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 March 31, 1999
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)
34801 Campus Drive
Fremont, Ca. 94555
(Address of principal executive offices)
Telephone Number (510) 574-1400
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 March 31, 1999, there were 18,618,825 shares of the Registrant's
Common Stock outstanding.
<PAGE>
PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations
Three months ended March 31, 1999 and 1998
Balance Sheets
March 31, 1999 and December 31, 1998
Statements of Cash Flows
Three months ended March 31, 1999 and 1998
Notes to Unaudited Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
PART II. OTHER INFORMATION
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
(In thousands, except net loss per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Revenue under agreements
with third parties $6,462 $1,791
Interest and other income 2,373 2,444
---------- ----------
Total revenues 8,835 4,235
---------- ----------
Costs and expenses:
Research and development 8,280 6,406
General and administrative 2,445 1,842
---------- ----------
Total costs and expenses 10,725 8,248
---------- ----------
Net loss ($1,890) ($4,013)
========== ==========
Net loss per share:
Basic ($0.10) ($0.22)
Diluted ($0.10) ($0.22)
========== ==========
Weighted average number of shares:
Basic 18,618 18,457
Diluted 18,618 18,457
========== ==========
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
(In thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $27,352 $27,907
Short-term investments 14,948 59,233
Other current assets 5,436 4,608
------------ -----------
Total current assets 47,736 91,748
Property and equipment, net 22,931 23,016
Long-term investments 97,961 56,299
Other assets 1,083 787
------------ -----------
$169,711 $171,850
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,474 $1,310
Accrued compensation 989 925
Accrued clinical trials 1,225 1,293
Other accrued liabilities 1,466 3,591
Deferred revenue 4,025 2,235
------------ -----------
Total current liabilities 9,179 9,354
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; 18,619
and 18,595 issued and outstanding at
March 31, 1999 and December 31, 1998,
respectively 186 186
Additional paid-in capital 231,497 231,035
Accumulated deficit (70,774) (68,884)
Unrealized gain on investments (377) 159
------------ -----------
Total stockholders' equity 160,532 162,496
------------ -----------
$169,711 $171,850
============ ===========
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,890) ($4,013)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 857 833
Other 185 376
Changes in assets and liabilities:
Other current assets (827) (56)
Accounts payable 164 24
Accrued liabilities (2,131) (900)
Deferred revenue 1,791 1,963
---------- ----------
Total adjustments 39 2,240
---------- ----------
Net cash used in operating activities (1,851) (1,773)
Cash flows from investing activities:
Purchases of short- and long-term investments (59,500) (41,979)
Maturities of short- and long-term investments 61,400 57,000
Capital expenditures (770) (665)
(Increase) decrease in other assets (296) 16
---------- ----------
Net cash provided by investing activities 834 14,372
Cash flows from financing activities:
Proceeds from issuance of capital stock 462 2,732
---------- ----------
Net cash provided by financing activities 462 2,732
---------- ----------
Net increase (decrease) in cash and cash equivalents (555) 15,331
Cash and cash equivalents at beginning of period 27,907 9,266
---------- ----------
Cash and cash equivalents at end of period $27,352 $24,597
========== ==========
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(unaudited)
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 and royalties from pharmaceutical and biotechnology 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.
The Company receives royalties on sales of Synagis[TM], Herceptin[R] and
Zenapax[R]. Royalty revenues from third party sales of these licensed
humanized antibodies are subject to the specific terms of each agreement
and, under the Company's policy, are recognized by the Company during
the quarter such royalties are reported to PDL. This method of revenue
recognition may increase fluctuations reported in any particular quarter
since the agreements generally provide for royalty reports to the
Company following completion of each calendar quarter or semi-annual
period. Further, royalty revenues are unpredictable as they are
dependent upon numerous factors including the seasonality of sales of
licensed products, the existence of competing products, the marketing
efforts of the Company's licensees and the rights certain licensees have
to partially offset certain previously paid milestones and third party
royalties against royalties payable to the Company. In addition,
expenses may fluctuate from quarter to quarter due to the timing of
certain expenses, including milestone payments that may be payable by
the Company under certain licensing arrangements.
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 or humanization agreements, significant royalties on
sales of 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 undertakes marketing and market
planning activities, 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, product candidates or businesses.
Basis of Presentation and Responsibility for Quarterly Financial
Statements
The balance sheet as of March 31, 1999 and the statements of operations
and cash flows for the three month periods ended March 31, 1999 and 1998
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, 1998. 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.
Cash and cash equivalents for the period ended March 31, 1999 increased
primarily as a result of maturities of short-term and the redemption of
certain long-term investments. The changes in short- and long-term
investments were the result of reinvestment of these maturing and
redeemed securities into investments with maturities longer than twelve
months.
Revenue Recognition
Contract revenues from research and development arrangements 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 or clinical results
stipulated in the agreement have been met. Deferred revenue arises
principally due to timing of cash payments received under research and
development contracts.
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. 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. Non-refundable signing and licensing fees
under these arrangements are recognized as revenue when there are no
future performance obligations remaining with respect to such fees.
Net Income Per Share
In accordance with Financial Accounting Standards Board Statement No.
128, "Earnings Per Share" ("FAS 128"), basic net earnings (loss) per
share have been computed using the weighted average number of shares of
common stock outstanding during the periods presented and excludesed the
dilutive effect of stock options. If the Company had a net loss position
for the applicable period, as is the case for the three month periods
ended March 31, 1999 and 1998, FAS 128 specifies that the Company shall
not include the effect of stock options outstanding for the applicable
period as the effect would be antidilutive.
Following is a reconciliation of the numerators and denominators of the
basic and diluted net loss per share computations for the periods
presented below:
(In thousands, except basic and diluted net loss per share)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Numerator:
Net loss $(1,890) $(4,013)
========== ==========
Denominator:
Basic net loss per share -
weighted-average shares 18,618 18,457
Dilutive potential common shares:
Stock Options -- --
---------- ----------
Denominator for diluted net
loss per share 18,618 18,457
========== ==========
Basic net loss per share $(0.10) $(0.22)
========== ==========
Diluted net loss per share $(0.10) $(0.22)
========== ==========
</TABLE>
Comprehensive Income
In accordance with Financial Accounting Standards Statement No. 130,
"Reporting Comprehensive Income," ("FAS 130"), the Company is required
to display comprehensive income and its components as part of the
Company's complete set of financial statements. The measurement and
presentation of net loss did not change. Comprehensive income is
comprised of net loss and other comprehensive income. Other
comprehensive income includes certain changes in equity of the Company
that are excluded from net loss. Specifically, FAS 130 requires
unrealized gains and losses on the Company's holdings of available-for-
sale securities, which were reported separately in stockholders' equity,
to be included in accumulated other comprehensive income. 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 March 31, 1999 and 1998, total comprehensive loss
amounted to $2.4 million and $4.2 million, respectively.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"). FAS 133 is not required to be adopted until 2000. However,
the Company has reviewed FAS 133 and because it does not use
derivatives, the adoption of FAS 133 is not expected to effect the
results of operations or the financial position of the Company.
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 Ostavir[TM] 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 Holding Ltd
acquired 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
Ostavir in the event certain conditions are met with respect to that
study.
Other Accrued Liabilities
Other accrued liabilities decreased from December 31, 1998 infor the
period ended March 31, 1999 primarily as a result of payments of
approximately $1.3 million for capital expenditures related to the
Company's new Fremont, California facilities.
Deferred Revenue
Deferred revenue increased from December 31, 1998 infor the period ended
March 31, 1999 primarily as a result of research and development funding
of $2.4 million received in advance of the performance of the research.
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,
1998.
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, 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 and royalties from pharmaceutical and biotechnology 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.
The Company receives royalties on sales of Synagis[TM], Herceptin[R]
and Zenapax[R]. Royalty revenues from third party sales of these licensed
humanized antibodies are subject to the specific terms of each agreement
and, under the Company's policy, are recognized by the Company during
the quarter such royalties are reported to PDL. This method of revenue
recognition may increase fluctuations reported in any particular quarter
since the agreements generally provide for royalty reports to the
Company following completion of each calendar quarter or semi-annual
period. Further, royalty revenues are unpredictable as they are
dependent upon numerous factors including the seasonality of sales of
licensed products, the existence of competing products, the marketing
efforts of the Company's licensees and the rights certain licensees have
to partially offset certain previously paid milestones and third party
royalties against royalties payable to the Company. In addition,
expenses may fluctuate from quarter to quarter due to the timing of
certain expenses, including milestone payments that may be payable by
the Company under certain licensing arrangements.
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 or humanization agreements, significant royalties on
sales of 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, product candidates 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 or clinical results stipulated in the
agreement have been met. Deferred revenue arises principally due to
timing of cash payments received under research and development
contracts.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
The Company's total revenues for the three months ended March 31,
1999 were $8.8 million as compared to $4.2 million in the first quarter
of 1998. Total revenues recognized under agreements with third parties
were $6.5 million in the first quarter of 1999 compared to $1.8 million
in the comparable period in 1998. Interest and other income was
approximately $2.4 million in each of the first quarters of 1999 and
1998.
Revenues under agreements with third parties of $6.5 million for
the three months ended March 31, 1999 consisted principally of a $3.0
million non-refundable, non-creditable signing and licensing fee from
BioNet Pharma GmbH ("BioNet") for rights to the SMART[TM] Anti-L-Selectin
Antibody in Europe, the Middle East and Africa, royalties and research
and development reimbursement funding. In the first quarter of 1998,
revenues of $1.8 million under agreements with third parties consisted
principally of milestone payments earned under licensing agreements and
research and development reimbursement funding.
Total costs and expenses for the three months ended March 31, 1999
increased to $10.7 million from $8.2 million in the comparable period in
1998. The increase in costs and expenses was primarily due to the
addition of staff in the Company's pharmaceutical research and
development programs, administrative functions and associated expenses
to manage and support the Company's expanding operations.
Research and development expenses for the three month period ended
March 31, 1999 increased to $8.3 million from $6.4 million in the
comparable period in 1998. 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
March 31, 1999 increased to $2.4 million from $1.8 million in the
comparable period in 1998. These increases were primarily the result of
increased staffing and associated expenses to manage and support the
Company's expanding operations and payments of third party royalties due
on sales of Zenapax.
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 March
31, 1999, the Company had cash, cash equivalents and investments in the
aggregate of $140.3 million, compared to $143.4 million at December 31,
1998. Cash and cash equivalents and investments for the period do not
include the $3.0 million non-refundable, non-creditable signing and
licensing fee from BioNet received in May 1999.
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 Ostavir 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 Holding Ltd acquired 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 Ostavir in the event certain conditions are met with
respect to that study.
As set forth in the Statements of Cash Flows, net cash used in
operating activities was $1.9 million for the three months ended March
31, 1999 compared to $1.8 million in the same period in 1998.
As set forth in the Statements of Cash Flows, net cash provided by
investing activities for the three months ended March 31, 1999 was $0.8
million. Net Cash provided by investing activities for the comparable
period in 1998 was $14.3 million resulting primarily from the maturities
of short- and long-term investments.
As set forth in the Statements of Cash Flows, net cash provided by
financing activities for each of the three months ended March 31, 1999
and 1998 was $0.5 million and $2.7 million, respectively, in each period
resulting primarily from the exercise of outstanding stock options. Net
cash provided by financing activities for the comparable period in 1998
was $2.7 million. The 1998 amount resulted primarily from exercise of
outstanding stock options.
The Company's future capital requirements will depend on numerous
factors, including, among others, royalties from sales of products of
third party licensees, including Synagis, Herceptin and 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
arrangementsagreements; 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 2001.
YEAR 2000 COMPLIANCE
As is true for most companies, the ability of the Company's
systems and equipment as well as those of its key suppliers to address
the Year 2000 ("Y2K") issue presents a potential risk for the Company.
If systems software and/or equipment containing embedded software or
controllers do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on the Company's
operations. The risk for the Company exists in two areas: systems used
by the Company to run its business and systems used by the Company's
suppliers. The Company is currently evaluating its exposure in these two
areas. The Company has also reviewed, but views as a much less
significant risk, claims related to potential warranty or other claims
from its collaborative research customers.
Based on a preliminary assessment by an outside consultant
retained by the Company in early 1998, the Company believes that its
most important information systems are Y2K-compliant; however, the
Company is in the process of conducting a comprehensive inventory and
evaluation of its systems, equipment and facilities. In connection with
its recent move to a new headquarters and research and development
facility in Fremont, California, the Company has replaced or upgraded
many of its systems and equipment that were known or believed to present
potential Y2K problems. In addition, the Company specifically identified
and contacted certain key vendors regarding Y2K compliance of its key
information systems and has either received software upgrades or
assurances that Y2K-compliant software will be made available in a
manner designed for the Company to timely address the Y2K issue with
respect to these systems.
The Company has retained this consultant to develop and implement
a Y2K program, which retention includes the development of a more
extensive inventory and assessment program for the Company with respect
to Y2K risks. The consultant has expertise in assessing other
organizations with similar vendors and computer systems. This program
will include a comprehensive review of all major systems and equipment
of the Company and will also include a contingency plan for any mission
critical systems that may be identified as potential Y2K problems.
The Company has established a Y2K committee with responsibility
for coordinating awareness and identifying potential Y2K risk areas
within the Company. As part of its comprehensive review of potentially
affected systems, equipment and facilities, the Company is also
reviewing controllers used to perform key functions in its manufacturing
facility in Plymouth, Minnesota. At this time, the Company has not
reviewed all systems and processes for potential Y2K problems nor has
the Company identified alternative remediation plans if upgrade or
replacement is not feasible. The Company will consider the need for such
remediation or replacement plans as it continues to assess the Y2K risk.
For Y2K non-compliance issues identified to date, the cost of upgrade or
remediation has not been and is not expected to be material to the
Company's operating results. The Company has completed a work and
project plan for Company awareness and is implementing a detailed
assessment and inventory review process corresponding to the five-step
General Accounting Office recommended process guidelines. For Y2K
compliance, the total out-of-pocket costs expended to date and currently
planned budget expenditures are less than $100,000. If implementation of
replacement systems is delayed, or if significant new non-compliance
issues are identified, the Company's results of operations or financial
condition could be materially adversely affected.
The Company has identified and inquired of most of its critical
suppliers and has plans to initiate further inquiries of other suppliers
in order to determine whether the operations and the products or
services provided by these identified vendors are Y2K-compliant. Where
practicable, the Company will attempt to mitigate its risks with respect
to the failure of vendors to be Y2K-compliant. In the event that vendors
are not compliant, the Company may adjust its purchasing decisions or
seek alternative sources of supplies or services. However, many of the
Company's vendors have been qualified for regulatory purposes such that
qualifying new vendors could involve significant time and resource
commitments by the Company. Failure of vendors to be Y2K-compliant
remains a possibility and could limit the ability of the Company to
manufacture material for clinical studies or timely conduct regulatory
compliance programs that would result in a delay in the initiation or
continuation of certain planned clinical studies. Significant delays or
expenditures due to vendors' failures to become Y2K-compliant could have
an adverse impact on the Company's results of operations or financial
condition.
With respect to research conducted by the Company in support of
its collaborative research customers, many of the systems and software
used to support such efforts are new. Where appropriate, the Company
has, as a condition to accepting such systems and software, required
that the systems be Y2K-compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company maintains a non-trading investment portfolio of
investment grade, highly liquid, debt securities which limits the amount
of credit exposure to any one issue, issuer, or type of instrument. The
Company does not use derivative financial instruments for speculative or
trading purposes. The securities in the Company's investment portfolio
are not leveraged and are classified as available for sale and therefore
are subject to interest rate risk. The Company does not currently hedge
interest rate exposure. As of March 31, 1999, there has been no material
change in the Company's interest rate exposure from that described in
the Company's Annual Report on Form 10-K for the year ended December 31,
1998.
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 in this document and in the discussion captioned "Risk Factors" in
the Company's Annual Report on Form 10-K for the year ending December
31, 1998.
History Of Losses; Future Profitability Uncertain. The Company has
a history of operating losses and expects to incur substantial
additional expenses 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 March 31, 1999, the Company had an accumulated
deficit of approximately $70.8 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, milestone
payments and royalties from pharmaceutical and biotechnology 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. Further, royalty revenues are unpredictable as
they are dependent upon numerous factors, including the seasonality of
sales of licensed products, the existence of competing products, the
marketing efforts of the Company's licensees and rights certain
licensees may have to partially offset certain previously paid
milestones and third party royalties against royalties payable to the
Company. In addition, expenses may fluctuate from quarter to quarter due
to the timing of certain expenses, including milestone payments that may
be payable under licensing arrangements.
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 or humanization agreements, significant royalties on
sales of 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, product candidates or businesses. For
example, revenues in the first quarter of 1999 included a $3.0 million
non-refundable, non-creditable licensing and signing fee from BioNet
Pharma GmbH ("BioNet"). In the absence of similar substantial non-
recurring revenues or significant royalty revenues in any future period,
there can be no assurance that the Company will sustain or increase the
level of revenues in any future quarters from those reported in the
first quarter of 1999.
Hoffmann-La Roche Inc. and its affiliates ("Roche") have received
regulatory approval to distribute Zenapax in the U.S. and certain other
countries. Zenapax, a product created by the Company, is licensed
exclusively to Roche. The Company has also entered into nonexclusive
patent license agreements covering Synagis[TM], a product developed by
MedImmune, Inc., and Herceptin[R], a product developed by Genentech, Inc.
The Company recognizes royalty revenues when royalty reports are
received from its collaborative partners, including Roche. With respect
to royalties based on revenue from sales of Zenapax by Roche, royalties
based on U.S. sales are reported to the Company on a quarterly basis and
royalties based on sales outside of the U.S. are reported on a semi-
annual basis. With respect to royalties on sales of Synagis and
Herceptin, royalty reports are due in the quarter following the quarter
in which sales occur or are reported by sublicensees, as the case may
be. Each of these licensees has certain rights to partially offset
certain payments previously made to the Company or paid to third
parties. For example, Roche has a right to partially offset certain
third party royalties, patent reimbursement expenses and previously paid
milestones against royalties payable to the Company with respect to
Zenapax. The Company records revenue when reports are received from its
licensees. 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.
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 Licensees With Respect to Marketed Products. The
Company is dependent upon the development and marketing efforts of its
licensees with respect to products for which the Company may receive
royalties. For example, in 1998, the Company began receiving royalties
from sales of Zenapax, a product exclusively licensed to Roche. The
Company's royalties on Zenapax depend upon the efforts of Roche and
there can be no assurance that Roche's development, regulatory and
marketing efforts will be successful, including without limitation,
whether or how quickly Zenapax might receive regulatory approvals in
various countries throughout the world and how rapidly it might be
adopted by the medical community. Moreover, Simulect[R], a product
competitive with Zenapax, is marketed in the U.S. and other countries
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 marketing and sales support efforts than
might otherwise be obtained for Zenapax if this potentially competitive
product were not under development or being marketed. In addition,
Zenapax is being tested in certain early stage clinical trials in
autoimmune indications. There can be no assurance that clinical
development in autoimmune indications will continue or, that even if the
further clinical development is pursued, that 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.
The Company has also entered into non-exclusive patent licensing
arrangements for Synagis and Herceptin. The Company is dependent upon
the further development, regulatory and marketing efforts of its
licensees with respect to these products and there can be no assurance
that the development, regulatory and marketing efforts of these
licensees will be successful, including, without limitation, if and when
regulatory approvals in various countries may be obtained and whether or
how quickly these products might be adopted by the medical community.
Uncertainty Of Patents And Proprietary Technology; Opposition
Proceedings. The Company's success is significantly dependent on its
ability to obtain and maintain 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, import, manufacture, market or sell 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, import, manufacture, market or sell 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 patents 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. 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 countries.
The Company has a number of patents and has exclusively licensed
certain patents from third parties. In June 1996, the Company was issued
a U.S. patent covering Zenapax and certain related antibodies against
the IL-2 receptor. The Company has been issued patents by the PTO, the
Japanese Patent Office ("JPO") and European Patent Office ("EPO") that
relate to humanized antibodies and the methods of making those
antibodies. With respect to its issued antibody humanization patents,
the Company believes the patent claims cover Zenapax, Herceptin and
Synagis and, based on its review of the scientific literature, most
other humanized antibodies. In addition, the Company is 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.
The Company's humanization patent issued by the EPO applies in the
United Kingdom, Germany, France, Italy and eight other European
countries. The EPO (but not PTO) procedures provided for an opposition
period in which other parties submitted arguments as to why the patent
was incorrectly granted and should be withdrawn or limited. Eighteen
notices of opposition to the Company'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.
The Company submitted its response to the briefs filed by these parties
and a preliminary view from the EPO was recently received on May 12,
1999. The preliminary view represents the initial non-binding statement
from the EPO with respect to the issued European patent and does not
represent the final determination concerning the patent. Complex
preliminary views are common in EPO proceedings, and are intended to set
an agenda for discussion at the oral hearing. The final determination
from the EPO is expected to occur at an oral hearing currently scheduled
to take place in March 2000. At or following the oral hearing, the
Company expects that the European patent will either be maintained in
full, maintained in an amended version or revoked. Any of the parties to
the opposition may appeal a decision to a board of appeals within the
EPO. Such an appeal can take 2 or more years to be resolved.
The preliminary view from the EPO raises significant questions
regarding the validity of the European patent, which, if not
satisfactorily responded to by the Company in the oral hearing, could
result in revocation of certain claims or the entire European patent. If
the key claims in the European patent are revoked following the oral
hearing and the Company's other humanization patents do not provide
sufficient coverage of certain products licensed under the Company's
patents, then the Company's ability to collect royalties on European
sales of existing licensed products and to license its patents relating
to humanized antibodies may be materially adversely affected, which
would have a material adverse affect on the business and financial
condition of the Company. The Company is currently reviewing the
preliminary view with counsel in preparation for the scheduled oral
hearing. Although the entire opposition process, including appeals, may
take several years to complete, and although the European patent remains
issued and any revocation of the European patent is suspended during the
appeals process, the validity of the European patent will be at issue,
which may limit the Company's ability to collect royalties or to
negotiate future licensing or collaborative research and development
arrangements based on this patent. In addition, the Company may need to
initiate formal legal actions, if permissible, in order to enforce its
rights under its various humanization patents, including the European
patent, and there can be no assurance that the Company will successfully
enforce its rights under the European or similar U.S. and Japanese
patents of the Company.
A 6-month opposition period has also begun with respect to the
Company's humanization patent issued in Japan in late 1998. Similar to
the process in Europe, third parties have the opportunity to file their
opposition to the issuance of the JPO patent. The Company intends to
vigorously defend the European patent and, if necessary, the Japanese
patent and U.S. patents; 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 or Japanese opposition proceeding or any litigation involving
the Company's antibody humanization patents were to be unfavorable, the
Company's ability to collect royalties on existing 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 condition 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 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 conflicts 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 may determine questions of patentability. 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
("European Adair Patent"), which the Company has opposed, and that
Celltech has also been issued a corresponding U.S. patent (the "U.S.
Adair Patent") that contains claims that may be considered broader in
scope than the European Adair Patent. The Company is currently reviewing
the claims under the U.S. Adair Patent in an effort to determine its
future course of action with respect to this patent. If it were
determined that the Company's SMART antibodies were covered by the
European or U.S. Adair Patents, the Company might be required to obtain
a license under such patents or to significantly alter its processes or
products, if necessary to make, use or sell its products in Europe and
the U.S. There can be no assurance that the Company would be able to
successfully alter its processes or products to avoid infringing such
patents or to obtain such a license from Celltech 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.
In addition, if the claims of the U.S. Adair Patent or any related
patent applications conflict with claims in the Company's U.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 the Company
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 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 a 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.
The Company is also aware of an issued U.S. patent assigned to
Stanford University and Columbia University to which the Company does
not have a license, which may cover a process the Company uses to
produce its potential products. The Company has been advised that an
exclusive license has been previously granted to a third party under
this patent. 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 the U.S.
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. Moreover, any
alteration of processes or products to avoid infringing the patent could
result in a significant delay in achieving regulatory approval with
respect to the products affected by such alterations.
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.
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 clinical 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 safety and
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.
Dependence On Collaborative Partners. The Company has
collaborative agreements with several pharmaceutical or other companies
to develop, manufacture and market certain potential products. 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. For
example, Boehringer Mannheim GmbH ("Boehringer Mannheim") and the
Company from time to time had differences with respect to the clinical
development of certain products licensed by the Company to Boehringer
Mannheim under a collaborative agreement. In December 1997, as a result
of Boehringer Mannheim's internal review of products licensed from the
Company, product rights to the Human Anti-Hepatitis B Antibody
("Ostavir") were returned to the Company. In March 1998, Roche acquired
Corange Limited ("Corange"), the parent company of Boehringer Mannheim.
Roche's review of the products acquired from Boehringer Mannheim
resulted in a decision to return the SMART Anti-L-Selectin Antibody and
an antibody directed against an undisclosed cardiovascular target to the
Company effective as of December 31, 1998. Although the Company has
licensed certain rights to the SMART Anti-L-Selectin Antibody to BioNet
in order to continue its development, the development of this compound
has been delayed as a result of the review and return of the product by
Roche. Moreover, the development of the other compound returned by Roche
has been delayed significantly and there can be no assurance that the
Company will continue or initiate further development efforts with this
compound. 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 other than certain restrictions on transfers
of significant blocks of stock. Further, 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 Ostavir 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.
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.
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,
EPO and JPO with claims that the Company believes, based on its survey
of the scientific literature, cover most humanized antibodies. The
Company has also been allowed patents with similar claims in other
countries and has applied for similar patents in certain other
countries. See "Risk Factors -- Uncertainty of Patents and Proprietary
Technology; Opposition Proceedings." The EPO and JPO patents are
currently in the opposition proceeding stages in those patent offices.
In addition, all of the Company's antibody humanization patents may be
further challenged through administrative or judicial proceedings. 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 proceedings before the EPO or JPO or, if necessary, to defend
patents granted by the PTO, EPO or JPO or to successfully prosecute the
corresponding patent applications in other countries could adversely
affect the ability of the Company to collect royalties on existing
licensed products, 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 and the Company is responsible for
manufacturing the Company's other products for its own 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 all of 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 and
corresponding foreign authorities 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 and corresponding foreign authorities 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 the SMART M195 and
SMART Anti-CD3 Antibodies. 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 products. 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 for which regulatory approval is
obtained 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 Europe. In addition to an earlier launch in Europe, 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.
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 and
technologies, results of clinical trials, delays in manufacturing or
clinical trial plans, fluctuations in the Company's operating results,
disputes or disagreements with collaborative partners, unfavorable news
or information resulting in the reduction in value of significant
intellectual property assets, 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 March
31, 1999.
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: May 14, 1999
PROTEIN DESIGN LABS, INC.
(Registrant)
Laurence Jay Korn
Chief Executive Officer,
Chairperson of the
Board of Directors
(Principal Executive Officer)
Jon Saxe
Senior Adviser to the Chief
Executive Officer
(Chief Accounting Officer)
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