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, 1998
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 (650) 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, 1998, there were 18,527,590 shares of the Registrant's
Common Stock outstanding.
<PAGE>
PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations
Three months ended June 30, 1998 and 1997
Six months ended June 30, 1998 and 1997
Balance Sheets
June 30, 1998 and December 31, 1997
Statements of Cash Flows
Six months ended June 30, 1998 and 1997
Notes to Unaudited Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION - RISK FACTORS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except net loss per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Revenue under agreements
with third parties $5,873 $2,500 $7,665 $4,791
Interest and other income 2,485 2,528 4,929 4,122
---------- ---------- ---------- ----------
Total revenues 8,358 5,028 12,594 8,913
---------- ---------- ---------- ----------
Costs and expenses:
Research and development 7,327 6,309 13,734 12,813
General and administrative 1,959 1,550 3,801 3,021
---------- ---------- ---------- ----------
Total costs and expenses 9,286 7,859 17,535 15,834
---------- ---------- ---------- ----------
Net loss ($928) ($2,831) ($4,941) ($6,921)
========== ========== ========== ==========
Net loss per share ($0.05) ($0.16) ($0.27) ($0.41)
========== ========== ========== ==========
Shares used in computation of net
loss per share(basic and diluted) 18,516 18,128 18,487 17,064
========== ========== ========== ==========
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
(In thousands, except par value per share)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,715 $9,266
Short-term investments 90,748 63,003
Other current assets 3,335 779
---------- ----------
Total current assets 110,798 73,048
Property and equipment, net 13,349 9,996
Long-term investments 48,997 91,386
Other assets 579 596
---------- ----------
$173,723 $175,026
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $332 $475
Accrued compensation 929 833
Accrued clinical trials 1,218 1,434
Other accrued liabilities 1,868 2,212
Deferred revenue 3,129 1,604
---------- ----------
Total current liabilities 7,476 6,558
Commitments
Stockholders' equity:
Preferred stock, par value $0.01 per
share, 10,000 shares authorized;
no shares issued and outstanding -- --
Common stock, par value $0.01 per share,
40,000 shares authorized; 18,528
and 18,348 issued and outstanding at
June 30, 1998 and December 31, 1997,
respectively 185 183
Additional paid-in capital 230,012 227,093
Accumulated deficit (64,323) (59,382)
Unrealized gain on investments 373 574
---------- ----------
Total stockholders' equity 166,247 168,468
---------- ----------
$173,723 $175,026
========== ==========
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,941) ($6,921)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,727 1,567
Other (73) (984)
Changes in assets and liabilities:
Other current assets (2,556) 140
Accounts payable (144) (553)
Accrued liabilities (462) 133
Deferred revenue 1,525 --
---------- ----------
Total adjustments 17 303
---------- ----------
Net cash used in operating activities (4,924) (6,618)
Cash flows from investing activities:
Purchases of short- and long-term investments (61,979) (182,219)
Maturities of short- and long-term investments 76,500 136,050
Capital expenditures (5,084) (1,900)
(Increase) decrease in other assets 16 (212)
---------- ----------
Net cash provided by (used in) investing activities 9,453 (48,281)
Cash flows from financing activities:
Proceeds from issuance of capital stock 2,920 69,718
---------- ----------
Net cash provided by financing activities 2,920 69,718
---------- ----------
Net increase in cash and cash equivalents 7,449 14,819
Cash and cash equivalents at beginning of period 9,266 14,141
---------- ----------
Cash and cash equivalents at end of period $16,715 $28,960
========== ==========
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
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, devote significant resources to preclinical
studies, clinical trials, and manufacturing and to defend its patents
and other proprietary rights. The Company's revenues to date have
consisted principally of research and development funding, licensing
and signing fees and milestone payments from pharmaceutical companies
under collaborative research and development, humanization, patent
licensing and clinical supply 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. In 1998, the Company began
receiving royalties from sales of Zenapax. Royalties on sales of
Zenapax are payable under exclusive license agreements with
Hoffmann-La Roche Inc. and affiliates ("Roche"). The Company is
dependent upon the further development, regulatory and marketing
efforts of Roche with respect to Zenapax and there can be no
assurance that Roche's further development, regulatory and marketing
efforts will be successful, including, without limitation, if and
when regulatory approvals in various countries may be obtained and
whether or how quickly Zenapax might be adopted by the medical
community. In addition, the Company recognizes royalty revenues when
royalty reports are received from Roche and the Company's other
collaborative partners. This method of recognizing royalty revenues
from the Company's licensees, taken together with the unpredictable
timing of payments of non-recurring licensing and signing fees and
milestones under new and existing collaborative research and
development, humanization, patent licensing and clinical supply
agreements, may result in significant fluctuations in revenues in
quarterly and annual periods.
Although the Company anticipates entering into new collaborative,
humanization and patent licensing agreements from time to time, the
Company presently does not anticipate realizing non-royalty revenue
from its new and proposed collaborations and agreements 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 activity, and administrative and patent
activities. Accordingly, in the absence of substantial revenues from
new corporate collaborations or patent licensing agreements,
significant royalties on sales of Zenapax and other products licensed
under the Company's intellectual property rights, or other sources,
the Company expects to incur substantial 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 additional facilities or manufacturing
capacity, as the Company defends or prosecutes its patents and patent
applications and as the Company invests in research or acquires
additional technologies or businesses.
Basis of Presentation and Responsibility for Quarterly Financial
Statements
The balance sheet as of June 30, 1998 and the statements of
operations and cash flows for the six month periods ended June 30,
1998 and 1997 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, 1997. Results for any quarterly period are not
necessarily indicative of results for any other quarterly 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 "Other" adjustments line item in the Statements
of Cash Flows represents the accretion of the book value of certain
debt securities. The Company places its cash and short-term and long-
term investments with high-credit-quality financial institutions and
in securities of the 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
Contract revenues from research and development are recorded as
earned based on the performance requirements of the contracts.
Revenues from achievement of milestone events are recognized when the
funding party agrees that the scientific, clinical or regulatory
results stipulated in the agreement have been met. Revenue recognized
under certain clinical supply agreements is based upon the percentage
of completion method. Deferred revenue arises principally due to the
timing of cash payments received under research and development
contracts.
The Company's collaborative, humanization and patent licensing
agreements with third parties provide for the payment of royalties to
the Company based on net sales of the licensed product under the
agreement. Royalties, as reported to the Company, may include
deductions for creditable amounts related to milestone payments
previously received by the Company. The agreements generally provide
for royalty payments to the Company following completion of each
calendar quarter or semi-annual period and royalty revenue is
recognized when royalty reports are received from the third party.
New Accounting Standards
Effective as of January 1, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes new rules for
the reporting and display of comprehensive income (loss) and its
components; however, the adoption of FAS 130 had no impact on the
Company's net loss or stockholders' equity. FAS 130 requires
unrealized gains and losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income
(loss). FAS 130 permits the disclosure of this information in notes
to interim financial statements and the Company has elected this
approach. For the three month periods ended June 30, 1998 and 1997,
total comprehensive loss amounted to $1.0 million and $2.3 million,
respectively. For the six month periods ended June 30, 1998 and 1997,
total comprehensive loss amounted to $5.1 million and $6.7 million,
respectively.
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" ("FAS 128").
FAS 128 requires the presentation of basic earnings (loss) per share
and diluted earnings (loss) per share, if more dilutive, for all
periods presented. In accordance with FAS 128, net loss per share has
been computed using the weighted average number of shares of common
stock outstanding during the period. Diluted net loss per share has
not been presented as, due to the Company's net loss position, it is
antidilutive. Had the Company been in a net income position, diluted
earnings per share for the three months ended June 30, 1998 and 1997
would have included an additional 497,000 and 700,000 shares,
respectively, related to the Company's outstanding stock options. Had
the Company been in a net income position, diluted earnings per share
for the six months ended June 30, 1998 and 1997 would have included
an additional 693,000 and 870,000 shares, respectively, related to
the Company's outstanding stock options. The Company's previously
reported net loss per share amounts conformed to FAS 128 and,
accordingly, its adoption has no effect on these financial
statements.
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. 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-cancellable 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.
In 1997, Boehringer Mannheim GmbH ("Boehringer Mannheim") invoked 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") then being conducted by Boehringer Mannheim as well as
certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in the first quarter of 1997. In
March 1998, Roche acquired Corange Limited, the parent company of
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 in the event certain conditions were met with respect to
that study.
In June 1997, the Company entered into a Sponsored Research Agreement
with Stanford University to provide aggregate funding and equipment
support of up to $3.4 million over a period of 3 years for the
laboratory of Stanley Falkow, Ph.D., a member of the Board of
Directors and a Distinguished Investigator (consultant) of the
Company. The funding arrangement provides the Company with certain
exclusive rights to intellectual property resulting from the research
efforts in Dr. Falkow's laboratory during the funding period. The
Company expensed approximately $0.3 million in connection with this
funding arrangement for the six month period ended June 30, 1998.
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, filed with the Securities and Exchange Commission for the
year ended December 31, 1997.
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 losses over at least the next few years,
as it continues to develop its proprietary products, devote significant
resources to preclinical studies, clinical trials, and manufacturing and
to defend its patents and other proprietary rights. The Company's
revenues to date have consisted principally of research and development
funding, licensing and signing fees and milestone payments from
pharmaceutical, chemical and biotechnology companies under collaborative
research and development and patent licensing and clinical supply
agreements. These revenues may vary considerably from quarter to quarter
and 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. In 1998, the
Company began receiving royalties from sales of Zenapaxr[R] by Hoffmann-La
Roche Inc. and affiliates ("Roche"). Roche has rights to partially
offset certain previously paid milestones and third party royalties
against royalties payable to the Company with respect to Zenapax. The
Company is dependent upon the further development, regulatory and
marketing efforts of Roche with respect to Zenapax and there can be no
assurance that Roche's further development, regulatory and marketing
efforts will be successful, including, without limitation, if and when
regulatory approvals in various countries may be obtained and whether or
how quickly Zenapax might be adopted by the medical community. Royalties
from Zenapax are reported to the Company on a quarterly basis for U.S.
sales and on a semi-annual basis for sales outside of the U.S. The
Company recognizes royalty revenues when royalty reports are received
from Roche and the Company's other collaborative partners. This method
of recognizing royalty revenues from the Company's licensees, taken
together with Roche's rights to partially offset third party royalties
and certain milestone payments and the unpredictable timing of payments
of non-recurring licensing and signing fees, milestones and payments for
manufacturing services under new and existing collaborative research and
development and patent licensing and clinical supply agreements, is
likely to result in significant fluctuations in revenues in quarterly
and annual periods.
Although the Company anticipates entering into new collaborations
and humanization and patent licensing agreements from time to time, the
Company presently does not anticipate realizing non-royalty revenue from
its new and proposed collaborations and agreements at levels
commensurate with the non-royalty revenue recognized under its older
collaborations. Moreover, the Company anticipates that its operating
expenses will generally continue to increase significantly as the
Company expands its business activities and advances potential products
in clinical development, dedicates more resources to its research and
development, manufacturing, preclinical and clinical activity, and
administrative and patent activities. Accordingly, in the absence of
substantial revenues from new corporate collaborations, humanization and
patent licensing agreements, significant royalties on sales of Zenapax
and other products licensed under the Company's intellectual property
rights, or other sources, the Company expects to incur substantial
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 additional facilities or
manufacturing capacity, as the Company defends or prosecutes its patents
and patent applications and as the Company invests in research or
acquires additional technologies or businesses.
Contract revenues from research and development are recorded as
earned based on the performance requirements of the contracts. Revenues
from achievement of milestone events are recognized when the funding
party agrees that the scientific, clinical or regulatory results
stipulated in the agreement have been met. Revenue recognized under
certain clinical supply agreements are based on the percentage of
completion method. Deferred revenue arises principally due to timing of
cash payments received under research and development contracts.
The Company's collaborative, humanization and patent licensing
agreements with third parties provide for the payment of royalties to
the Company based on net sales of the licensed product under the
agreement. Royalties, as reported to the Company, may include deductions
for creditable amounts related to milestone payments previously received
by the Company. The agreements generally provide for royalty reports to
the Company following completion of each calendar quarter or semi-annual
period and royalty revenue is recognized when royalty reports are
received from the third party.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
The Company's total revenues for the three months ended June 30,
1998 were $8.4 million as compared to $5.0 million in 1997. Total
revenues recognized under agreements with third parties were $5.9
million in the second quarter of 1998 compared to $2.5 million in the
comparable period in 1997. Interest and other income amounted to $2.5
million in the second quarters of both 1998 and 1997.
Revenues under agreements with third parties of $5.9 million for
the three months ended June 30, 1998 consisted principally of licensing
and signing fees, manufacturing services revenues under clinical supply
agreements, milestone payments earned under licensing agreements,
research and development reimbursement funding and royalties. In the
second quarter of 1997, revenues under agreements with third parties
consisted of $2.5 million of milestone payments earned under licensing
agreements.
Total costs and expenses for the three months ended June 30, 1998
increased to $9.3 million from $7.9 million in the comparable period in
1997. The increase in costs was primarily due to the addition of staff
in the Company's pharmaceutical research and development programs,
administrative functions and associated expenses desirable to manage and
support the Company's expanding operations.
Research and development expenses for the three month period ended
June 30, 1998 increased to $7.3 million from $6.3 million in the
comparable period in 1997. The increase in costs was primarily due to
the addition of staff, the continuation of clinical trials, costs of
conducting preclinical tests and expansion of research and
pharmaceutical development capabilities, including support for both
clinical development and manufacturing process development.
General and administrative expenses for the three months ended
June 30, 1998 increased to $2.0 million from $1.6 million in the
comparable period in 1997. These increases were primarily the result of
increased staffing and associated expenses desirable to manage and
support the Company's expanding operations.
Six Months Ended June 30, 1998 and 1997
The Company's total revenues for the six months ended June 30,
1998 were $12.6 million as compared to $8.9 million in 1997. Total
revenues recognized under agreements with third parties were $7.7
million for the six months ended June 30, 1998 compared to $4.8 million
in the comparable period in 1997. Interest and other income for the six
months ended June 30, 1998 were $4.9 million compared to $4.1 million in
the comparable period in 1997. This increase is primarily attributable
to the increased interest earned on the Company's increased 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.
Revenues under agreements with third parties of $7.7 million for
the six months ended June 30, 1998 consisted principally of licensing
and signing fees, manufacturing services revenues under clinical supply
agreements, milestone payments earned under licensing agreements,
research and development reimbursement funding and royalties. In the
comparable period of 1997, revenues under agreements with third parties
consisted of $4.8 million of licensing and signing fees and milestone
payments earned under licensing agreements.
Total costs and expenses for the six months ended June 30, 1998
increased to $17.5 million from $15.8 million in the comparable period
in 1997. The increase in costs was primarily due to the addition of
staff in the Company's pharmaceutical research and development programs,
administrative functions and associated expenses desirable to manage and
support the Company's expanding operations.
Research and development expenses for the six months ended June
30, 1998 increased to $13.7 million from $12.8 million in the comparable
period in 1997. The increase in costs was primarily due to the addition
of staff, the continuation of clinical trials, costs of conducting
preclinical tests and expansion of research and pharmaceutical
development capabilities, including support for both clinical
development and manufacturing process development.
General and administrative expenses for the six months ended June
30, 1998 increased to $3.8 million from $3.0 million in the comparable
period in 1997. These increases were primarily the result of increased
staffing and associated expenses desirable 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 securities, research and
development revenues and interest income on invested capital. At June
30, 1998, the Company had cash, cash equivalents and investments in the
aggregate of $156.5 million, compared to $163.7 million at December 31,
1997.
In 1997, Boehringer Mannheim GmbH ("Boehringer Mannheim") invoked
the dispute resolution provisions under its collaborative research
agreement with the Company 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") then being conducted by Boehringer Mannheim as well
as certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in the first quarter of 1997. In March
1998, Roche acquired Corange Limited, the parent company of 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 in the
event certain conditions were met with respect to that study.
As set forth in the Statements of Cash Flows, net cash used in
operating activities was $4.9 million for the six months ended June 30,
1998 compared to $6.6 million in the same period in 1997. The decrease
in 1998 was primarily due to the Company receiving research and
development reimbursement funding in advance of the related work to be
performed by the Company.
As set forth in the Statements of Cash Flows, net cash provided by
investing activities for the six months ended June 30, 1998 was $9.5
million, resulting primarily from maturities of short-term investments.
Net cash used in investing activities for the comparable period in 1997
was $48.3 million reflecting the purchase of short- and long-term
investments.
The Company has entered into a twelve year lease of approximately
90,000 square feet for the relocation of its headquarters and research
and development facilities to Fremont, California. The Company plans to
invest approximately $13 million in order to make the facilities
suitable for its operations. As set forth in the Statements of Cash
Flows, capital expenditures increased to $5.1 million for the six months
ended June 30, 1998 compared to $1.9 million in the comparable period in
1997, primarily from its investment in these facilities.
As set forth in the Statements of Cash Flows, net cash provided by
financing activities for the six months ended June 30, 1998 was $2.9
million resulting primarily from the exercise of outstanding stock
options. Net cash provided by financing activities for the comparable
period in 1997 was $69.7 million. The 1997 amount resulted primarily
from the completion of a public offering of 2.275 million shares of the
Company's common stock in the first quarter of 1997.
The Company's future capital requirements will depend on numerous
factors, including, among others, royalties from Roche's marketing of
Zenapax; the ability of the Company to enter into additional
collaborative, humanization and patent licensing arrangements; the
progress of the Company's product candidates in clinical trials; the
ability of the Company's licensees to obtain regulatory approval and
successfully manufacture and market products licensed under the
Company's patents; the continued or additional support by collaborative
partners or other third parties of research and development efforts 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 facilities and methods and advanced technologies; the
ability of the Company to obtain and retain funding from third parties
under collaborative agreements; the continued 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on June
19, 1998, at the Company's principal offices in Mountain View,
California. Of the 18,512,081 shares outstanding as of the record date,
15,284,904 shares were present at the meeting or represented by proxies,
representing approximately 82.5% of the total votes eligible to be cast.
At the meeting, the stockholders voted to re-elect three Class III
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 III
director elected at the Annual Meeting and the votes cast with respect
to each such individual are set forth below.
For Withheld
Jurgen Drews 14,669,644 615,260
Laurence Jay Korn 15,194,459 90,445
Max Link 15,196,191 88,713
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, 1998. The votes cast are set forth
below.
For Against Abstentions
15,263,916 12,071 8,917
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - 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 in the
Company's Annual Report on Form 10-K for the year ending December 31,
1997.
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 June 30,
1998, the Company had an accumulated deficit of approximately $64.3
million. 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, its collaborative partners or
licensees will successfully develop products, obtain required regulatory
approvals, manufacture products at an acceptable cost and with
appropriate quality, or successfully market such products.
The Company's revenues to date have consisted principally of
research and development funding, licensing and signing fees and
milestone and other payments from pharmaceutical, chemical and
biotechnology companies under collaborative, humanization, patent
licensing and clinical supply 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. In addition, revenues from patent licensing
arrangements and royalties are expected to 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, with significant
variations depending on the terms of the particular agreements. For
example, revenues in each of the quarters of 1997 included several non-
recurring payments in connection with new humanization, patent licensing
and other research and development agreements, which payments resulted
in significant variations in revenues in each of the quarters in 1997.
Hoffmann-La Roche Inc. and its affiliates ("Roche") have received
regulatory approval to distribute Zenapax[R] in the U.S. and Switzerland.
Zenapax, a product created by the Company, is licensed exclusively to
Roche and the Company is dependent upon the efforts of Roche to obtain
additional regulatory approvals and market Zenapax. The Company has
begun receiving royalties in 1998 based on revenue from sales of Zenapax
by Roche, with royalties based on U.S. sales paid to the Company on a
quarterly basis and sales outside of the U.S. on a semi-annual basis.
Roche has rights to partially offset third party royalties and certain
previously paid milestones against royalties payable to the Company with
respect to Zenapax. The Company recognizes royalty revenues
when royalty reports are received from its collaborative partners,
including Roche. This method of accounting for royalty revenues from the
Company's licensees, taken together with the unpredictable timing of
payments of non-recurring licensing and signing fees, payments for
manufacturing services and milestones under new and existing
collaborative, humanization, patent licensing and clinical supply
agreements, is likely to result in significant quarterly fluctuations in
revenues in quarterly and annual periods. Thus, 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.
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 it will
incur significant operating expenses as the Company increases its
research and development, manufacturing, preclinical, clinical,
marketing and administrative and patent activities. Accordingly, in the
absence of substantial revenues from new corporate collaborations or
patent licensing arrangements, royalties on sales of Zenapax or other
products licensed under the Company's intellectual property rights or
other sources, the Company expects to incur substantial 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 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. For example,
the Company expects to invest approximately $13 million related to the
construction of its new headquarters facilities located in Fremont,
California, which improvements will include the expansion of laboratory
and development facilities. 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 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 and year to year.
Dependence On Roche With Respect To Zenapax. Roche controls the
development and marketing 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 receive royalties or additional milestone payments
from the marketing and development of this product. There can be no
assurance that Roche's further development, regulatory and marketing
efforts will be successful, including without limitation, whether or how
quickly Zenapax might receive regulatory approvals in addition to those
in the U.S. and Switzerland and how rapidly it might be adopted by the
medical community. Moreover, Simulect[R], a product competitive with
Zenapax, has recently been approved for marketing in the U.S. and
Switzerland and there can be no assurance that Roche will successfully
market and sell Zenapax against this and other available competitive
products. In addition, there can be no assurance that other
independently developed products of Roche, including CellCept[R], or
others will not compete with or prevent Zenapax from achieving
meaningful sales. Roche's development and marketing efforts for CellCept
may result in delays or a relatively smaller resource commitment to
product launch and support efforts than might otherwise be obtained for
Zenapax if this potentially competitive product were not under
development or being marketed.
Moreover, Zenapax is being tested in certain early stage clinical
trials 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 clinical 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.
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-stage clinical trials may not be
predictive of results that will be obtained in late-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, late-stage clinical trials
from those obtained in early-stage trials. For example, early-stage
clinical trials usually involve a small number of patients, often at a
single center, 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 late-stage multi-center clinical trial. Also,
differences in the clinical trial design between early-stage and late-
stage clinical trials 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 late-stage trials are
generally required to be blinded in order to provide more objective data
for assessing the safety and efficacy of the product. Moreover,
preliminary results from early-stage trials may not be representative of
results that may be obtained as the trial proceeds to completion.
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.
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. These considerations may lead the
Company to consider the termination of ongoing clinical trials or
halting further development of a product for a particular indication.
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. The Company 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, the Company 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 U.S. Patent and Trademark Office ("PTO") or the courts in
proceedings instituted by third parties. Moreover, the issuance of a
patent in one country does not assure the issuance 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.
The Company has several patents and exclusive licenses covering
its humanized and human antibody technology, respectively. With respect
to its human antibody technology and antibodies, the Company 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, the Company has been issued fundamental patents by the
European Patent Office ("EPO") and PTO. In addition, in June 1996 the
Company was issued a U.S. patent covering Zenapax and certain related
antibodies against the IL-2 receptor. The Company 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 the Company'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 the Company's
compounds. However, the Company 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 the Company's patents will prevent others
from developing competitive products using related technology.
With respect to its issued antibody humanization patents, the
Company 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. Eighteen notices
of opposition and opposition briefs to the Company's European patent
were filed during the opposition period, including filings 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. The Company recently filed its response to the
briefs filed by these parties. 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. The Company 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. If the
outcome of the European opposition proceeding or any litigation
involving the Company's antibody humanization patents were to be
unfavorable, the Company's ability to collect royalties on licensed
products and to license its patents relating to humanized antibodies may
be materially adversely affected, which could have a material adverse
affect on the business and financial conditions of the Company. 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 the Company's programs. Some of these
applications or patents may be competitive with the Company's
applications or contain claims that conflict with those made under the
Company's patent applications or patents. Such conflict could prevent
issuance of patents to the Company, provoke an interference with the
Company's patents or result in a significant reduction in the scope or
invalidation of the Company'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 the Company's products or processes, and
such claims are ultimately determined to be valid, no assurance can be
given that the Company would be able to obtain licenses to these patents
at a reasonable cost, if at all, or to develop or obtain alternative
technology.
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 that Celltech has a pending application for a
corresponding U.S. patent (the "U.S. Adair Patent Application"). Because
U.S. patent applications are maintained in secrecy, the U.S. Adair
Patent Application remains confidential. Accordingly, there can be no
assurance that claims in such a patent or application would not cover
any of the Company's SMART antibodies or be competitive with or conflict
with claims in the Company's patents or patent applications. If the U.S.
Adair Patent Application issues and if it is determined to be valid and
to cover any of the Company'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
Application conflict with claims in the Company'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 additional patents to PDL relating to
humanization of antibodies or result in a significant reduction in the
scope or invalidation of the Company's patents, if issued. Moreover,
uncertainty as to the validity or scope of patents issued to the Company
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.
The Company has obtained a nonexclusive license under a patent
held by Celltech (the "Boss Patent") relating to the Company'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
the Company does not have a license. The Company 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 the Company's processes and
products were covered by a patent issuing from such patent application,
the Company may be required to obtain a license under such patent or to
significantly alter its processes or products. There can be no assurance
that the Company 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 Company.
The Company is aware that Lonza Biologics, Inc. has a patent
issued in Europe to which the Company 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 the Company's processes were
covered by such patent, the Company might 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 the Company 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. Although the European patent was declared invalid
by the EPO in the opposition process, Genentech has appealed that
decision, thereby staying that decision. If Genentech were to assert
that the Company's SMART antibodies infringe these patents, the Company
might 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 the Company 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 could have a material adverse effect
on the business and financial condition of the Company.
In addition to seeking the protection of patents and licenses, the
Company 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 the Company would have adequate remedies for any breach
or that the Company's trade secrets will not otherwise become known,
independently developed or patented by competitors.
Dependence On Collaborative Partners. The Company has
collaborative agreements with several pharmaceutical or other companies
to develop, manufacture and market certain potential products, which
include Zenapax, the most advanced product of the Company. The Company
granted 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. As a result, the Company
often has little or no control over the development and marketing 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 on the
timely achievement of research and development objectives by the
Company, the retention of key personnel performing work under those
agreements and the successful achievement of research or clinical trial
goals, none of which can be assured, as well as 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,
Boehringer Mannheim GmbH ("Boehringer Mannheim") recently returned all
rights to OST 577 to the Company. Although a Phase IIa clinical study
involving this antibody has recently been initiated, the Company remains
dependent upon Boehringer Mannheim to transfer technical data, existing
clinical supplies and other regulatory information related to OST 577 to
the Company or to the FDA in a timely manner in order to facilitate
further development of OST 577. There can be no assurance that
Boehringer Mannheim will continue to cooperate with the Company in
providing such data, supplies or information in a timely manner. In
addition, Boehringer Mannheim has invoked 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") 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.
Further, in March 1998 Roche acquired Corange Limited, the parent
company of Boehringer Mannheim. The Company expects that Roche may
terminate the various drug development programs of the Company and
Boehringer Mannheim, including those for the SMART[Tm]Anti-L-Selectin
Antibody and an antibody to an undisclosed cardiovascular target. The
Company cannot predict the timing of Roche's determination to continue,
modify or terminate the development program for these antibodies. In
addition, Roche acquired 1,682,877 shares of the Company's common stock
held by Corange which are no longer subject to contractual limitations
on disposition.
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 depends upon, among
other things, the Company's patent position with respect to such
products. In this regard, the Company has been issued patents by PTO and
EPO with claims that the Company believes, based on its survey of the
scientific literature, cover most humanized antibodies. Eighteen notices
of opposition and opposition briefs 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 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 collect royalties on existing licensed
products such as Zenapax, and enter into additional collaborations,
humanization or patent licensing agreements and could therefore have a
material adverse effect on the Company's business or financial
condition.
Absence Of Manufacturing Experience. Of the products developed by
the Company which are currently in clinical development, Roche is
responsible for manufacturing Zenapax. If further development occurs,
the Company intends to manufacture OST 577, the SMART M195 Antibody and
the SMART Anti-CD3 Antibody as well as some or all of its other products
in preclinical development. The Company currently leases approximately
47,000 square feet housing its manufacturing facilities in Plymouth,
Minnesota. The Company 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, the Company 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.
The Company 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 create
capacity to produce its products for commercial sale at an acceptable
cost, the Company 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 fully implemented, 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. Further, there can be no assurance
that the Company 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.
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 the Company's products currently in clinical development,
in particular OST 577. 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. In addition, manufacturing changes to its
manufacturing facility may require the Company to shut down production
for a period of time. There can be no assurance that the Company will be
able to reinitiate production in a timely manner, if at all, following
such shutdown. Delays as a result of manufacturing changes or shutdown
of the manufacturing facility 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.
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 the Company's 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 or 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 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 obtaining regulatory approval for
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, Novartis has received approval to market
Simulect, a product competitive with Zenapax, in the U.S. and
Switzerland. Novartis has a significant marketing and sales force
directed to the transplantation market and there can be no assurance
that Roche will successfully market and sell Zenapax against this and
other available products. 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. The
Company's current clinical plans for OST 577 involve a study of the
combination of OST 577 and nucleoside analogs such as lamivudine. The
lack of availability of lamivudine or other drugs for the treatment of
CHB 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.
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 disappointing sales of approved
products, approval or introduction of competing products, 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, sales of
the Company's common stock held by collaborative partners or insiders
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 the
Company'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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) No Reports on Form 8-K were filed during the quarter ended
June 30, 1998.
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: August 13, 1998
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/ Jon Saxe
Jon Saxe
President
(Chief Accounting Officer)
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