996, the Company received research and development
reimbursement funding, licensing and signing fees and milestone payments
totaling $11.5 million. Interest and other income for the nine months ending
September 1997 were $6.6 million compared to $4.6 million in the comparable
period in 1996. This increase is primarily attributable to the increased
interest earned on the Company's cash and cash equivalents balances as a result
of the Company's follow-on public offering which was completed during the first
quarter of 1997.
The Company's research and development revenues under agreements with
third parties consisted of research and development reimbursement funding,
licensing and signing fees and milestone payments. Research and development
revenues from unrelated parties of $9.3 million for the nine months ending
September 30, 1997 consisted of licensing and signing fees and milestone
payments earned under licensing agreements. This compares to $1.5 million of
similar revenue received from unrelated parties in the same period in 1996. In
the comparable period of 1996, research and development revenues from related
parties consisted of $10.0 million solely from Boehringer Mannheim under a
research and development funding commitment that expired as scheduled in October
1996 and a milestone payment.
Total costs and expenses for the nine months ending September 30, 1997
decreased to $23.8 million from $26.1 million in the comparable period in 1996.
The decrease in costs and expenses was primarily due to reduced clinical trial
expenses associated with PROTOVIR, a product candidate, including a $1.1 million
one-time charge for expenses associated with the halting of one clinical trial.
Research and development expenses for the nine months ending September
30, 1997 decreased to $19.1 million from $22.1 million in the comparable period
in 1996. Excluding clinical trial costs for PROTOVIR, the Company's 1997 ongoing
expenses increased as a result of the addition of staff, the continuation of
other clinical trials, costs of conducting preclinical tests, expansion of
pharmaceutical
9
<PAGE> 11
development capabilities, including support for both clinical development and
manufacturing process development, and increased manufacturing operations.
General and administrative expenses for the nine months ending September
30, 1997 increased to $4.7 million from $4.0 million in the comparable period in
1996. These increases were primarily the result of increased staffing and
associated expenses necessary to manage and support the Company's expanding
operations.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
public and private placements of equity, research and development revenue
(including fees from humanization and patent licensing agreements) and interest
income on invested capital. At September 30 and June 30, 1997, the Company had
cash, cash equivalents and investments in the aggregate of $161.8 million,
compared to $99.7 million at December 31, 1996. This increase in cash resources
in 1997 primarily reflects the completion of a public offering of 2.275 million
shares of the Company's common stock in the first quarter of 1997. The net
proceeds of this offering to the Company were approximately $68.2 million.
The Company recently received a notice from Boehringer Mannheim
invoking the dispute resolution provisions under its collaborative research
agreement to address the reimbursement of up to $2.0 million for the Phase II
study of OST 577 for the treatment of CHB being conducted by Boehringer
Mannheim. The Company is unable to predict the outcome of this proceeding but
in any event has estimated and recorded a liability with respect to this
matter. The collaborative research agreement with Boehringer Mannheim provides
for reimbursement from PDL of costs and expenses of up to $2.0 million for a
Phase II study of OST 577 and up to $8.8 million for a Phase III study of OST
577 in the event certain conditions are met with respect to those studies.
Net cash used in operating activities was approximately $7.7 million for
the nine months ending September 30, 1997 compared to approximately $7.1 million
in the comparable period in 1996. The Company's future capital requirements will
depend on numerous factors, including, among others, the progress of the
Company's product candidates in clinical trials; the ability of the Company's
collaborative partners to obtain regulatory approval and successfully
manufacture and market the Company's products; the continued or additional
support by collaborative partners or other third parties of research and
clinical trials; enhancement of existing and investment in new research and
development programs; the time required to gain regulatory approvals; the
resources the Company devotes to self-funded products, manufacturing methods and
advanced technologies; third party manufacturing commitments; the ability of the
Company to obtain and retain funding from third parties under collaborative
agreements; the development of internal marketing and sales capabilities; the
demand for the Company's potential products, if and when approved; potential
acquisitions of technology, product candidates or businesses by the Company; and
the costs of defending or prosecuting any patent opposition or litigation
necessary to protect the Company's proprietary technology. In order to develop
and commercialize its potential products the Company may need to raise
substantial additional funds through equity or debt financings, collaborative
arrangements, the use of sponsored research efforts or other means. No assurance
can be given that such additional financing will be available on acceptable
terms, if at all, and such financing may only be available on terms dilutive to
existing stockholders. The Company believes that existing capital resources will
be adequate to satisfy its capital needs through at least 2000.
10
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on August 21, 1997
at its manufacturing facility in Plymouth, Minnesota. Of the 18,134,038 shares
outstanding as of the record date, 11,358,861 shares were present at the meeting
or represented by proxies, representing approximately 63% of the total votes
eligible to be cast.
At the meeting, the stockholders voted to elect two (2) Class II
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 II director
elected at the Annual Meeting and the votes cast with respect to each such
individual are set forth below.
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Stanley Falkow, Ph.D. 9,644,590 1,714,271
Cary L. Queen, Ph.D. 9,644,590 1,714,271
</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, 1997. This proposal received 10,393,866 affirmative votes and
683,692 negative votes. There were 281,303 abstentions.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION--RISK FACTORS
RISK FACTORS
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 may cause such a difference include
those discussed in the material set forth under "Risk Factors" and elsewhere in
this document and the Company's Annual Report on Form 10-K, as amended, for the
year ending December 31, 1996.
HISTORY OF LOSSES; FUTURE PROFITABILITY UNCERTAIN. The Company has a
history of operating losses and expects to incur substantial additional expenses
with resulting quarterly losses over at least the next several years as it
continues to develop its potential products, to invest in new research areas and
to devote significant resources to preclinical studies, clinical trials and
manufacturing. As of September 30, 1997, the Company had an accumulated deficit
of approximately $43.3 million. To date, the Company has not received regulatory
approval to distribute any products. The time and resource commitment required
to achieve market success for any individual product is extensive and uncertain
and in some cases controlled by the Company's collaborators. No assurance can be
given that the Company's, or any of its collaborative partners', product
development efforts will be successful, that required regulatory approvals can
be obtained, that potential products can be manufactured at an acceptable cost
and with appropriate quality, or that any approved products can be successfully
marketed.
The Company has not received any material revenues 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 at least the next several years. The Company'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, milestone payments
and royalties from pharmaceutical and other biotechnology companies under
collaborative research and development and patent licensing agreements. 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, and variations may be significant depending on the terms of the
particular agreements. For example, revenues in each of the first three quarters
of 1997, which included several non-recurring payments in connection with new
humanization and patent licensing agreements, may not be indicative of revenues
in future quarters. While the Company historically has received significant
revenue pursuant to certain of its research and development agreements, the
Company has recognized substantially all of the research and development and
milestone revenues due under these collaborations. Although the Company
anticipates entering into new collaborations from time to time, the Company
presently does not anticipate continuing to realize non-royalty revenue from its
new and proposed collaborations at levels commensurate with the revenue
historically recognized under its older collaborations. Moreover, the Company
anticipates that its operating expenses will continue to increase significantly
as the Company increases its research and development, manufacturing,
preclinical, clinical and administrative and patent activities. Accordingly, in
the absence of substantial revenues from new corporate collaborations or
licensing arrangements, royalties on sales of Zenapax(R) or other products
covered by licenses under the Company's patents, if any, or other sources, the
Company expects to incur substantial and increased operating losses in the
12
<PAGE> 14
foreseeable future as certain of its earlier stage potential products move into
later stage clinical development, as additional potential products are selected
as clinical candidates for further development, as the Company invests in new
headquarters and additional laboratory and manufacturing facilities or capacity,
as the Company defends or prosecutes its patents and patent applications, and as
the Company invests in continuing and new research programs or acquires
additional technologies, product candidates or businesses. 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, obtain regulatory approvals for and market its potential products.
No assurances can be given that the Company will be able to achieve or sustain
profitability, and results are expected to fluctuate from quarter to quarter.
UNCERTAINTY OF CLINICAL TRIAL RESULTS. Before obtaining regulatory
approval for the commercial sale of any of its potential products, 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. There can be no assurance that the Company will be permitted
to undertake or continue clinical trials for any of its potential products or,
if permitted, that such products will be demonstrated to be safe and
efficacious. Moreover, the results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in later-stage
clinical trials. Thus, there can be no assurance that the Company's present or
future clinical trials will demonstrate the safety and efficacy of any potential
products or will result in approval to market products.
In advanced clinical development, 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 predict 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 may at times elect
to aggressively enter potential products into Phase I/II trials to determine
preliminary efficacy in specific indications. In addition, in certain cases the
Company has commenced clinical trials without conducting preclinical animal
testing where an appropriate animal model does not exist. Similarly, the Company
or its partners at times will conduct potentially pivotal Phase II/III or Phase
III trials based on limited Phase I or Phase I/II data. As a result of these and
other factors, the Company anticipates that only some of its potential products
will show safety and efficacy in clinical trials and that the number of products
that fail to show safety and efficacy may be significant.
The Company has completed a Phase II trial evaluating PROTOVIR(TM) (MSL
109) for the prevention of CMV infections, death, or disease relapse in bone
marrow transplant recipients. The clinical trial showed PROTOVIR to be
well-tolerated and a preliminary analysis of data indicates that patients who
did not have a CMV infection prior to transplant and received a graft from a
CMV-positive donor showed a statistically significantly lower incidence of the
primary endpoint (CMV infection, death, or disease relapse) in the PROTOVIR
treatment group versus the control group at 98 days post-transplant. The Company
is evaluating whether to pursue additional clinical trials involving PROTOVIR
and there can be no assurance that further development will be pursued or be
successful if pursued.
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
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example, in August 1996, the Company announced the halt of a Phase II/III
clinical trial using PROTOVIR for treatment of CMV retinitis in acquired
immune deficiency syndrome ("AIDS") patients conducted by the National Eye
Institute ("NEI SOCA") due to lack of evidence of efficacy. Based on the
findings and actions in the above study, enrollment in a Phase II clinical trial
for treatment of CMV retinitis in AIDS patients conducted by the National
Institute of Allergy and Infectious Disease was suspended, and the trial was
subsequently terminated.
DEPENDENCE ON COLLABORATIVE PARTNERS. The Company has collaborative
agreements with several pharmaceutical companies to develop, manufacture and
market certain potential products, which include the most advanced products
under development by the Company. The Company granted to its collaborative
partners certain exclusive rights to commercialize the products covered by these
collaborative agreements. In some cases, the Company is relying on its
collaborative partners to conduct clinical trials, to compile and analyze the
data received from such trials, to obtain regulatory approvals and, if approved,
to manufacture and market these licensed products, including Zenapax and the
Company's Human Anti-Hepatitis B Virus Antibody (OST 577). As a result, the
Company often has little or no control over the development of these potential
products and little or no opportunity to review clinical data prior to or
following public announcement.
The Company's collaborative research agreements are generally terminable
by its partners on short notice. Suspension or termination of certain 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. Continued funding and participation by
collaborative partners will depend not only on the timely achievement of
research and development objectives by the Company 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, among other things, 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
the collaborators or by others, including their relative patent and proprietary
technology positions, and their ability to manufacture potential products
successfully. In this regard, the Company has, at times, experienced difficulty
in its continuing relationship with Boehringer Mannheim GmbH ("Boehringer
Mannheim") due to a number of factors, including disagreements regarding
reimbursement for certain costs related to and the timing of the initiation and
design of certain proposed clinical trials involving the development of certain
products licensed to Boehringer Mannheim, particularly OST 577. The Company
recently received a notice from Boehringer Mannheim invoking the dispute
resolution provisions under its collaborative research agreement to address the
reimbursement of up to $2.0 million for the Phase II study of OST 577 for the
treatment of chronic hepatitis B ("CHB") being conducted by Boehringer Mannheim.
The Company is unable to predict the outcome of this proceeding but in any event
has estimated and recorded a liability with respect to this matter.
The Company has been advised by Boehringer Mannheim that as of October
30, 1997, sixteen patients have been enrolled in Boehringer Mannheim's 200
patient Phase II study of OST 577 for the treatment of CHB. Of the sixteen, ten
patients have been randomized for treatment with OST 577. In accordance with the
clinical trial protocol, randomization in this trial has been suspended pending
completion of a predefined interim safety analysis review with the FDA that is
scheduled to take place after ten patients have been treated with OST 577 for a
period ranging from initial treatment up to a maximum of four weeks. After the
data from these initial ten patients is evaluated and reviewed with the FDA, the
trial could be continued or it may be necessary or advisable to modify or
terminate the trial. Moreover, this clinical trial is an open-label study and
Boehringer Mannheim will have regular access to the results of the trial such
that they may, at any point in the trial determine to modify, suspend or halt
the trial. Such a modification, suspension or halting of Boehringer Mannheim's
trial could significantly delay or impair the clinical development of OST 577.
In addition, continued enrollment at the rate experienced to date in this trial
or any other delays in the trial could result in a decision by Boehringer
Mannheim to terminate the trial or to modify the design of the trial, and could
result in a situation in which additional Phase II studies are necessary for
various reasons, such as if the standard of care were to change. In any event,
Phase II trials, if successful, must generally be followed by one or more Phase
III clinical trials prior to applying for regulatory approval.
Further, Roche Holding Ltd, including its subsidiaries ("Roche") and the
parent company of Boehringer Mannheim have agreed to an acquisition of
Boehringer Mannheim by Roche, which may be concluded in the future. The Company
has not been advised of any anticipated changes to the existing collaborative
arrangement with the Company resulting from a completed acquisition. However,
the Company expects that Roche, if such acquisition occurs, will review the
various drug development programs of the Company and Boehringer Mannheim,
including those for OST 577, PROTOVIR, the SMART(TM) Anti-L-Selectin Antibody
and an antibody to an undisclosed cardiovascular target. If the acquisition is
completed, the Company cannot predict the outcome or timing of such review or
whether or not it will occur and in particular, whether Roche will decide to
continue, modify or terminate the clinical development program for OST 577 for
CHB or the planned Phase II/III trial of OST 577 in patients receiving liver
transplants for end-stage liver disease due to CHB and some or all of the
other Boehringer Mannheim clinical development programs being conducted with the
Company.
In addition, certain collaborative partners have developed and may be
developing competitive products that may result in delay or a relatively smaller
resource commitment to product launch and
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support efforts than might otherwise be obtained if the potentially competitive
product were not under development or being marketed. 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 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 proceed to bring this product to market in a
rapid and timely manner, if at all, or if marketed, that other independently
developed products of Roche (including CellCept(R)) or others will not compete
with or prevent Zenapax from achieving meaningful sales. Also, Roche has stated
that it plans to conduct or support other clinical trials of Zenapax in
autoimmune indications. There can be no assurance that Roche will continue or
pursue additional clinical trials in these indications or that, even if the
additional clinical trials are completed, Zenapax will be shown to be safe and
efficacious, or that the trials will result in approval to market Zenapax in
these indications. Any adverse event or announcement related to Zenapax would
have a material adverse effect on the business and financial condition of the
Company.
Further, 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 with the FDA and equivalent foreign government
regulatory agencies. The Company currently relies on Boehringer Mannheim for the
manufacturing and clinical development of OST 577. Boehringer Mannheim has
marketing rights to this antibody in countries outside of North America. There
can be no assurance that Boehringer Mannheim will provide timely access to the
manufacturing and clinical data, that the U.S. Food and Drug Administration
("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 were 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, either of which would have a
material adverse effect on the business and financial condition of the Company.
The Company's ability to enter into new collaborations and the
willingness of the Company's existing collaborators to continue development of
the Company's potential products is dependent upon, among other things, the
Company's patent position with respect to such products. In this regard, in 1996
the Company was issued patents by the U.S. Patent and Trademark Office ("PTO")
and European Patent Office ("EPO") with claims that the Company believes, based
on its survey of the scientific literature, cover most humanized antibodies.
Eighteen notices of opposition to the European patent have been filed with the
EPO, and either or both patents may be further challenged through administrative
or judicial proceedings. The Company has applied for similar patents in Japan
and other countries. The Company has entered into several collaborations related
to both the humanization and patent licensing of certain antibodies whereby it
granted nonexclusive licenses to its patent rights relating to such antibodies,
and the Company anticipates entering into additional collaborations and patent
licensing agreements partially as a result of the Company's patent and patent
applications with respect to humanized antibodies. As a result, the inability of
the Company to successfully defend the opposition proceeding before the EPO or,
if necessary, to defend patents granted by the PTO or EPO or to successfully
prosecute the corresponding patent applications in Japan or other countries
could adversely affect the ability of the Company to enter into additional
collaborations or patent licensing agreements and could therefore have a
material adverse effect on the Company's business or financial condition.
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LIMITED EXPERIENCE WITH CLINICAL TRIALS; RISK OF DELAY. The Company has
conducted only a limited number of 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 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 potential products. The
inability of the Company or its collaborative partners to commence or continue
clinical trials as currently planned, to complete the clinical trials on a
timely basis or to demonstrate the safety and efficacy of its potential
products, would have a material adverse effect on the business and financial
condition of the Company.
The rate of completion of the Company's or its collaborators' clinical
trials is significantly dependent upon, among other factors, the rate of patient
enrollment. Patient enrollment is a function of many factors, including, among
others, 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 or government sources, 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 may require
the Company to undertake additional studies in order to obtain regulatory
approval if the applicable standard of care changes in the therapeutic
indication under study. For example, 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 where the Company's trial is being conducted. There can be no
assurance that any actions by the Company to accelerate accrual in this trial
will be successful or, to the extent that they involve modifications in the
design of the trial, will not cause that trial to be considered a Phase II
clinical trial and thereby require one or more additional potentially pivotal
trials to be conducted.
UNCERTAINTY OF PATENTS AND PROPRIETARY TECHNOLOGY; OPPOSITION
PROCEEDINGS. The Company's success is significantly dependent on its ability to
obtain patent protection for its products and technologies and to preserve its
trade secrets and operate without infringing on the proprietary rights of third
parties. PDL files and prosecutes patent applications to protect its inventions.
No assurance can be given that the Company's pending patent applications will
result in the issuance of patents or that any patents will provide competitive
advantages or will not be invalidated or circumvented by its competitors.
Moreover, no assurance can be given that patents are not issued to, or patent
applications have not been filed by, other companies which would have an adverse
effect on the Company's ability to use, manufacture or market its products or
maintain its competitive position with respect to its products. Other companies
obtaining patents claiming products or processes useful to the Company may bring
infringement actions against the Company. As a result, the Company may be
required to obtain licenses from others or not be able to use, manufacture or
market its products. Such licenses may not be available on commercially
reasonable terms, if at all.
Patents in the U.S. are issued to the party that is first to invent the
claimed invention. Since patent applications in the U.S. are maintained in
secrecy until patents issue, PDL cannot be certain that it was the first
inventor of the inventions covered by its pending patent applications or that it
was the first to file patent applications for such inventions. The patent
positions of biotechnology firms generally are highly uncertain and involve
complex legal and factual questions. No consistent policy has emerged regarding
the breadth of claims in biotechnology patents, and patents of biotechnology
products are uncertain so that even issued patents may later be modified or
revoked by the PTO or the courts in proceedings instituted by third parties.
Moreover, the issuance of a patent in one country does not assure the issuance
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of a patent with similar claims in another country and claim interpretation and
infringement laws vary among countries, so the extent of any patent protection
may vary in different territories.
PDL has several patents and exclusive licenses covering its humanized
and human antibody technology, respectively. With respect to its human antibody
technology and antibodies, PDL has exclusively licensed certain patents from
Novartis Pharmaceuticals Corporation ("Novartis") (formerly known as Sandoz
Pharmaceuticals Corporation). With respect to its SMART antibody technology and
antibodies, in January and December 1996, PDL was issued fundamental patents by
the EPO and PTO. In addition, in June 1996 PDL was issued a U.S. patent covering
Zenapax and certain related antibodies against the IL-2 receptor. PDL is also
currently prosecuting other patent applications with the PTO and in other
countries, including members of the European Patent Convention, Canada, Japan
and Australia. The patent applications are directed to various aspects of PDL's
SMART and human antibodies, antibody technology and other programs, and include
claims relating to compositions of matter, methods of preparation and use of a
number of PDL's compounds. However, PDL does not know whether any pending
applications will result in the issuance of patents or whether such patents will
provide protection of commercial significance. Further, there can be no
assurance that PDL's patents will prevent others from developing competitive
products using related technology.
With respect to its issued antibody humanization patents, PDL believes
the patent claims cover Zenapax and, based on its review of the scientific
literature, most humanized antibodies. The EPO (but not PTO) procedures provide
for a nine-month opposition period in which other parties may submit arguments
as to why the patent was incorrectly granted and should be withdrawn or limited.
The entire opposition process, including appeals, may take several years to
complete, and during this lengthy process, the validity of the EPO patent will
be at issue, which may limit the Company's ability to negotiate or collect
royalties or to negotiate future collaborative research and development
agreements based on this patent. Eighteen notices of opposition to PDL's
European patent were filed during the opposition period, including oppositions
by major pharmaceutical and biotechnology companies, which cited references and
made arguments not considered by the EPO and PTO before grant of the respective
patents. PDL intends to vigorously defend the European and, if necessary, the
U.S. patent; however, there can be no assurance that the Company will prevail in
the opposition proceedings or any litigation contesting the validity or scope of
these patents. In addition, such proceedings or litigation, or any other
proceedings or litigation to protect the Company's intellectual property rights
or defend against infringement claims by others, could result in substantial
costs and a diversion of management's time and attention, which could have a
material adverse effect on the business and financial condition of the Company.
A number of companies, universities and research institutions have filed
patent applications or received patents in the areas of antibodies and other
fields relating to PDL's programs. Some of these applications or patents may be
competitive with PDL's applications or contain claims that conflict with those
made under PDL's patent applications or patents. Such conflict could prevent
issuance of patents to PDL, provoke an interference with PDL's patents or result
in a significant reduction in the scope or invalidation of PDL's patents, if
issued. An interference is an administrative proceeding conducted by the PTO to
determine the priority of invention and other matters relating to the decision
to grant patents. Moreover, if patents are held by or issued to other parties
that contain claims relating to PDL's products or processes, and such claims are
ultimately determined to be valid, no assurance can be given that PDL would be
able to obtain licenses to these patents at a reasonable cost, if at all, or to
develop or obtain alternative technology.
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The Company is aware that Celltech Limited ("Celltech") has been granted
a patent by the EPO covering certain humanized antibodies, which PDL has
opposed, and Celltech announced in September 1996 that it had received a notice
of allowance of a corresponding U.S. patent (the "U.S. Adair Patent"). There can
be no assurance that the claims in the European patent or, if issued, the U.S.
patent would not be interpreted to cover any or all of PDL's SMART antibodies or
be competitive with or conflict with claims in PDL's patents or patent
applications. If the U.S. Adair Patent issues and if it or any corresponding
international patent is determined to be valid and to cover any of PDL's SMART
antibodies, there can be no assurance that PDL would be able to obtain a license
on commercially reasonable terms, if at all. If the claims of the U.S. Adair
Patent conflict with claims in PDL's patents or patent applications, there can
be no assurance that an interference would not be declared by the PTO, which
could take several years to resolve and could involve significant expense to the
Company. Also, such conflict could prevent issuance of patents to PDL relating
to humanization of antibodies or result in a significant reduction in the scope
or invalidation of PDL's patents, if issued. Moreover, uncertainty as to the
validity or scope of patents issued to PDL relating generally to humanization of
antibodies may limit the Company's ability to negotiate or collect royalties or
to negotiate future collaborative research and development agreements based on
these patents.
PDL has obtained a nonexclusive license under a patent held by Celltech
(the "Boss Patent") relating to PDL's current process for producing SMART and
human antibodies. An interference proceeding was declared in early 1991 by the
PTO between the Boss Patent and a patent application filed by Genentech, Inc.
("Genentech") to which PDL does not have a license. PDL is not a party to this
proceeding, and the timing and outcome of the proceeding or the scope of any
patent that may be subsequently issued cannot be predicted. If the Genentech
patent application were held to have priority over the Boss Patent, and if it
were determined that PDL's processes and products were covered by a patent
issuing from such patent application, PDL may be required to obtain a license
under such patent or to significantly alter its processes or products. There can
be no assurance that PDL would be able to successfully alter its processes or
products to avoid infringing such patent or to obtain such a license on
commercially reasonable terms, if at all, and the failure to do so could have a
material adverse effect on PDL.
The Company is aware that Lonza Biologics, Inc. has a patent issued in
Europe to which PDL does not have a license (although Roche has advised the
Company that it has a license covering Zenapax), which may cover the process the
Company uses to produce its potential products. If it were determined that PDL's
processes were covered by such patent, PDL may be required to obtain a license
under such patent or to significantly alter its processes or products, if
necessary to manufacture or import its products in Europe. There can be no
assurance that PDL would be able to successfully alter its processes or products
to avoid infringing such patent or to obtain such a license on commercially
reasonable terms, if at all, and the failure to do so could have a material
adverse effect on the business and financial condition of the Company.
Also, Genentech has patents in the U.S. and Europe that relate to
chimeric antibodies. Such European patent was revoked in May 1997 in connection
with European opposition proceedings. Genentech may choose to appeal that ruling
and, if so, revocation of the European patent would be stayed pending resolution
of the appeal. If Genentech were to assert that the Company's SMART antibodies
infringe these patents, PDL may have to choose whether to seek a license or to
challenge in court the validity of such patents or Genentech's claim of
infringement. There can be no assurance that PDL would be successful in either
obtaining such a license on commercially reasonable terms, if at all, or that it
would be successful in such a challenge of the Genentech patents, and the
failure to do so would have a material adverse effect on the business and
financial condition of the Company.
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In addition to seeking the protection of patents and licenses, PDL also
relies upon trade secrets, know-how and continuing technological innovation
which it seeks to protect, in part, by confidentiality agreements with
employees, consultants, suppliers and licensees. There can be no assurance that
these agreements will not be breached, that PDL would have adequate remedies for
any breach or that PDL's trade secrets will not otherwise become known or
independently developed by competitors.
ABSENCE OF MANUFACTURING EXPERIENCE; DEPENDENCE ON 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. If
further development occurs, the Company intends to continue to manufacture the
SMART M195 Antibody and PROTOVIR as well as 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 current Good Manufacturing Practices ("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.
For example, PDL has experienced some difficulties in the past in manufacturing
certain potential products on a consistent basis. Production interruptions, 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, which would have a material adverse
effect on the business and financial condition of the Company.
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, including demonstration to the FDA of its
ability to manufacture its products using controlled, reproducible processes.
Accordingly, the Company is evaluating plans to improve and expand the capacity
of its current manufacturing facility. Such plans, if instituted, would result
in substantial costs to the Company and may require a suspension of
manufacturing operations during construction. There can be no assurance that
construction delays would not occur, and any 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 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, which could have a material adverse effect on the business or
financial condition of the Company.
In addition, PDL and Boehringer Mannheim have agreed to negotiate
additional agreements 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 and 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
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manufacturing arrangements on a timely basis, if at all, and the inability to do
so could have a material adverse effect on the business and financial condition
of the Company.
UNCERTAINTIES RESULTING FROM MANUFACTURING CHANGES. Manufacturing of
antibodies for use as therapeutics in compliance with regulatory requirements is
complex, time-consuming and expensive. When certain changes are made in the
manufacturing process, it is necessary to demonstrate to the FDA that the
changes have not caused the resulting drug material to differ significantly from
the drug material previously produced, if results of prior preclinical studies
and clinical trials 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 type 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 requiring 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.
Roche has equipped a manufacturing facility that is expected to be used
to produce Zenapax. Successful Phase III trials of Zenapax in kidney
transplantation were conducted using material produced for Roche by a third
party contract manufacturer at a different facility using a different cell line
and a different manufacturing process. Roche has produced Zenapax at its
facility using the new cell line and process and has produced data indicating
that the newly produced material is substantially similar to the material used
in the Phase III clinical trials. However, there can be no assurance that
changes in the manufacturing site or any other manufacturing changes by Roche
will 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.
DEPENDENCE ON SUPPLIERS. The Company is dependent on outside vendors for
the supply of raw materials used to produce its product candidates. The Company
currently qualifies only one or a few vendors for its source of certain raw
materials. Therefore, once a supplier's materials have been selected for use in
the Company's manufacturing process, the supplier in effect becomes a sole or
limited source of such raw materials to the Company due to the extensive
regulatory compliance procedures governing changes in manufacturing processes.
Although the Company believes it could qualify alternative suppliers, there can
be no assurance that the Company would not experience a disruption in
manufacturing if it experienced a disruption in supply from any of these
sources. Any significant interruption in the supply of any of the raw materials
currently obtained from such sources, or the time and expense necessary to
transition a replacement supplier's product into the Company's manufacturing
process, could disrupt its operations and have a material adverse effect on the
business and financial condition of the Company. A problem or suspected problem
with the quality of raw materials supplied could result in a suspension of
clinical trials, notification of patients treated with products or product
candidates produced using such materials, potential product liability claims, a
recall of products or product candidates produced using such materials, and an
interruption of supplies, any of which could have a material adverse effect on
the business or financial condition of the Company.
COMPETITION; RAPID TECHNOLOGICAL CHANGE. The Company's potential
products are intended to address a wide variety of disease conditions,
including autoimmune diseases, inflammatory conditions, cancers and viral
infections. Competition with respect to these disease conditions is intense and
is expected to increase. This competition involves, among other things,
successful research and development efforts, obtaining appropriate regulatory
approvals, establishing and defending intellectual property rights, successful
product manufacturing, marketing, distribution, market and physician
acceptance, patient compliance, price and potentially securing eligibility for
reimbursement or payment for the use of the Company's product. The Company
believes its most significant competitors may be fully integrated
pharmaceutical companies with substantial expertise in research and
development, manufacturing, testing, obtaining regulatory approvals, marketing
and securing eligibility for reimbursement or payment, and substantially
greater financial and other resources than the Company. Smaller companies also
may prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical companies. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations conduct research, seek patent protection, and establish
collaborative arrangements for product development, clinical development and
marketing. These companies and institutions also compete with the Company in
recruiting and retaining highly qualified personnel. The biotechnology and
pharmaceutical industries are subject to rapid and substantial technological
change. The Company's competitors may develop and introduce other technologies
or approaches to accomplishing the intended purposes of the Company's products
which may render the Company's technologies and products noncompetitive and
obsolete.
In addition to currently marketed competitive drugs, the Company is
aware of potential products in research and development by its competitors that
address all of the diseases being targeted by the Company. These and other
products may compete directly with the potential products being developed by
the Company. In this regard, the Company is aware that potential competitors
are developing antibodies or other compounds for treating autoimmune diseases,
inflammatory conditions, cancers and viral infections. In particular, a number
of other companies have developed and will continue to develop human anti-viral
antibodies and humanized antibodies. In addition, protein design is being
actively pursued at a number of academic and commercial organizations, and
several companies have developed or may develop technologies that can compete
with the Company's SMART and human antibody technologies. There can be no
assurance that competitors will not succeed in more rapidly developing and
marketing technologies and products that are more effective than the products
being developed by the Company or that would render the Company's products or
technology obsolete or noncompetitive. Further, there can be no assurance that
the Company's collaborative partners will not independently develop products
competitive with those licensed to such partners by the Company, thereby
reducing the likelihood that the Company will receive revenues under its
agreements with such partners.
Any potential product that the Company or its collaborative partners
succeed in developing and for which regulatory approval is achieved must then
compete for market acceptance and market share. For certain of the Company's
potential products, an important factor will be the timing of market
introduction of competitive products. Accordingly, the relative speed with
which the Company and its collaborative partners can develop products, complete
the clinical testing and approval processes, and supply commercial quantities of
the products to the market compared to competitive companies is expected to be
an important determinant of market success. For example, with respect to the
speed of development of OST 577, the Company is aware that other drugs such as
lamivudine from Glaxo Wellcome plc are in advanced clinical development or have
been submitted for approval in certain jurisdictions for the treatment of CHB
by competitive companies that have significantly greater experience and
resources in developing antiviral products than the Company and Boehringer
Mannheim. The availability of lamivudine could have a material adverse impact
on the clinical development and commercial potential of OST 577.
Other competitive factors include the capabilities of the Company's
collaborative partners, product efficacy and safety, timing and scope of
regulatory approval, product availability, marketing and sales capabilities,
reimbursement coverage, the amount of clinical benefit of the Company's
products relative to their cost, method of administration, price and patent
protection. There can be no assurance that the Company's competitors will not
develop more efficacious or more affordable products, or achieve earlier
product development completion, patent protection, regulatory approval or
product commercialization than the Company. The occurrence of any of these
events by the Company's competitors could have a material adverse effect on the
business and financial condition of the Company.
20
<PAGE> 22
DEPENDENCE ON KEY PERSONNEL. The Company's success is dependent to a
significant degree on its key management personnel. To be successful, the
Company will have to retain its qualified clinical, manufacturing, scientific
and management personnel. The Company faces competition for personnel from other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining qualified personnel, and its failure to do so could have a material
adverse effect on the business and financial condition of the Company.
POTENTIAL VOLATILITY OF STOCK PRICE. The market for the Company's
securities is volatile and investment in these securities involves substantial
risk. The market prices for securities of biotechnology companies (including the
Company) have been highly volatile, and the stock market from time to time has
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. Factors such as results of
clinical trials, delays in manufacturing or clinical trial plans, fluctuations
in the Company's operating results, disputes or disagreements with collaborative
partners, market reaction to announcements by other biotechnology or
pharmaceutical companies, announcements of technological innovations or new
commercial therapeutic products by the Company or its competitors, initiation,
termination or modification of agreements with collaborative partners, failures
or unexpected delays in manufacturing or in obtaining regulatory approvals or
FDA advisory panel recommendations, developments or disputes as to patent or
other proprietary rights, loss of key personnel, litigation, public concern as
to the safety of drugs developed by the Company, regulatory developments in
either the U.S. or foreign countries (such as opinions, recommendations or
statements by the FDA or FDA advisory panels, health care reform measures or
proposals), market acceptance of products developed and marketed by the
Company's collaborators, and general market conditions could result in the
Company's failure to meet the expectations of securities analysts or investors.
In such event, or in the event that adverse conditions prevail or are perceived
to prevail with respect to the Company's business, the price of PDL's common
stock would likely drop significantly. In the past, following significant drops
in the price of a company's common stock, securities class action litigation has
often been instituted against such a company. Such litigation against the
Company could result in substantial costs and a diversion of management's
attention and resources, which would have a material adverse effect on the
Company's business and financial condition.
21
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Number
- ------
<S> <C>
11.1 Statement of Computation of Earnings Per Share
</TABLE>
(b) No Reports on Form 8-K were filed during the quarter ending
September 30, 1997
22
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its be half by the
undersigned thereunto duly authorized.
Dated: November 12, 1997
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> 25
Exhibit Index
<TABLE>
<CAPTION>
<S> <C>
11.1 Statement of Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11.1
PROTEIN DESIGN LABS, INC.
STATEMENT OF COMPUTATION OF EARNING PER SHARE
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ending September 30, Nine months ending September 30,
1997 1996 1997 1996
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Computation of common and common
equivalent shares outstanding:
Weighted average common shares 18,170 15,632 17,433 15,578
outstanding
Weighted average shares
outstanding assuming conversion
of preferred stock -- -- -- --
-------- -------- -------- --------
18,170 15,632 17,433 15,578
-------- -------- -------- --------
Stock related to SAB No. 55, 64,
and 83 -- -- -- --
-------- -------- -------- --------
Total weighted average common and
common equivalent shares
outstanding 18,170 15,632 17,433 15,578
======== ======== ======== ========
Net loss $ (905) $ (4,305) $ (7,826) $ (9,982)
======== ======== ======== ========
Loss per share $ (0.05) $ (0.28) $ (0.45) $ (0.64)
======== ======== ======== ========
</TABLE>
24
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 36,966
<SECURITIES> 124,855
<RECEIVABLES> 2,765
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 20,405
<DEPRECIATION> (11,481)
<TOTAL-ASSETS> 173,510
<CURRENT-LIABILITIES> 4,326
<BONDS> 0
0
0
<COMMON> 182
<OTHER-SE> 169,002
<TOTAL-LIABILITY-AND-EQUITY> 173,510
<SALES> 0
<TOTAL-REVENUES> 15,949
<CGS> 0
<TOTAL-COSTS> (23,775)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,826)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,826)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
