SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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 No.)
34801 Campus Drive
Fremont, CA 94555
(Address of principal executive offices)
Telephone Number (510) 574-1400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par value $.01
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on December
31, 1998, as reported on the NASDAQ National Market System, was approximately
$430,015,087.
As of December 31, 1998, registrant had outstanding 18,595,247 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 1999 Annual
Meeting of Stockholders, to be filed with the Commission on or prior to
April 30, 1999, are incorporated by reference into Part III of this report.
<PAGE>
PART I
This Annual Report for Protein Design Labs, Inc. ("PDL" or the
"Company"), in addition to historical information, 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," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" as well as those discussed
elsewhere in this document. Actual events or results may differ
materially from those discussed in this Annual Report.
ITEM 1. BUSINESS
OVERVIEW
PDL is a leader in the development of humanized monoclonal
antibodies for the prevention and treatment of a variety of disease
conditions. PDL currently has antibodies under development for
autoimmune and inflammatory conditions, transplantation, cancers and
viral infections. The Company uses proprietary computer software and
other technologies to develop its SMART[TM] humanized antibodies for
potential use as effective pharmaceuticals without the limitations of
traditional mouse-derived (murine) antibodies. PDL believes that its
technologies are broadly applicable to a variety of diseases, as
demonstrated by the Company's diverse product development pipeline and
its collaborative, humanization and licensing arrangements with
pharmaceutical and biotechnology companies. The Company has multiple
product candidates in clinical development and numerous additional
product candidates in preclinical studies. The Company's most advanced
product, Zenapax[R] (daclizumab), has been approved for marketing in the
United States ("U.S."), Europe and several other countries for the
prophylaxis of acute organ rejection in patients receiving renal
transplantations. This product is exclusively licensed to Hoffmann-La
Roche Inc. and its affiliates ("Roche") and in 1998 the Company began
receiving royalties from sales of Zenapax.
PDL has been issued patents in the U.S., Europe and Japan that the
Company believes cover most humanized antibodies. The Company has
leveraged this patent position by granting nonexclusive licenses under
its antibody humanization patents for more than 20 humanized antibodies
of pharmaceutical and biotechnology companies. Two such licensed
antibodies, Synagis[TM] (palivizumab), developed by MedImmune, Inc.
("MedImmune") and Herceptin[R] (trastuzumab), developed by Genentech, Inc.
("Genentech") were approved for marketing in the U.S. in 1998. The
Company receives royalties on sales of these products.
Antibodies have long had promise as therapeutic compounds to treat
a variety of disease conditions. Traditional murine antibodies, however,
have significant drawbacks which in most cases prevent them from
becoming effective therapeutics. The most important of these is the
human anti-mouse antibody ("HAMA") response, in which the murine
antibody is recognized by the body's immune system as foreign and is
rapidly neutralized and rendered ineffective. PDL's antibodies are
designed to avoid these drawbacks, including the HAMA response. PDL's
SMART antibodies are predominantly human antibodies that incorporate the
structural information from the binding region of promising murine
antibodies. By applying its proprietary SMART antibody technology,
the Company is able to create recombinant antibodies with molecular
structures that are approximately 90% human and 10% murine. The Company
also has technologies to produce fully human antibodies to treat
additional diseases using antibody therapy.
PDL has also established a program to discover and develop novel
antibiotics to treat microbial infections, including those due to
microbes that have developed resistance to available antibiotics. This
program involves the identification of microbial genes expressed within
the host and the screening of compounds which may be active against the
genes or their products.
PDL's business strategy is to leverage its technologies, research
expertise and intellectual property to become a profitable, research-
based biotechnology company that manufactures and, in North America,
markets its own products. Key aspects of PDL's strategy are to:
(i) expand and develop the Company's product portfolio to provide
multiple product candidates to treat a variety of diseases and
conditions; (ii) establish collaborative relationships with
pharmaceutical companies to reduce development costs and risks and to
enhance commercial opportunities; (iii) leverage its patent position by
providing humanization services for promising murine antibodies of other
parties and/or licensing certain rights in exchange for near-term
revenues and future royalty opportunities; and (iv) retain North
American marketing rights to certain products to provide for greater
revenue opportunities.
The Company actively seeks partnerships with other companies. The
breadth of the Company's antibody technology and its patent position are
key assets in attracting such companies to enter into various types of
collaborative relationships. In one type of collaborative arrangement,
the Company licenses certain marketing rights to one or more potential
products developed by PDL in return for a licensing and signing fee,
research funding and milestone payments, and royalties on potential
product sales. In another type of arrangement, PDL uses its proprietary
technology to develop a SMART antibody based on a promising murine
antibody developed by a corporate partner. In such cases, PDL typically
receives a licensing and signing fee and other payments, royalties
on potential product sales and, in some cases, an option to co-promote
in North America. Finally, PDL licenses its patents and patent
applications in return for licensing and signing fees, royalties on
potential product sales and, in some cases, milestone payments.
PRODUCTS AND PRODUCT CANDIDATES
The Company believes it is a leader in the development of
humanized antibody-based therapeutics. One antibody product created by
the Company has been approved for marketing by the U.S. Food and Drug
Administration ("FDA") and certain foreign regulatory authorities, and
the Company has a number of other product candidates in clinical and
preclinical development.
Clinical Product Candidates
Table One summarizes the potential therapeutic
indications, development status and commercial rights for PDL product
candidates approved for marketing, currently in clinical studies or
having recently completed certain clinical studies. The development and
commercialization of the Company's clinical product candidates are
subject to numerous risks and uncertainties. See "Risk Factors."
Table One
<TABLE>
<CAPTION>
POTENTIAL
THERAPEUTIC DEVELOPMENT COMMERCIAL
PRODUCT INDICATIONS STATUS (1) RIGHTS
- --------------------- ----------------------- ------------------ -----------------
<S> <C> <C> <C>
Zenapax Organ transplantation Approved for Roche
rejection marketing (kidney)
Uveitis Phase I/II
Psoriasis Phase I/II
Tropical spastic Phase I/II
paraparesis ("TSP")
Graft-versus-host-disease Phase II
("GVHD")(treatment)
Certain blood cancers Phase II
SMART M195 Acute myelogenous Phase II/III PDL and Nippon
Antibody leukemia ("AML") Organon(2)
Myelodysplastic syndrome Phase II
Acute promyelocytic Phase II
leukemia
SMART Anti-CD3 Organ transplantation Phase I/II PDL
Antibody rejection and certain
autoimmune diseases
Ostavir (TM)("OST 577"), Treatment of chronic Phase IIa PDL and Novartis(3)
human anti-hepatitis B hepatitis B
antibody
</TABLE>
(1) The development status identifies the most advanced
development status achieved for at least one of the listed potential
therapeutic indications, but not all potential therapeutic indications
have achieved the development status specified.
(2) Kanebo, Ltd. ("Kanebo") was the original licensee in Asia for
these rights. In 1999, in connection with the transfer of Kanebo's
research efforts in this area to the pharmaceutical division of Akzo
Nobel N.V., Kanebo's rights under this agreement were assigned to Nippon
Organon K.K. ("Nippon Organon")
(3) Novartis Pharmaceuticals Corporation ("Novartis") has certain
rights to co-promote this product. See "Collaborative, Humanization and
Patent Licensing Arrangements -- Novartis."
ZENAPAX. Zenapax is a humanized antibody, created by PDL and
licensed exclusively to Roche, which binds to the IL-2 receptor on T
cells. IL-2 is a lymphokine which stimulates T cells to divide and
participate in an immune response. By blocking the binding of IL-2 to
its receptor, Zenapax inhibits the proliferation of activated T cells
and can suppress the immune response. Zenapax is more specific and less
toxic than other immunosuppressive drugs such as cyclosporine or
ORTHOCLONE OKT[R]3 ("OKT3"), because Zenapax suppresses only activated T
cells involved in an immune response rather than all T cells and
possibly other cells. Zenapax may also be useful to prevent rejection
of other transplanted organs and for the treatment of certain autoimmune
diseases, and has been tested clinically for several such indications.
In September 1996, Roche announced results from two multinational
Phase III studies of Zenapax for the prevention of acute rejection
episodes in a total of 535 cadaveric kidney transplantation recipients.
Analysis of the data by Roche indicated that, when administered with a
standard immunosuppressive regimen, Zenapax is effective in reducing the
incidence of acute rejection episodes that occur within six months of
transplantation, the primary endpoint of these two trials. In the double
therapy trial, in which all patients received an immunosuppressive
regimen of cyclosporine and prednisone, acute rejection episodes were
reduced by 40% in patients treated with Zenapax (47% without Zenapax,
28% with Zenapax, p=0.001). In the triple therapy trial, in which all
patients received cyclosporine, prednisone and azathioprine, the
incidence of acute rejection episodes was reduced by 37% in patients
treated with Zenapax (35% without Zenapax, 22% with Zenapax, p=0.03).
Zenapax treatment was well-tolerated and did not cause an increase in
serious adverse events.
Based on the results of these trials, Roche filed a Biologics
License Application ("BLA") with the FDA in June 1997 for clearance to
market Zenapax for the prophylaxis of acute organ rejection in patients
receiving renal (kidney) transplantations. In October 1997, the FDA's
Biological Response Modifiers Advisory Committee unanimously recommended
to the FDA that Zenapax be approved, and the FDA granted such approval
in December 1997. Zenapax was the first humanized antibody to be
approved for marketing by the FDA. In March 1999, Zenapax was authorized
for marketing in the countries of the European Union for the prevention
of acute organ rejection in patients receiving kidney transplantations.
Zenapax also has been approved for marketing in Argentina, Brazil,
Guatemala, Lithuania, Mexico, New Zealand, the Philippines, Russia,
South Korea, Switzerland and Thailand. Additional Roche regulatory
submissions for Zenapax are currently under review in Canada and other
countries. PDL receives royalties on Roche's Zenapax sales. See "Risk
Factors -- Dependence on Licensees with Respect to Marketed Products."
Roche has sponsored or authorized several additional clinical
trials of Zenapax in transplantation and certain autoimmune diseases.
Clinical trials also are ongoing at the National Cancer Institute
("NCI") to evaluate the potential of Zenapax in the treatment of certain
blood cancers. The most recent published or publicly presented clinical
results using Zenapax in certain of these potential indications include:
Prevent acute organ rejection in kidney transplantation in
combination with CellCept[R]. In a Phase I/II study, 75 evaluable patients
were randomized to receive either Roche's CellCept, cyclosporine and
steroids, or those three drugs plus Zenapax. Six months post-
transplantation, 12% of patients who received the three-drug combination
with Zenapax had experienced a rejection episode, compared with 20% of
patients who received the three-drug combination without Zenapax.
Prevent acute organ rejection in kidney transplantation without
the use of calcineurin inhibitors. A single-arm multicenter Phase II
study was conducted to evaluate the combination of Zenapax, CellCept and
corticosteroids, without potentially toxic calcineurin inhibitors such
as cyclosporine, in kidney transplantation. At 150 day median follow-up,
the following results were observed in 98 evaluable patients: (a) 58%
(57 of 98) of patients who received successful kidney transplants
remained rejection episode-free; (b) rejection episodes in the remaining
41 patients were successfully reversed with corticosteroids or
antibodies, and the patients were begun on a calcineurin inhibitor; (c)
there were no grafts lost due to rejection episodes; and (d) median
serum creatinine levels (a measure of kidney function) were improved in
patients who did not receive calcineurin inhibitors as compared to those
receiving such drugs in one of the Phase III Zenapax trials.
Treat GVHD. In a Phase II trial, two dosing schedules of Zenapax
were evaluated in 43 allogeneic bone marrow transplant recipients with
advanced or steroid-refractory GVHD. Using one dosing schedule, 29% of
24 patients had complete responses on day 43 after transplantation and
29% of the patients survived at least to day 120. Using the second
dosing schedule, the response rate in 19 patients was 47% on day 43 and
53% of patients survived at least to day 120. Complete response rates by
organ involved were 73% for skin, 70% for the gut and 17% for the liver.
Prevent organ rejection in liver transplantation and pediatric
kidney transplantation. In a single-arm Phase II study using Zenapax
with standard immunosuppressive drugs, one of 28 liver transplantation
patients (3.6%) had an acute rejection episode within three months of
transplantation. In a single-arm Phase I/II study using Zenapax with
standard immunosuppressive drugs in pediatric kidney transplantation,
three of 47 patients (6%) had acute rejection episodes within six months
of transplantation.
Treat uveitis. At the National Eye Institute, ten patients are
being evaluated in a Phase I/II trial using Zenapax for the treatment of
uveitis, an autoimmune disease of the eye. The patients had been
receiving other immunosuppressive drugs and were tapered off those drugs
after initiation of Zenapax treatment. Nine of the ten patients have met
the primary endpoint of maintenance of visual acuity for up to 28 months
following initiation of Zenapax treatment.
Treat TSP. TSP is a neurological disease resulting from an
interaction between retroviral infection and activation of the immune
system. In a Phase I/II trial, three of nine TSP patients treated with
Zenapax exhibited minimal improvement as measured by the Expanded
Disability Severity Scale. The investigators in this trial consider TSP
to be a clinical model for multiple sclerosis and concluded that this
study demonstrated a potential role for Zenapax in treating autoimmune
diseases.
In all of these clinical trials, Zenapax was well-tolerated and
was not associated with an increase in serious adverse events.
There can be no assurance that Roche will pursue further clinical
development of Zenapax in transplantation or autoimmune diseases in a
timely manner, if at all. Roche has expressed to the Company limited
interest in additional development of Zenapax in certain additional
indications, including autoimmune diseases. Since the Company believes
further clinical development of Zenapax would, if successful, increase
the product's market potential, the Company is seeking to obtain certain
clinical development rights from Roche. There can be no assurance that
PDL would be able to obtain rights to develop Zenapax on acceptable
terms or that Zenapax will be successfully developed for any additional
indications. See "Risk Factors -- Dependence on Licensees with Respect to
Marketed Products."
SMART M195 ANTIBODY. The SMART M195 Antibody is a humanized
antibody that binds to the cancer cells of most patients with myeloid
leukemias. Myeloid leukemia, the major form of leukemia in adults, is
classified into two types -- AML and chronic myelogenous leukemia. There
are at least 14,000 new cases of myeloid leukemia in the U.S. each year,
of which more than 10,000 are AML. Currently, the survival rate of
myeloid leukemia patients is very low, despite aggressive chemotherapy
and multiple, expensive hospitalizations.
PDL has adopted strategies designed to achieve improved efficacy
of antibodies in certain cancers. First, PDL's anti-cancer antibodies
are humanized, which allows for longer-term treatment by minimizing the
HAMA response and potentially makes the antibodies more effective in
killing cancer cells. Second, the Company is initially focusing on
treatment of blood cancers, such as myeloid leukemia, that express high
numbers of the target antigen and whose cancer cells are more readily
accessible. Third, PDL generally plans to conduct trials of its
antibodies in combination with, or following, other chemotherapeutic
agents.
Several clinical trials using the SMART M195 Antibody have been
conducted. Such trials include: (1) a multicenter Phase II/III trial to
prolong remission in AML patients; (2) a Phase II trial to induce
remission in relapsed AML patients; (3) a physician-sponsored Phase II
trial in patients with newly diagnosed acute promyelocytic leukemia, one of
several subtypes of AML; and (4) physician-sponsored trials using the
SMART M195 Antibody linked to the radioisotopes 90-Yttrium or 213-Bismuth.
In the Phase II/III trial, initiated in 1994, patients first
received a specific regimen of chemotherapy. Those patients entering
clinical remission were randomized either to observation or to receive
20 doses of the SMART M195 Antibody given over an eight month period.
Accrual of patients into this trial was terminated in 1998 because of
slow enrollment. The Company is currently evaluating data from the
patients entered, but after preliminary assessment does not expect the
study to meet its primary endpoint of an increase in disease-free
survival in patients treated with the SMART M195 Antibody.
In 1997, the Company initiated a Phase II trial of the SMART M195
Antibody in patients with relapsed or treatment refractory AML. The goal
of the study is to determine whether high doses of the SMART M195
Antibody, administered as a single agent, can induce complete responses
in this patient population, and to define the optimum dose for a
potential Phase III trial. All of the 40 patients planned for enrollment
in this study have been entered, and the Company is currently completing
follow-up and analyzing the data. Preliminary results in this Phase II
trial have demonstrated some biological activity and potential for
efficacy of the SMART M195 Antibody. Based on these results, the Company
is currently considering the design of a Phase III trial. The Phase III
trial, if conducted, may employ a different dose of SMART M195 Antibody
and a different regimen of chemotherapy than in previous trials. See
"Risk Factors -- Limited Experience with Clinical Trials; Risk of
Delay."
In 1999, a Phase II study to evaluate the safety and potential
efficacy of the SMART M195 Antibody as treatment for patients with high
risk myelodyspastic syndrome is being intitiated by the European
Organization for the Research and Treatment of Cancer (commonly known as
the EORTC). In this trial, patients with the myelodyspastic syndrome
subtypes Refractory Anemia with Excess Blasts (commonly known as RAEB)
and Refractory Anemia with Excess Blasts in Transformation (commonly
known as RAEB-T) are administered four cycles of SMART M195 Antibody. The
ability of the antibody to prevent progression of myelodyspastic syndrome to
AML and improvement of hematopoiesis will be monitored. Exclusive
development and marketing rights to the SMART M195 Antibody in Asia have
been licensed to PDL's collaborative partner, Nippon Organon.
SMART ANTI-CD3 ANTIBODY. This humanized antibody binds to the CD3
antigen, a key receptor for stimulation of T cells. A competitive murine
antibody, OKT3, also binds to the CD3 antigen. OKT3 is marketed by
Johnson & Johnson for the treatment of acute kidney, liver and heart
transplantation rejection. While highly effective, OKT3 is hampered by
the often serious toxicity associated with its use, as well as by the
HAMA response. In addition to being humanized, PDL's SMART Anti-CD3
Antibody has been engineered in a manner that reduces interactions with
the immune system, a factor that the Company believes contributes to the
toxicity of OKT3. The Company has retained worldwide rights to the SMART
Anti-CD3 antibody and believes that potential indications for
this antibody may include treatment of organ transplantation rejection
and certain severe autoimmune diseases.
The Company has conducted a Phase I, open-label dose escalation
trial of the SMART Anti-CD3 Antibody in kidney transplantation patients.
A multiple-dose Phase I/II trial to evaluate escalating doses of the
antibody for treatment of kidney transplantation rejection is currently
underway. Additional trials are planned in transplantation and
autoimmune diseases. There can be no assurance that the SMART Anti-CD3
Antibody will be found to be safe and effective in ongoing or future
studies or that future studies will be initiated. See "Risk Factors --
Uncertainty of Clinical Trial Results."
OSTAVIR (HUMAN ANTI-HEPATITIS B ANTIBODY, OST-577). Ostavir is a
human antibody licensed by PDL from Novartis. Ostavir binds to the major
protein present on the surface of hepatitis B virus ("HBV"), the
hepatitis B surface antigen. Infection with HBV is a common cause of
liver disease. In most cases of infection, the patient's immune response
is sufficient to ultimately eliminate the virus. However, an estimated
2% to 10% of HBV-infected patients become chronic carriers of the virus,
and about one-fourth of these patients develop chronic hepatitis B
("CHB"), which is characterized by progressive liver damage and often
cirrhosis and liver cancer. In the U.S. there are an estimated one
million chronic carriers of HBV, with 300,000 new HBV infections and
more than 10,000 patients hospitalized due to HBV infections each year.
Interferon-alpha is approved in the U.S. for treatment of CHB, although
only 30-40% of treated patients respond to this treatment, which has
significant side effects. In December 1998, the nucleoside analog
lamivudine was approved for CHB treatment.
Phase I/II clinical trials of Ostavir have been conducted in
patients undergoing liver transplantation due to CHB and in patients
with chronic CHB. In 1996, PDL's former development partner for this
antibody, Boehringer Mannheim Gmbh ("Boehringer Mannheim"), initiated a
multinational, controlled Phase II trial to evaluate the antibody for use
both as a single agent and in combination with interferon-alpha. In December
1997, after 16 of a planned 200 patients had been enrolled in this study,
Boehringer Mannheim concluded, based on its analysis of the data, that when
used as defined in the study, treatment with Ostavir gave rise, in certain
patients, to self-resolving side effects induced by immune complex
formation such as proteinuria and fever. Based on its analysis,
Boehringer Mannheim terminated the study and returned all rights to this
product to PDL.
In June 1998, a physician-sponsored Phase IIa clinical trial in
Europe was initiated using Ostavir in combination with lamivudine in CHB
patients. The Company believes that lamivudine treatment may reduce
circulating levels of HBV and therefore reduce or eliminate the
formation of immune complexes and associated side effects. Patient
enrollment in this study is complete and follow-up is ongoing. The
Company intends to seek a partner for the further development of
Ostavir. See "Risk Factors -- Uncertainty of Clinical Trial Results."
Novartis has certain rights to co-promote or co-market this antibody in
North America or to receive royalties on product sales, if any. See
"Collaborative, Humanization and Patent Licensing Arrangements --
Novartis."
YAMANOUCHI HUMANIZED ANTIBODY. Yamanouchi Pharmaceutical Co.,
Ltd. ("Yamanouchi") has in progress a Phase I clinical trial in Europe
of an antibody humanized by the Company, an anti-gpIIb/IIIa monoclonal
antibody fragment, for the potential treatment of certain cardiovascular
disorders.
PRECLINICAL PRODUCT CANDIDATES
Table Two summarizes the potential therapeutic indications and
commercial rights for certain of PDL's preclinical product candidates.
"Preclinical" development includes in vitro testing, efficacy and
toxicology testing in animals, process development and manufacturing
scale-up prior to initiation of clinical trials. The Company has other
compounds in development in addition to those listed below and is
conducting research in other areas. The development and
commercialization of the Company's preclinical product candidates are
subject to numerous risks and uncertainties. See "Risk Factors."
Table Two
<TABLE>
<CAPTION>
CERTAIN
POTENTIAL
THERAPEUTIC COMMERCIAL
PRODUCT INDICATIONS RIGHTS
- --------------------- ----------------------- ------------------
<S> <C> <C>
Autoimmune and
Inflammatory Conditions
SMART Anti-E/P- Stroke, certain PDL
Selectin Antibody autoimmune diseases
(e.g., psoriasis), asthma,
atopic dermatitis
SMART Anti-Gamma- Certain autoimmune PDL
Interferon Antibody diseases (e.g., Crohn's
disease)
SMART Anti-L-Selectin Trauma, adult respiratory PDL
Antibody distress syndrome ("ARDS"),
reperfusion injury
Cancer
SMART 1D10 Antibody B cell lymphoma and PDL
leukemia
Viral Infections
Human Anti-Varicella Shingles (herpes zoster) PDL and Novartis(1)
Zoster Antibody
Human Anti-Herpes Neonatal and genital PDL and Novartis(1)
Antibody herpes
</TABLE>
(1) Novartis has certain rights to co-promote or co-market these
products. See "Collaborative, Humanization and Patent Licensing
Arrangements -- Novartis."
AUTOIMMUNE DISEASE AND INFLAMMATION. Discoveries in immunology
have made possible a new therapeutic approach to inflammation resulting
from causes such as injury or autoimmune disease. Certain proteins
called adhesion molecules, located on the surface of various types of
cells, play a key role in inflammation by directing the movement of
white blood cells from the bloodstream into the sites of tissue
inflammation. In laboratory experiments conducted by PDL and others,
antibodies have been shown to block the function of these adhesion
molecules. PDL has developed several SMART antibodies against adhesion
molecules.
PDL's SMART Anti-E/P-Selectin Antibody binds to two different
adhesion molecules, E- and P-selectin, that occur on the surface of the
cells on the inner lining of blood vessels. The Company believes that
potential indications for such an antibody may include stroke, certain
autoimmune diseases (including psoriasis), asthma and atopic dermatitis.
PDL's SMART Anti-Gamma-Interferon Antibody binds to and
neutralizes gamma interferon, a lymphokine that stimulates several types
of white blood cells. The Company believes that potential indications
for this antibody may include inflammatory bowel disease, type I
diabetes mellitus, multiple sclerosis and other autoimmune diseases.
PDL's SMART Anti-L-Selectin Antibody binds to L-selectin,
an adhesion molecule on the surface of white blood cells. The Company
believes that potential indications for this antibody may include
trauma, ARDS and reperfusion injury (e.g., due to myocardial
infarction). In studies conducted by independent
investigators, treatment with the SMART Anti-L-Selectin Antibody
resulted in a statistically significant improvement in survival in a
primate model that simulates severe trauma.
CANCERS. Monoclonal antibodies have been considered to have
particular promise for the treatment of cancers because of their ability
to act upon specific cells without significantly affecting other cell
populations as do many cancer chemotherapeutics. PDL's SMART 1D10
Antibody targets a form of the HLA-DR antigen present on B cells and may
therefore be useful for the treatment of B cell lymphoma. This is a
different target antigen than the two anti-CD20 antibodies either
approved for marketing (Rituxan[R]) or in clinical trials (Bexaar[R]). The
Company has a clinical trials agreement involving investigators at the
NCI to conduct an initial NCI-sponsored clinical trial of the SMART 1D10
Antibody. PDL has submitted a Drug Master File to the FDA which
describes the manufacture of antibody to be used in this trial.
VIRAL INFECTIONS. Varicella zoster virus ("VZV") is the virus
responsible for causing chickenpox and shingles (herpes zoster).
Shingles, a painful blistering condition of the skin, results from
reactivation of the latent VZV that initially infected the patient years
earlier. In the U.S., 10-20% of the population will develop shingles,
with the incidence and severity of the condition increasing with age. A
significant percentage of patients with shingles experience post-
herpetic neuralgia, a very painful nerve condition which may last
from weeks to years in some patients. Current antiviral therapies are
moderately effective in treating shingles, but have little or no effect
on post-herpetic neuralgia. PDL's Human Anti-Varicella Zoster Antibody
effectively neutralizes all tested strains of VZV in in vitro studies.
Herpes simplex virus ("HSV") causes a painful recurring genital
infection. The virus also causes neonatal herpes, an uncommon but very
serious disease of newborn infants. PDL's Human Anti-Herpes Antibody
binds to and effectively neutralizes all strains of HSV tested, and is
well-tolerated and non-immunogenic in primates. In animal studies
sponsored by the National Institute of Allergy and Infectious Disease
Collaborative Antiviral Studies Group ("NIAID-CASG"), the antibody
effectively protected mice from a lethal herpes infection
when administered up to 72 hours after exposure to the virus. The
Company believes that competition from antiviral drugs and the present
reimbursement environment may limit the market opportunities for the
Human Anti-Herpes Antibody in treating genital herpes. The Company has
signed a Collaborative Research and Development Agreement with NIAID-
CASG to provide the antibody primarily for clinical studies in neonatal
herpes, but there can be no assurance NIAID-CASG will initiate or
complete such studies in a timely manner, if at all.
PDL TECHNOLOGIES
BACKGROUND ON ANTIBODIES. Antibodies are protective proteins
released by the immune system's B cells, a type of white blood cell, in
response to the presence of a foreign substance in the body, such as a
virus. B cells produce millions of different kinds of antibodies, which
have slightly different shapes that enable them to bind to and thereby
inactivate different targets. Antibodies of identical molecular
structure that bind to a specific target are called monoclonal
antibodies. Typically, mice have been used to produce
monoclonal antibodies to a wide variety of molecular targets, including
targets to which the human body does not normally produce antibodies. In
particular, many murine antibodies have been developed as potential
therapeutics to neutralize viruses, destroy cancer cells or inhibit
immune function.
Although murine monoclonal antibodies are relatively easy to
generate, they have significant drawbacks as therapeutics. Murine
antibodies have a relatively short half-life in human patients,
requiring them to be administered frequently. Moreover, murine
antibodies are not adapted to work effectively with the human immune
system and therefore often have limited ability to destroy the
target, such as cancer cells. Most importantly, when injected into
humans, a murine antibody is usually recognized by the body's immune
system as foreign. The immune system therefore responds with a HAMA
response, which rapidly neutralizes the murine antibody and renders it
ineffective for further therapy. These problems have largely prevented
murine antibodies from fulfilling their promise as therapeutics.
More recently, improved forms of antibodies, such as humanized,
human and chimeric antibodies, have been developed using recombinant DNA
and other technologies. These new antibodies can minimize or avoid many
of the problems associated with murine antibodies and have led to a
resurgence of interest in antibody therapeutics by the pharmaceutical
and biotechnology industries. As a result of these advances, many
monoclonal antibodies are now progressing into clinical trials. In a
list of biotechnology medicines under clinical development in the U.S.
published in 1998 by the Pharmaceutical Research and Manufacturers of
America, antibodies comprised the single largest category (excluding
vaccines), representing 74 of 350 products listed. In particular, PDL is
aware of more than thirty humanized antibodies in clinical
trials, including several antibodies addressing large markets that are
being developed by major pharmaceutical companies. Seven humanized or
chimeric antibodies have already been approved for marketing by the FDA.
PDL'S SMART ANTIBODY TECHNOLOGY. PDL believes that its patented
SMART antibody technology has positioned the Company as a leader in the
development of therapeutic antibodies that overcome the problems
associated with murine antibodies. PDL's SMART antibodies are human-like
antibodies designed using structural information from promising murine
antibodies to capture the benefits of such antibodies while overcoming
many of their limitations in treating humans. Clinical trials and
preclinical studies have shown that PDL's SMART antibodies generally
avoid a HAMA response and have a longer half-life than murine
antibodies.
Every antibody contains two regions: a variable domain that binds
to the target antigen and a constant domain that interacts with other
portions of the immune system. The variable domain is composed of the
complementarity determining regions ("CDRs") that directly bind to the
target antigen and the framework region that holds the CDRs in position
and helps maintain their required shape. Researchers have used genetic
engineering to construct "humanized" antibodies that consist of the CDRs
from a murine antibody with the framework region and constant domain
from a human antibody. However, when the CDRs from the murine antibody
are combined with the framework of the human antibody, the human
framework often distorts the shape of the CDRs so they no longer bind
well to the target. Therefore, it is usually necessary to substitute one
or more amino acids from the murine antibody into the framework of the
humanized antibody for it to maintain the binding ability of the murine
antibody.
A SMART antibody is a humanized antibody designed by using
PDL's proprietary computer technology to guide the choice of
substitutions of amino acids from the murine antibody into the human
antibody framework, based on structural information derived from the
murine antibody. The construction of a SMART antibody starts with the
identification of a murine antibody that has demonstrated favorable
results in laboratory, animal or human studies. A model of the murine
antibody is generated using proprietary computer modeling software that
predicts the shapes of antibodies and eliminates the need for more time-
consuming laboratory techniques. The resulting model is carefully
analyzed to identify the few key amino acids in the framework most
responsible for maintaining the shape of the CDRs. Software developed at
PDL as well as the experience of the Company's computational chemists is
important in this analysis. These few key murine amino acids are
substituted into the human framework of the SMART antibody along with
the murine CDRs in order to maintain their ability to bind well to the
target. The resulting SMART antibody retains most or all of the binding
ability of the murine antibody, but is about 90% human.
In 1996, the Company was issued U.S. and European patents which
cover, in most circumstances, humanized antibodies that contain amino
acid substitutions from the murine antibody in their framework. The
Company was issued a similar patent in Japan in late 1998. The Company
believes that most humanized antibodies require such amino acid
substitutions in order to maintain high binding ability. The patents
also cover pharmaceutical compositions containing such humanized
antibodies and other aspects of PDL's SMART antibody technology. Two
additional U.S. patents that cover other aspects of PDL's humanization
technology were issued in 1997. PDL has filed similar patent
applications in other countries. See "Patents and Proprietary
Technology."
OTHER PDL TECHNOLOGIES. In addition to its SMART antibody
technology, PDL employs additional antibody-based drug development
technologies to overcome shortcomings of murine antibodies. The Company
is also pursuing a program to discover novel antibiotics and a rational
drug design program that leverages its computer expertise to potentially
develop new drug candidates.
Human Antibodies. The use of fully human monoclonal antibodies
is another approach to avoiding many of the problems associated with
murine antibodies. In April 1993, PDL exclusively licensed from Novartis
its patented "trioma" technology to generate certain human antibodies,
along with four human antiviral antibodies. The trioma technology is
used to produce fully human antibodies against viruses and potentially
other organisms which infect humans. A key aspect of the technology is
the use of a mouse-human hybrid cell line as the fusion partner to
immortalize human antibody-producing B cells. Trioma cell lines
generated in this manner often stably produce human antibodies. As
with SMART antibodies, clinical trials and preclinical studies have
shown that PDL's human antibodies generally avoid a HAMA response and
have a longer half-life than murine antibodies. See "-- Collaborative,
Humanization and Patent Licensing Arrangements -- Novartis."
Novel Antibiotics. PDL has begun a research program to discover
and develop new antibiotics for the treatment of certain microbial
infections, including infections caused by microbes that have developed
resistance to available antibiotics. This program, which utilizes
technology to identify microbial genes that are differentially expressed
when microbes infect a host, was developed by Stanley Falkow, Ph.D.,
Professor of Microbiology and Immunology at Stanford University School
of Medicine. Dr. Falkow, director of the program, was a member of PDL's
Board of Directors prior to recently becoming an employee of the
Company. If discovered, these microbial genes and their products may
become potential targets for novel antibiotics, which may be identified
by high throughput screening and medicinal chemistry. It is anticipated
that aspects of this work will be conducted by PDL's corporate partners.
PDL has entered into a collaborative agreement with Eli Lilly & Company
("Lilly"), under which Lilly will receive rights to products generated
under this research program involving seven specific genera of bacteria.
See "-- Collaborative, Humanization and Patent Licensing Arrangements --
Lilly."
Other New Technologies. The Company is pursuing a rational drug
design program focusing on small molecules by extending the Company's
computer modeling tools originally developed for its SMART antibody
program. Rational drug design utilizes computer models of proteins and
their interactions with smaller molecules to accelerate discovery and
optimization of new drug compounds. Although PDL's technology is at an
early stage, the Company believes that this application of its modeling
algorithms may ultimately be used to develop non-antibody, small-
molecule drug candidates. For that purpose, PDL has initiated a program
in medicinal and combinatorial chemistry.
BUSINESS STRATEGY
PDL's objective is to leverage its research expertise and
intellectual property primarily in the field of antibodies to become a
profitable, research-based biotechnology company that manufactures and,
in North America, markets its own products. PDL's strategy to achieve
this objective involves the following elements:
Expand Product Portfolio. The Company believes that its SMART
antibody technology is capable of converting essentially any promising
murine antibody into a humanized antibody better suited for therapeutic
use. As a result, the Company has been able to develop a broad
portfolio of product candidates with potential applications to the
prevention and treatment of autoimmune and inflammatory conditions,
transplantation, cancers and viral infections. This diverse product
pipeline enhances commercial opportunities and reduces the Company's
reliance on individual products.
Establish Collaborative Arrangements. The Company actively seeks
corporate partnerships with pharmaceutical companies, and to date has
entered into partnerships with numerous such companies, including Roche
and Lilly. Typically, the Company receives a licensing and signing fee,
research funding and/or milestone payments, and the rights to royalties
on product sales, if any, in return for certain marketing rights to one
or more potential products developed at PDL. These revenues help to
defray PDL's own product development expenses, while the partner
typically bears significant direct responsibility for certain product
development activities and expenses. One antibody developed under such a
collaborative arrangement, Zenapax, has been approved and is marketed by
Roche. The Company receives royalties on Roche's Zenapax sales.
Leverage Patent Position. An important aspect of PDL's business
strategy is to obtain both near-term revenues and potential royalties by
providing humanization services for promising murine antibodies of other
parties and/or licensing limited rights under its issued humanized
antibody patents and corresponding patent applications to other
companies developing humanized antibodies. These arrangements typically
involve a combination of licensing and signing fees, milestone payments,
annual maintenance fees and royalties on product sales, if any. Since
November 1996, PDL has also entered into thirteen patent licensing
arrangements with other companies. In addition to Zenapax, two
antibodies licensed under PDL patents, Herceptin, developed by
Genentech, and Synagis, developed by MedImmune, are currently marketed.
PDL receives royalties on Herceptin and Synagis product sales.
The Company's patents are also helpful in inducing other companies
to enter into humanization or other collaborative relationships with the
Company, in which PDL uses its proprietary technology to develop SMART
antibodies based on promising murine antibodies developed by the other
companies. PDL has entered into eight such humanization relationships.
In addition to paying PDL licensing and signing fees, milestone payments
and royalties on product sales, if any, in some cases the other
companies have granted PDL options to obtain North American co-promotion
rights.
Retain North American Marketing Rights. Where appropriate, PDL
retains North American marketing rights to its potential products. This
strategy provides the Company with future revenue opportunities.
COLLABORATIVE, HUMANIZATION AND PATENT LICENSING ARRANGEMENTS
The Company has entered into numerous arrangements with
pharmaceutical and biotechnology companies related to either the
Company's own antibody product candidates or other technology, its
expertise in antibody humanization and/or its patent estate relative to
humanized antibodies.
Collaborative Arrangements.
Roche. In 1989, PDL entered into agreements with Roche to
collaborate on the research and development of humanized and chimeric
antibodies which bind to the IL-2 receptor, including Zenapax. Under
these agreements, Roche has exclusive, worldwide rights to manufacture,
market and sell Zenapax. The arrangement provides for research and
development funding, milestone and bonus payments and royalties to PDL
under the agreements. Most of such milestone and bonus payments have
already been received from Roche, and Roche has completed its research
funding to PDL under these agreements. PDL began receiving royalties on
sales of Zenapax in 1998. Royalties to PDL are subject to certain
offsets for milestones, third party royalties and patent expenses paid
by Roche under the arrangement. See "Risk Factors -- Dependence on
Licensees with Respect to Marketed Products."
Lilly. In December 1997, PDL entered into a collaborative
agreement with Lilly to discover and develop new antimicrobial agents
for the treatment of certain microbial infections, including those
caused by microbes that have developed resistance to available
antibiotics. The agreement involves a program to identify microbial
genes that are differentially expressed when microbes infect a host. PDL
received an initial payment of $3 million under the agreement. The
agreement further provides for additional research funding for a total
of up to $9.6 million for the second through fifth years of the
agreement, if the agreement is not earlier terminated. PDL can also
receive milestone payments for identification of gene targets and for
each compound selected for development by Lilly. Lilly will receive
exclusive worldwide rights to gene targets and human pharmaceutical and
related diagnostic products generated under the research program
directed to seven specific genera of bacteria. PDL is entitled to
royalties on Lilly sales of such products, if any, and the parties have
agreed to negotiate co-promotion rights in the U.S. and Canada. In
addition, under certain conditions, PDL will have an option to develop
certain compounds identified through the collaboration.
Novartis. In April 1993, PDL and Novartis entered into agreements
providing for the grant of exclusive licenses to PDL of four human anti-
viral antibodies and other related technology and antibodies from
Novartis. The four human monoclonal antibodies target cytomegalovirus,
the hepatitis B virus, herpes simplex viruses, and varicella zoster
virus, respectively. In addition, PDL received an exclusive license to
the SMART ABL 364 Antibody, an antibody previously humanized by PDL for
Novartis. This arrangement also included exclusive licenses to the
Novartis trioma human antibody technology and patents as well as the
purchase of certain antibody supplies and related manufacturing
equipment. In consideration for the licenses and assets transferred, PDL
initially paid Novartis $5 million and agreed to provide up to an
additional $5 million in future milestone payments in the event of
certain product approvals under the agreements.
Under the terms of the Novartis agreements, PDL has the right to
manufacture and market the antibodies acquired from Novartis throughout
the world. Novartis retained certain co-promotion and co-marketing
rights, and rights to royalties on sales by PDL of licensed products in
countries where Novartis does not sell these antibodies with PDL under
the co-promotion and co-marketing arrangements. In November 1993, PDL
paid Novartis an additional $2.75 million to amend the April 1993
agreement relating to the human antibodies in order to terminate certain
of Novartis' co-promotion and co-marketing rights in countries outside
of the U.S., Canada and Asia and to reduce royalties Novartis may earn
from the sale of human antibody products in countries outside of the
U.S., Canada and Asia.
Nippon Organon/Kanebo. In February 1992, PDL and Kanebo entered
into a product licensing agreement whereby Kanebo received an exclusive
license to the SMART M195 Antibody for therapeutic uses in certain Asian
countries, including Japan, in exchange for a licensing and signing fee,
research funding, milestone payments and royalties on product sales, if
any. The research funding period under the agreement expired in
September 1993. Also in September 1993 and May 1995, PDL entered into
purchase agreements with Kanebo pursuant to which PDL sold Kanebo
preclinical and clinical quantities of the SMART M195 Antibody. In 1999,
in connection with the transfer of Kanebo's research efforts in this
area to the pharmaceutical division of Akzo Nobel N.V., Kanebo's rights
under this agreement were assigned to Nippon Organon.
Humanization and Patent Licensing Arrangements.
Yamanouchi. In February 1991, PDL and Yamanouchi entered into a
collaborative agreement providing for the humanization of a murine anti-
platelet (anti-gpIIb/IIIa) antibody developed by Yamanouchi for
potentially treating certain cardiovascular disorders. Yamanouchi is
currently conducting Phase I clinical trials in Europe with this
humanized antibody. Yamanouchi has exclusive, worldwide rights to this
antibody and is responsible for all clinical trials and for obtaining
necessary government regulatory approvals. The agreement provides for
milestone payments, all of which have been received by the Company, and
royalties on product sales, if any.
Mochida. In December 1995, PDL and Mochida Pharmaceutical Co.,
Ltd. ("Mochida") entered into an agreement providing for the
humanization by PDL of a murine antibody that has potential for treating
certain infectious diseases. PDL received a licensing and signing fee
and milestone payments and can earn royalties on product sales, if any.
In addition, PDL has an option to co-promote the antibody in North
America.
Toagosei. In September 1996, PDL and Toagosei Co., Ltd.
("Toagosei") entered into an agreement providing for the humanization by
PDL of a murine antibody that has potential for treating cancer. PDL
received a licensing and signing fee and milestone payments and can earn
royalties on product sales, if any. PDL also has an option to co-promote
the compound in North America. In the fourth quarter of 1997, Toagosei
made a $2.0 million private equity investment in PDL in return for
44,568 newly issued shares of PDL common stock at a purchase price of
$44.875 per share. In 1998, PDL conducted a manufacturing campaign
pursuant to which Toagosei and PDL shared the costs to produce material
for clinical development of the humanized antibody by the parties.
Genetics Institute. In December 1996, PDL and Genetics Institute,
Inc. ("Genetics Institute"), a wholly-owned subsidiary of American Home
Products Corporation, entered into an agreement pursuant to which PDL
will initially develop three humanized monoclonal antibodies based on
murine antibodies developed by Genetics Institute that modulate the
immune co-stimulatory pathway. In addition, Genetics Institute received
a worldwide, nonexclusive license for those antibodies under PDL's
humanized antibody patents. To date, PDL has received a $2.5 million
licensing and signing fee and a milestone payment and is entitled to
receive additional milestone payments and royalties on product sales, if
any. In addition, PDL received an option to co-promote the products in
North America under certain conditions. The agreement contemplates that
PDL may collaborate with Genetics Institute to humanize additional
antibodies in the field.
Teijin. In March 1997, PDL and Teijin Limited ("Teijin") entered
into an agreement providing for the humanization by PDL of a murine
antibody to a toxin produced by the E. coli O157 bacteria that can cause
serious illness or death from the consumption of contaminated food. PDL
has received a licensing and signing fee and milestone payment and is
entitled to royalties on product sales, if any.
Ajinomoto. In July 1997, PDL and Ajinomoto Co., Inc. ("Ajinomoto")
entered into an agreement providing for the humanization by PDL of a
murine antibody directed at cardiovascular conditions. PDL has received
a licensing and signing fee and milestone payments and is entitled to
royalties on product sales, if any. In addition, PDL received certain
rights to obtain co-promotion rights to the potential product in North
America.
Genentech. In September 1998, Genentech and the Company entered
into an arrangement to grant each party a right to obtain a nonexclusive
license to certain intellectual property rights related to monoclonal
antibodies held by the other party. Under the agreement, Genentech paid
the Company a $6.0 million non-creditable, non-refundable fee, and the
Company paid Genentech a $1.0 million non-creditable, non-refundable
fee. Each party has rights to license antibodies under specified
patents and patent applications held by the other party upon payment of
an additional fee of at least $1.0 million per antibody. Licensed
antibodies will bear royalties on product sales, if any. The agreement
initially covers up to six antibodies per company. The number of
licensed antibodies may be increased and the term of the agreement
extended upon payment of additional fees. In November 1998, the Company
and Genentech entered into a nonexclusive license agreement under this
arrangement for Herceptin, pursuant to which PDL received a $1.0 million
licensing and signing fee and receives royalties on sales of Herceptin.
Other Patent License Agreements. PDL has entered into patent
licensing agreements with a number of other companies covering humanized
antibodies. In each licensing agreement, PDL granted a worldwide,
nonexclusive license under its humanized antibody patents to the other
company for an antibody to a specific target antigen. In general, PDL
receives a licensing and signing fee and has the right to receive annual
maintenance fees and royalties on product sales, if any. Under some of
these agreements, PDL also may receive milestone payments and, under
certain circumstances, certain marketing rights. In addition to
Herceptin, PDL receives royalties on sales of Synagis, a licensed
antibody developed by MedImmune which is currently marketed in the U.S.
Since November 1996, PDL has entered into thirteen patent licensing
agreements, including agreements with Sankyo Co., Ltd., Biogen, Inc.,
IDEC Pharmaceuticals Corporation, NeoRx Corporation, Elan Corporation,
Tanox Biosystems, Inc. and Medarex, Inc. relating to antibodies
humanized by or for those companies.
For a discussion of certain risks related to the Company's
collaborative, humanization and patent licensing arrangements, see "Risk
Factors -- Uncertainty of Patents and Proprietary Technology; Opposition
Proceedings; -- Dependence on Collaborative Partners."
MANUFACTURING
PDL currently leases approximately 47,000 square feet housing its
manufacturing facilities in Plymouth, Minnesota. PDL intends to continue
to manufacture potential products for use in preclinical studies and
clinical trials using this manufacturing facility in accordance with
standard procedures that comply with current Good Manufacturing
Practices ("cGMP") and appropriate regulatory standards. Roche is
responsible for manufacturing Zenapax.
In order to obtain regulatory approvals and to expand its capacity
to produce its products for commercial sale at an acceptable cost, PDL
will need to improve and expand its existing manufacturing capabilities
and demonstrate to the FDA its ability to manufacture its products using
controlled, reproducible processes. Accordingly, the Company continues
to evaluate plans to improve and expand the capacity of its current
facility. Such plans, if fully implemented, would result in substantial
costs to the Company and may require a suspension of manufacturing
operations during construction. See "Risk Factors -- Absence of
Manufacturing Experience" and "-- Uncertainties Resulting From
Manufacturing Changes."
PATENTS AND PROPRIETARY TECHNOLOGY
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 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 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 has submitted its response to the briefs
filed by these parties. The entire opposition process, including
appeals, may take several years to complete, and although the EPO patent
remains enforceable 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. A 6-month
opposition period has 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 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 that Stanford University has a patent
issued in the U.S. 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.
GOVERNMENT REGULATION
The manufacturing, testing and marketing of PDL's products are
subject to regulation by numerous governmental authorities in the U.S.
and other countries based upon their pricing, safety and efficacy. In
the U.S., pharmaceutical (biologic) products are subject to rigorous FDA
regulation. The federal Food, Drug and Cosmetic Act ("FD&C Act"), Public
Health Service Act ("PHS Act") and other federal, state and local
regulations govern the manufacture, testing, labeling, storage, record
keeping, clinical and nonclinical studies to assess safety and efficacy,
approval, advertising and promotion of pharmaceutical products. The
process of developing and obtaining approval for a new pharmaceutical
product within this regulatory framework requires a number of years and
the expenditure of substantial resources. There can be no assurance that
necessary approvals will be obtained on a timely basis, if at all.
In addition to the requirement for FDA approval of each
pharmaceutical product, each pharmaceutical product manufacturing
facility must be registered with, and approved by, the FDA. The
manufacturing and quality control procedures must conform to cGMP in
order to receive FDA approval. Pharmaceutical product manufacturing
establishments are subject to inspections by the FDA and local
authorities as well as inspections by authorities of other countries. To
supply pharmaceutical products for use in the U.S., foreign
manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies
in such countries under reciprocal agreements with the FDA. Moreover,
pharmaceutical product manufacturing facilities may also be regulated by
state, local and other authorities.
For marketing of pharmaceutical products outside the U.S., PDL is
subject to foreign regulatory requirements governing marketing approval
and pricing, and FDA and other U.S. export provisions should the
pharmaceutical product be manufactured in the U.S. Requirements relating
to the manufacturing, conduct of clinical trials, product licensing,
promotion, pricing and reimbursement vary widely in different countries.
Difficulties or unanticipated costs or price controls may be encountered
by PDL or its licensees or its marketing partners in their respective
efforts to secure necessary governmental approvals to market potential
pharmaceutical products, which could delay or preclude PDL or its
licensees or its marketing partners from marketing their potential
pharmaceutical products.
The basic steps required by the FDA before a new pharmaceutical
product for human use may be marketed in the U.S. include (i)
preclinical laboratory and animal tests, (ii) submission to the FDA of
an application for an Investigational New Drug ("IND") which must be
reviewed by the FDA before clinical trials may begin, (iii) completion
of adequate and well-controlled human clinical trials to establish the
safety and efficacy of the pharmaceutical product for its intended use,
(iv) for therapeutic monoclonal antibodies, submission of a Biologics
License Application ("BLA") to the FDA, and (v) FDA approval of the BLA
prior to any commercial sale or shipment of the pharmaceutical product.
Preclinical tests for safety are conducted in the laboratory and
in animals in compliance with FDA good laboratory practices regulations.
Other additional tests are conducted to assess the potential safety and
biological activity of the pharmaceutical product in order to support a
sponsor's contention that it is reasonably safe to conduct proposed
clinical investigations. The results of these studies are submitted to
the FDA as part of an IND. Testing in humans may begin 30 days after
filing an IND unless the FDA requests additional information or raises
questions or concerns that must be resolved before the FDA will permit
the study to proceed. In such cases, there can be no assurance that
resolution will be achieved in a timely manner, if at all.
Clinical trials are conducted in accordance with good clinical
practices based on regulations promulgated by the FDA and under
protocols that include detail on the objectives of the trial, the
parameters to be used to monitor safety, and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of an IND.
Further, each clinical trial must be reviewed and approved by an
independent institutional review board ("IRB") at each of the medical
institutions at which the trial will be conducted. There can be no
assurance that submission of a protocol to an IRB or an IND to the FDA
will result in the initiation or completion of a clinical investigation.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the pharmaceutical product
is typically tested in a small number of healthy people or patients to
initially determine safety, dose tolerance (including side effects
associated with increasing doses), metabolism, distribution and
excretion. Phase II usually involves studies in a limited patient
population to obtain a preliminary determination of efficacy, to
identify an optimal dose and to further identify safety risks. Phase III
trials are larger, multi-center trials undertaken to provide further
confirmation of efficacy and provide additional safety information in a
specific patient population. The FDA reviews the results of the trials
and may discontinue them at any time for safety reasons or other reasons
if they are deemed to be non-compliant with FDA regulations. There can
be no assurance that Phase I, II or III clinical trials will be
completed successfully within any specific time period, if at all, with
respect to any of the Company's or its collaborators' pharmaceutical
products that are subject to such testing requirements.
The FDA has been engaged in regulatory reform efforts aimed at
reducing the regulatory burden on manufacturers of certain biotechnology
products. For example, in May 1996, the FDA issued regulations that
eliminate the previous requirement of a separate establishment license
application, in addition to the product license application, for certain
categories of biotechnology products, including the pharmaceutical
products of the Company. Furthermore, the FDA has announced its
intention to adopt a single approval application for all pharmaceutical
products. There can be no assurance, however, that implementation of
these changes will benefit the Company or otherwise reduce the
regulatory requirements applicable to the Company or that these changes
will not result in the imposition of other, more burdensome obligations
on the Company in connection with regulatory review of the Company's
products. In any event, the results of the preclinical and clinical
trials and a description of the manufacturing process and tests to
control the quality of the pharmaceutical product must be submitted to
the FDA in a BLA for approval. The approval process is likely to require
substantial time and resource commitment by an applicant. Approval is
influenced by a number of factors, including the severity of the disease
being treated, availability of alternative treatments, and the risks and
benefits of the proposed therapeutic as demonstrated in the clinical
trials. Additional data or clinical trials may be requested by the FDA
and may delay approval. There is no assurance that FDA approval will be
granted on a timely basis, if at all.
After FDA approval for the initial indications and dosage forms,
further studies may be required by the FDA to gain approval for labeling
of the pharmaceutical product for other disease indications or dosage
forms, or to monitor for adverse effects. Both before and after approval
is obtained, a pharmaceutical product, its manufacturer and the holder
of the BLA for the pharmaceutical product are subject to comprehensive
regulatory oversight. The FDA may deny a BLA if applicable regulatory
criteria are not satisfied, require additional testing or information or
require postmarketing testing and surveillance to monitor the safety or
efficacy of the pharmaceutical product. Moreover, even if regulatory
approval is granted, such approval may be subject to limitations on the
indicated uses for which the pharmaceutical product may be marketed.
Approvals may be withdrawn if compliance with regulatory standards
is not maintained or if problems with the pharmaceutical product occur
following approval. Among the conditions for BLA approval is the
requirement that the manufacturer of the pharmaceutical product comply
with cGMP. In addition, under a BLA, the manufacturer continues to be
subject to facility inspection and the applicant must assume
responsibility for compliance with applicable pharmaceutical product and
establishment standards. Violations of regulatory requirements at any
stage may result in various adverse consequences, including FDA refusal
to accept a license application, total or partial suspension of
licensure, delay in approving or refusal to approve the pharmaceutical
product or pending marketing approval applications, warning letters,
fines, injunctions, withdrawal of the previously approved pharmaceutical
product or marketing approvals and/or the imposition of criminal
penalties against the manufacturer and/or BLA holders. In addition,
later discovery of previously unknown problems may result in new
restrictions on such pharmaceutical product, manufacturer and/or BLA
holders, including withdrawal of the pharmaceutical product or marketing
approvals and pharmaceutical product recalls or seizures.
In addition to regulations enforced by the FDA, the Company is
subject to federal, state and local laws and regulations governing the
use, generation, manufacture, storage, discharge, handling and disposal
of certain materials and wastes used in its operations, some of which
are classified as "hazardous." There can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental laws, the Occupational Safety and Health Act, and state,
local and foreign counterparts to such laws, rules and regulations as
its manufacturing and research activities are increased or that the
operations, business and future profitability of the Company will not be
adversely affected by current or future laws, rules and regulations.
Although the Company believes that its safety processes and
procedures and its handling and disposing of materials and wastes comply
with applicable laws, rules and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In
the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of
the Company. In addition, the Company cannot predict the extent of the
adverse effect on its business or the financial and other costs that
might result from any new government requirements arising out of future
legislative, administrative or judicial actions. Compliance with such
laws, rules and regulations does not have, nor is such compliance
presently expected to have, a material adverse effect on the Company's
business. However, the Company cannot predict the extent of the adverse
effect on its business or the financial and other costs that might
result from any new government requirements arising out of future
legislative, administrative or judicial actions.
COMPETITION
The Company's potential products are intended to address a wide
variety of disease conditions, including autoimmune diseases,
transplantation, 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 have received approval for
or are developing antibodies or other compounds for treating autoimmune
diseases, transplantation, inflammatory conditions, cancers and viral
infections. In particular, a number of other companies have developed
and will continue to develop human antibodies and humanized antibodies.
In addition, protein design is being actively pursued at a number of
academic and commercial organizations, and several companies have
developed or may develop technologies that can compete with the
Company's SMART and human antibody technologies. There can be no
assurance that competitors will not succeed in more rapidly developing
and marketing technologies and products that are more effective than the
products being developed by the Company or that would render the
Company's products or technology obsolete or noncompetitive. Further,
there can be no assurance that the Company's collaborative partners will
not independently develop products competitive with those licensed to
such partners by the Company, thereby reducing the likelihood that the
Company will receive revenues under its agreements with such partners.
Any potential product that the Company succeeds in developing and
for which it gains regulatory approval 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 competing companies can develop products, complete the
clinical testing and approval processes, and supply commercial
quantities of the products to the market is expected to be an important
determinant of market success. For example, Novartis has received
approval to market Simulect[R], a product competitive with Zenapax, in
the U.S., the European Union and other countries in 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. With respect to the speed of
development of Ostavir, the Company is aware that other drugs such as
lamivudine from Glaxo Wellcome plc have received or been submitted for
approval in certain jurisdictions for the treatment of CHB. These
competitive products are being developed by companies that have
significantly greater experience and resources in developing antiviral
products than the Company. The success of lamivudine or other drugs for
the treatment of CHB could have a material adverse impact on the
clinical development and commercial potential of Ostavir.
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.
HUMAN RESOURCES
As of December 31, 1998, PDL had 256 full-time employees, of whom
37 hold Ph.D. and/or M.D. degrees. Of the total, 99 employees were
engaged in research and development, 47 in quality assurance and
compliance, 30 in clinical and regulatory, 32 in manufacturing and 48 in
general and administrative functions. PDL's scientific staff members
have diversified experience and expertise in molecular and cell biology,
biochemistry, virology, immunology, protein chemistry, computational
chemistry and computer modeling. PDL's success will depend in large part
on its ability to attract and retain skilled and experienced employees.
None of PDL's employees are covered by a collective bargaining
agreement, and PDL considers its relations with its employees to be
good.
ENVIRONMENT
PDL seeks to comply with environmental statutes and the
regulations of federal, state and local governmental agencies. PDL has
put into place processes and procedures and maintains records in order
to monitor its environmental compliance. PDL may invest additional
resources, if required, to comply with applicable regulations, and the
cost of such compliance may increase significantly.
RISK FACTORS
This Annual 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 below and elsewhere in this document.
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 December 31, 1998, the Company had an
accumulated deficit of approximately $68.9 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 payments 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.
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
continue to 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, humanization agreements or patent licensing 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 third quarter of
1998 included a $6.0 million non-refundable licensing and signing fee
from Genentech, Inc. ("Genentech") that resulted in a profit in that
quarter. 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 be profitable in any future quarters.
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. 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[TM], a product
competitive with Zenapax, has been approved for marketing 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 certain products recently approved for marketing,
specifically 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 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 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 has submitted its response to the briefs
filed by these parties. The entire opposition process, including
appeals, may take several years to complete, and although the EPO patent
remains enforceable 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. A 6-month
opposition period has 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 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 that Stanford University has a patent
issued in the U.S. 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 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 is
assessing its development alternatives with respect to these antibodies,
the development of these compounds has been delayed significantly and
there can be no assurance that the Company will continue or initiate
further development efforts with any of these compounds. 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 Ostavir and the SMART M195 and SMART Anti-
CD3 Antibodies as well as 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 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 Ostavir and 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. With respect to the speed of development of Ostavir, the
Company is aware that other drugs such as lamivudine from Glaxo Wellcome
plc have received or been submitted for approval in certain
jurisdictions for the treatment of CHB. These competitive products are
being developed by companies that have significantly greater experience
and resources in developing antiviral products than the Company. The
success of lamivudine or other drugs for the treatment of CHB could have
a material adverse impact on the clinical development and commercial
potential of Ostavir.
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.
No Sales And Marketing Experience. The Company intends to market
and sell certain of its products, if successfully developed and
approved, either directly or through sales and marketing partnership
arrangements with collaborative partners. Although the Company does not
expect to establish a direct sales capability for at least the next few
years, the Company has no history or experience in sales, marketing or
distribution. To market products directly, the Company must either
establish a more extensive marketing group and direct sales force or
obtain the assistance of another company. There can be no assurance that
the Company will be able to establish marketing, sales and distribution
capabilities or succeed in gaining market acceptance for its products.
If the Company enters into co-promotion or other marketing or patent
licensing arrangements with established pharmaceutical companies, the
Company's revenues will be subject to the payment provisions of such
arrangements and dependent on the efforts of third parties. There can be
no assurance that the Company will be able to successfully market
products, establish a direct sales force or that its collaborators will
effectively market any of the Company's licensed products, and the
inability of the Company or its collaborators to do so could have a
material adverse effect on the business and financial condition of the
Company.
No Assurance Of Regulatory Approval; Government Regulation. The
manufacturing, testing and marketing of the Company's products are
subject to regulation by numerous governmental authorities in the U.S.
and other countries based upon their pricing, safety and efficacy. In
the U.S., pharmaceutical products are subject to rigorous FDA
regulation. The federal Food, Drug and Cosmetic Act ("FD&C Act"), Public
Health Service Act ("PHS Act") and other federal, state and local
regulations govern the manufacture, testing, labeling, storage, record
keeping, clinical and nonclinical studies to assess safety and efficacy,
approval, advertising and promotion of pharmaceutical products. The
process of developing and obtaining approval for a new pharmaceutical
product within this regulatory framework requires a number of years and
the expenditure of substantial resources. There can be no assurance that
necessary approvals will be obtained on a timely basis, if at all.
In addition to the requirement for FDA approval of each
pharmaceutical product, each pharmaceutical product manufacturing
facility must be registered with, and approved by, the FDA. The
manufacturing and quality control procedures must conform to cGMP in
order to receive FDA approval. Pharmaceutical product manufacturing
establishments are subject to inspections by the FDA and local
authorities as well as inspections by authorities of other countries. To
supply pharmaceutical products for use in the U.S., foreign
manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies
in such countries under reciprocal agreements with the FDA. Moreover,
pharmaceutical product manufacturing facilities may also be regulated by
state, local and other authorities.
For marketing of pharmaceutical products outside the U.S., the
Company is subject to foreign regulatory requirements governing
marketing approval and pricing, and FDA and other U.S. export provisions
should the pharmaceutical product be manufactured in the U.S.
Requirements relating to the manufacturing, conduct of clinical trials,
product licensing, promotion, pricing and reimbursement vary widely in
different countries. Difficulties or unanticipated costs or price
controls may be encountered by the Company or its licensees or marketing
partners in their respective efforts to secure necessary governmental
approvals to market the potential pharmaceutical products, which could
delay or preclude the Company or its licensees or its marketing partners
from marketing their potential pharmaceutical products.
The basic steps required by the FDA before a new pharmaceutical
product for human use may be marketed in the U.S. include (i)
preclinical laboratory and animal tests, (ii) submission to the FDA of
an application for an Investigational New Drug ("IND") which must be
reviewed by the FDA before clinical trials may begin, (iii) completion
of adequate and well-controlled human clinical trials to establish the
safety and efficacy of the pharmaceutical product for its intended use,
(iv) for therapeutic monoclonal antibodies, submission of a Biologics
License Application ("BLA") to the FDA, and (v) FDA approval of the BLA
prior to any commercial sale or shipment of the pharmaceutical product.
The FDA reviews the results of the trials and may discontinue them
at any time for safety reasons or other reasons if they are deemed to be
non-compliant with FDA regulations. There can be no assurance that Phase
I, II or III clinical trials will be completed successfully within any
specific time period, if at all, with respect to any of the Company's or
its collaborators' pharmaceutical products, each of which is subject to
such testing requirements.
Both before and after approval is obtained, a pharmaceutical
product, its manufacturer and the holder of the BLA for the
pharmaceutical product are subject to comprehensive regulatory
oversight. The FDA may deny a BLA if applicable regulatory criteria are
not satisfied, require additional testing or information or require
postmarketing testing and surveillance to monitor the safety or efficacy
of the pharmaceutical product. Moreover, even if regulatory approval is
granted, such approval may be subject to limitations on the indicated
uses for which the pharmaceutical product may be marketed. Further,
approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems with the pharmaceutical product occur
following approval. Among the conditions for BLA approval is the
requirement that the manufacturer of the pharmaceutical product comply
with cGMP. In addition, under a BLA, the manufacturer continues to be
subject to facility inspection and the applicant must assume
responsibility for compliance with applicable pharmaceutical product and
establishment standards. Violations of regulatory requirements at any
stage may result in various adverse consequences, including FDA refusal
to accept a license application, total or partial suspension of
licensure, delay in approving or refusal to approve the pharmaceutical
product or pending marketing approval applications, warning letters,
fines, injunctions, withdrawal of the previously approved pharmaceutical
product or marketing approvals and/or the imposition of criminal
penalties against the manufacturer and/or BLA holders. In addition,
later discovery of previously unknown problems may result in new
restrictions on such pharmaceutical product, manufacturer and/or BLA
holders, including withdrawal of the pharmaceutical product or marketing
approvals and pharmaceutical product recalls or seizures.
Product Liability And Insurance. The Company faces an inherent
business risk of exposure to product liability claims in the event that
the use of products during research and development efforts or after
commercialization results in adverse effects. There can be no assurance
that the Company will avoid significant product liability exposure. The
Company maintains product liability insurance for clinical trials.
However, there can be no assurance that such coverage will be adequate
or that adequate insurance coverage for future clinical trials or
commercial activities will be available at an acceptable cost, if at
all, or that a product liability claim would not materially adversely
affect the business or financial condition of the Company.
Future Requirements For Significant Additional Capital. The
Company's operations to date have consumed substantial amounts of cash.
Negative cash flow from operations is expected to increase beyond
current levels over at least the next year as the Company expects to
spend substantial funds in conducting clinical trials, to expand its
marketing capabilities and efforts, to expand existing research and
development programs, to develop and expand its development and
manufacturing capabilities and to defend or prosecute its patents and
patent applications. The Company's future capital requirements will
depend on numerous factors, including, among others, royalties from the
sales of licensed products by licensees under the Company's patents; the
progress of the Company's product candidates in clinical trials; the
continued or additional support by collaborative partners or other third
parties of research and clinical trials; enhancement of research and
development programs; the time required to gain regulatory approvals;
the resources the Company devotes to self-funded products, manufacturing
methods and advanced technologies; the ability of the Company to obtain
and retain funding from third parties under collaborative agreements;
the ability of the Company and its collaborators to achieve development
milestones; the development of internal marketing and sales
capabilities; the demand for the Company's potential products, if and
when approved; potential acquisitions of technology, product candidates
or businesses by the Company; and the costs of defending or prosecuting
any patent opposition or litigation necessary to protect the Company's
proprietary technology. In order to develop and commercialize its
potential products, the Company may need to raise substantial additional
funds through equity or debt financings, collaborative arrangements, the
use of sponsored research efforts or other means. No assurance can be
given that such additional financing will be available on acceptable
terms, if at all, and such financing may only be available on terms
dilutive to existing stockholders. The inability of the Company to
secure adequate funds on a timely basis could result in the delay or
cancellation of programs that the Company might otherwise pursue and, in
any event, could have a material adverse effect on the business and
financial condition of the Company.
Environmental Regulation. The Company is subject to federal,
state and local laws and regulations governing the use, generation,
manufacture, storage, discharge, handling and disposal of certain
materials and wastes used in its operations, some of which are
classified as "hazardous." There can be no assurance that the Company
will not be required to incur significant costs to comply with
environmental laws, the Occupational Safety and Health Act, and state,
local and foreign counterparts to such laws, rules and regulations as
its manufacturing and research activities are increased or that the
operations, business and future profitability of the Company will not be
adversely affected by current or future laws, rules and regulations. The
risk of accidental contamination or injury from hazardous materials
cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability
could exceed the resources of the Company. In any event, the cost of
defending claims arising from such contamination or injury could be
substantial. In addition, the Company cannot predict the extent of the
adverse effect on its business or the financial and other costs that
might result from any new government requirements arising out of future
legislative, administrative or judicial actions.
Uncertainty Related To Health Care Industry. The health care
industry is subject to changing political, economic and regulatory
influences that may significantly affect the purchasing practices and
pricing of human therapeutics. Cost containment measures, whether
instituted by health care providers or enacted as a result of government
health administration regulators or new regulations, such as pricing
limitations or formulary eligibility for dispensation by medical
providers, could result in greater selectivity in the availability of
treatments. Such selectivity could have an adverse effect on the
Company's ability to sell its products and there can be no assurance
that adequate third-party coverage will be available for the Company to
maintain price levels sufficient to generate an appropriate return on
its investment in product development. Third-party payors are
increasingly focusing on the cost-benefit profile of alternative
therapies and prescription drugs and challenging the prices charged for
such products and services. Also, the trend towards managed health care
in the U.S. and the concurrent growth of organizations such as health
maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices or reduced markets
for the Company's products. The cost containment measures that health
care providers and payors are instituting and the effect of any health
care reform could adversely affect the Company's ability to sell its
products and may have a material adverse effect on the Company. To date,
the Company has conducted limited marketing studies on certain of its
potential products and has not undertaken any pharmacoeconomic analysis
with respect to its products under development. The cost containment
measures and reforms that government institutions and third party payors
are considering instituting could result in significant and
unpredictable changes to the marketing, pricing and reimbursement
practices of biopharmaceutical companies such as the Company. The
adoption of any such measures or reforms could have a material adverse
effect on the business and financial condition of the Company.
Conduct of Certain Activities in California. The Company maintains
its headquarters and research and development facilities in northern
California. California has historically been the site of various natural
disasters, including earthquakes, seismic tremors, unstable geologic
fault lines, floods and mudslides. The occurrence of a natural disaster
of significant magnitude in northern California could seriously impair
the operations of the Company for an extended period of time as well as
result in the loss of data and information essential to the continuation
of the Company's business. Although the Company maintains duplicate
copies of certain of its data and information on its information systems
at its Minnesota facility, there can be no assurance that such natural
disaster would not significantly disrupt the operations of the Company.
Moreover, there can be no assurance that the Company's employees or
other suitable personnel would be available to resume the operations of
the Company in California in a timely manner, and the cost of resuming
its operations and responding to such disaster could have a material
adverse effect on the business and financial condition of the Company.
ITEM 2. PROPERTIES
The Company leases approximately 92,000 square feet of research
and development and general office space in Fremont, California. The
Company relocated its California headquarters and research and
development facilities to this space beginning in September 1998. The
term of the Company's lease with respect to this space is approximately
12 years, with two additional five year options subject to certain
conditions. The Company also leases an additional 43,000 square feet of
laboratory and office space at the site of its former headquarters and
research and development facilities in Mountain View, California. In
1998, the Company entered into subleases with two parties for all of the
available space. The subleases are scheduled to terminate on December
31, 2000, the termination date of the Company's lease with respect to
this space.
The Company also leases approximately 47,000 square feet of
manufacturing, laboratory and office space in Plymouth, Minnesota. The
Company's lease will terminate on February 29, 2004, subject to the
Company's options to extend the lease for two additional five year
terms. Although these facilities currently leased by the Company are
sufficient for its present manufacturing operations, the Company
believes that it may have to obtain additional manufacturing space in
the future and may lease or acquire additional space as required.
The Company owns substantially all of the equipment used in its
facilities. See Note 4 to the financial statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in administrative opposition
proceedings being conducted by the European Patent Office with respect
to its European patent relating to humanized antibodies. Eighteen
oppositions were filed with respect to the issuance of the patent to the
Company in January 1996. The opposition briefs argue that the patent was
incorrectly granted and should be withdrawn or limited. See "Business -
- - Patents and Proprietary Technology" and "Risk Factors -- Uncertainty
of Patents and Proprietary Technology; Opposition Proceedings." The
Company has submitted its response to the briefs filed by these parties.
The Company has recently entered into a similar opposition period with
respect to the Company's recently issued Japanese patent relating to
humanized antibodies. The time to file oppositions in this proceeding
has not yet expired but the Company expects briefs to be filed in
opposition to the issuance of this patent.
Other than such administrative proceedings, the Company is not a
party to any material administrative proceedings. The Company believes
that the outcome of these opposition proceedings will not have a
material adverse effect on the financial position, results of operations
or the cash flows of the Company. However, if such outcomes 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 in the future have a
material adverse effect on the Company's results of operations, cash
flows and financial position.
In 1997, 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 terminated
Phase II study of Ostavir for the treatment of chronic active hepatitis
B initiated by Boehringer Mannheim as well as certain legal expenses
related to Boehringer Mannheim's participation in the Company's public
offering in early 1997. The collaborative research agreement with
Boehringer Mannheim provides for reimbursement from PDL of costs and
expenses of up to $2.0 million for a Phase II study of Ostavir in the
event certain conditions are met with respect to that study. In March
1998, Roche acquired Boehringer Mannheim. The Company is unable to
predict the outcome of this proceeding but in any event has estimated
and recorded a liability with respect to this matter. See "Risk
Factors." Other than such legal proceeding, the Company is not a party
to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION AND DIVIDEND POLICY ($)
1997 High Low
- -------------------- --------- ---------
First Quarter 40.13 31.75
Second Quarter 35.88 24.38
Third Quarter 43.50 26.50
Fourth Quarter 51.50 35.88
1998 High Low
- -------------------- --------- ---------
First Quarter 47.13 33.75
Second Quarter 40.38 20.13
Third Quarter 26.50 16.00
Fourth Quarter 28.44 16.13
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "PDLI." Prices indicated above are the high and low sales
prices as reported by the Nasdaq National Market System for the periods
indicated. The Company has never paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the
foreseeable future.
As of December 31, 1998, the approximate number of common
stockholders of record was 190. The Company believes that it has in
excess of 300 stockholders as many of the holders are "street name"
(nominee) accounts. The market for the Company's securities is volatile.
See "Risk Factors."
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share and number of employees data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Research and development
revenue under
collaborative agreements-
related parties (1) $ -- $ -- $11,000 $10,333 $9,333
Research and development
revenue-other (1) 21,325 11,137 5,500 1,075 2,527
Interest and other income 9,503 9,118 6,100 6,205 3,349
--------- --------- --------- --------- ---------
Total revenues 30,828 20,255 22,600 17,613 15,209
Costs and expenses:
Research and development 31,645 25,614 28,795 20,803 16,367
General and administrative 8,685 6,629 5,601 5,163 4,051
Special charge (2) -- 11,887 -- -- --
Interest expense -- -- -- 1 7
--------- --------- --------- --------- ---------
Total costs and expenses 40,330 44,130 34,396 25,967 20,425
--------- --------- --------- --------- ---------
Net loss ($9,502) ($23,875) ($11,796) ($8,354) ($5,216)
========= ========= ========= ========= =========
Net loss per share (3) ($0.51) ($1.35) ($0.76) ($0.54) ($0.37)
========= ========= ========= ========= =========
Shares used in computation
of net loss per share 18,525 17,649 15,604 15,343 14,060
========= ========= ========= ========= =========
December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and
investments $143,439 $163,655 $99,667 $107,065 $113,245
Working capital 82,394 66,490 74,221 43,522 95,450
Total assets 171,850 175,026 110,331 116,412 121,054
Accumulated deficit (68,884) (59,382) (35,507) (23,711) (15,357)
Total stockholders' equity 162,496 168,468 105,112 112,856 117,783
Number of employees 256 217 208 181 145
</TABLE>
- ------------------
(1) Certain amounts in the category "Research and development revenue
under collaborative agreements-related parties" for the years ended
December 31, 1994-96 have been reclassified under the category
"Research and development revenue-other" based on a determination
that one of the Company's collaborative partners was not a related
party during these periods. The total research and development
revenue for these periods is unchanged.
(2) Represents a non-cash special charge of approximately $11.9 million
related to the extension of the term of all outstanding stock
options held by employees, officers, directors and consultants to
the Company that were granted prior to February 1995, with the
single exception of stock options granted to one non-employee
director. The extension conforms the term of previously granted
stock options, which was six years, to those granted since February
1995, ten years.
(3) For a description of the computation of net loss per share, see
Note 1 to the Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual 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.
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 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.
In 1998, the Company began receiving royalties from sales of
Zenapax[R]. Royalties on sales of Zenapax are payable under exclusive
license agreements with Hoffmann-La Roche Inc. and affiliates ("Roche").
The Company has also entered into non-exclusive licenses under the
Company's antibody humanization patents for other humanized antibody
products recently approved for marketing. Royalty revenues from third
party sales of 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 and the marketing efforts of the Company's licensees. In
addition, certain licensees have rights to partially offset certain
previously paid milestones and third party royalties against royalties
payable to the Company.
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
Years ended December 31, 1998, 1997 and 1996
The Company's total revenues were $30.8 million in 1998 as
compared to $20.3 million in 1997 and $22.6 million in 1996. Total
research and development revenues represented $21.3 million, $11.1
million and $16.5 million of total revenues in 1998, 1997 and 1996,
respectively. Interest and other income were $9.5 million in 1998, $9.1
million in 1997, and $6.1 million in 1996.
The increase in total research and development revenues in 1998
from the prior years was primarily attributable to increased licensing
and signing fees, milestone payments, royalties and manufacturing
services revenues under clinical supply agreements during the period.
The Company recognized $21.3 million in licensing and signing fees,
milestone payments, manufacturing services revenues under clinical
supply agreements, research and development reimbursement funding and
royalties in 1998 compared to $11.0 million and $16.5 million in 1997
and 1996, respectively. Of the amounts expended by the Company for
research and development, $1.8 million in 1998, $0.1 million in 1997 and
$10.0 million in 1996 represented third-party funded research and
development activities (not including licensing and signing fees,
milestone payments and product sales).
Interest and other income increased to $9.5 million in 1998 from
$9.1 and $6.1 million in 1997 and 1996, respectively. This increase in
1998 and 1997 is primarily attributable to the increased interest earned
on the Company's investment balances as a result of the Company's
follow-on public offering, which was completed during the first quarter
of 1997.
Total costs and expenses decreased to $40.3 million in 1998 from
$44.1 million in 1997 and $34.4 million in 1996. In 1997, the Company
incurred a non-cash special charge of $11.9 million associated with the
extension of the term of certain stock options that were granted prior
to 1995. The special charge is expected to be non-recurring and
conformed the term of previously granted stock options, which was six
years, to those granted since February 1995, ten years. Exercise prices
of the stock options were not altered. Without the non-cash special
charge in 1997, total costs and expenses in 1998 increased to $40.3
million as compared to $32.2 million, due principally to an increase
in research and development and general and administrative expenses.
Research and development expenses in 1998 increased to $31.6
million from $25.6 million in 1997 and $28.8 million in 1996. The
increase in 1998 costs and expenses as compared to 1997 was primarily a
result of the addition of staff, increased expenses due to the
relocation and expansion of the Company's headquarters and research and
development facilities in Fremont, California, the initiation and
continuation of clinical trials, costs of conducting preclinical tests
and expansion of pharmaceutical development capabilities including
support for both clinical development and manufacturing process
development.
General and administrative expenses for 1998 increased to $8.7
million from $6.6 million in 1997 and $5.6 million in 1996. These
increases were primarily the result of increased staffing and associated
expenses necessary to manage and support the Company's expanding
operations.
LIQUIDITY AND CAPITAL RESOURCES
To date the Company has financed its operations primarily through
public and private placements of equity securities, research and
development revenues and interest income on invested capital. At
December 31, 1998, the Company had cash, cash equivalents and
investments in the aggregate of $143.4 million, compared to $163.7
million at December 31, 1997 and $99.7 million at December 31, 1996.
This decrease in cash resources in 1998 primarily reflects the Company's
investment of approximately $12.2 million in its new Fremont, California
headquarters and research and development facility for construction of
these new facilities and related improvements, including expanded
laboratory and development facilities.
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 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 approximately $6.5 million for the year ended
December 31, 1998 compared to approximately $7.6 million in 1997 and
$7.0 million in 1996. The decrease in 1998 was primarily due to the
Company's increased revenues and lower net loss during the period.
As set forth in the Statements of Cash Flows, net cash provided by
investing activities for the year ended December 31, 1998 was $21.2
million compared to net cash used in investing activities of $72.1
million in 1997 and provided by investing activities of $11.8 million in
1996. The change in 1998 was primarily the result of reinvestment
activities associated with the purchases of short- and long-term
investments.
As set forth in the Statements of Cash Flows, net cash provided by
financing activities for the year ended December 31, 1998 was $3.9
million compared to $74.9 million in 1997 and $4.7 million in 1996. The
change in 1998 was primarily the result of the 1997 completion of a
public offering by the Company and the exercise of outstanding stock
options. The change in 1997 was primarily the result of 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 the marketing and sales
efforts of third party licensees under the Company's patents; the
ability of the Company to enter into additional collaborative, patent
licensing or humanization arrangements; the progress of the Company's
product candidates in clinical trials; the ability of the Company's
collaborative partners to obtain regulatory approval and successfully
manufacture and market products; the continued or additional support by
collaborative partners or other third parties of research and clinical
trials; enhancement of existing and investment in new research and
development programs; the time required to gain regulatory approvals;
the resources the Company devotes to self-funded products, manufacturing
methods and advanced technologies; the ability of the Company to achieve
milestones and obtain and retain funding from third parties under
collaborative agreements; the development of internal marketing and
sales capabilities; the demand for the Company's potential products, if
and when approved; potential acquisitions of technology, product
candidates or businesses by the Company; and the costs of defending or
prosecuting any patent opposition or litigation necessary to protect the
Company's proprietary technology. In order to develop and commercialize
its potential products the Company may need to raise substantial
additional funds through equity or debt financings, collaborative
arrangements, the use of sponsored research efforts or other means. No
assurance can be given that such additional financing will be available
on acceptable terms, if at all, and such financing may only be available
on terms dilutive to existing stockholders. The Company believes that
existing capital resources will be adequate to satisfy its capital needs
through at least 2000.
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 7a. MARKET RISKS
The following discussion about the Company's market risk
includes "forward-looking statements" that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. The Company does not use
derivative financial instruments for speculative or trading purposes.
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
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. The modeling technique used measures the change in fair values
arising from an immediate hypothetical shift in market interest rates
and assumes ending fair values include principal plus accrued interest.
If market interest rates were to increase by 100 basis points from
December 31, 1998 levels, the fair value of the portfolio would decline
by approximately $0.8 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
(In thousands, except par value per share)
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $27,907 $9,266
Short-term investments 59,233 63,003
Other current assets 4,608 779
------------- -------------
Total current assets 91,748 73,048
Property and equipment, net 23,016 9,996
Long-term investments 56,299 91,386
Other assets 787 596
------------- -------------
$171,850 $175,026
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,310 $475
Accrued compensation 925 833
Other accrued liabilities 4,884 3,646
Deferred revenue 2235 1604
------------- -------------
Total current liabilities 9,354 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; 18,595
and 18,348 issued and outstanding at
December 31, 1998 and December 31, 1997,
respectively 186 183
Additional paid-in capital 231,035 227,093
Accumulated deficit (68,884) (59,382)
Accumulated other comprehensive income 159 574
------------- -------------
Total stockholders' equity 162,496 168,468
------------- -------------
$171,850 $175,026
============= =============
</TABLE>
See accompanying notes
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except net loss per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Research and development revenue
under collaborative agreements-
related parties $ -- $ -- $11,000
Research and development revenue-
other 21,325 11,137 5,500
Interest and other income 9,503 9,118 6,100
------------- ------------- ------------
Total revenues 30,828 20,255 22,600
Costs and expenses:
Research and development 31,645 25,614 28,795
General and administrative 8,685 6,629 5,601
Special charge -- 11,887 --
------------- ------------- ------------
Total costs and expenses 40,330 44,130 34,396
------------- ------------- ------------
Net loss ($9,502) ($23,875) ($11,796)
============= ============= ============
Net loss per share ($0.51) ($1.35) ($0.76)
============= ============= ============
Shares used in computation
of net loss per share 18,525 17,649 15,604
============= ============= ============
</TABLE>
See accompanying notes
PROTEIN DESIGN LABS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share and shares of common stock data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
---------------------- Paid-in Accumulated Comprehensive ComprehensiveStockholders'
Shares Amount Capital Deficit Income Income Equity
----------- --------- -------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 15,405,761 $154 $135,616 ($23,711) $796 $112,855
Issuance of common stock to
employees, consultants and
outside directors for cash 353,328 4 4,712 4,716
Comprehensive Income
Net loss (11,796) ($11,796) (11,796)
Other comprehensive income
Unrealized loss on securities (663) (663) (663)
------------
Comprehensive income (12,459)
----------- --------- -------------- ------------- ------------ ============ -------------
Balance at December 31, 1996 15,759,089 158 140,328 (35,507) 133 105,112
Follow-on public offering of
common stock at $32.00 per
share (net underwriters discount
of $4,004 and offering expenses
of $665) 2,275,000 22 68,109 68,131
Issuance of common stock to
investor at $44.875 per share 44,568 2,000 2,000
Issuance of common stock to
employees, consultants and
outside directors for cash 269,320 3 4,769 4,772
Extension of term of certain
stock options 11,887 11,887
Comprehensive Income
Net loss (23,875) (23,875) (23,875)
Other comprehensive income
Unrealized gain on securities 441 441 441
------------
Comprehensive income (23,434)
----------- --------- -------------- ------------- ------------ ============ -------------
Balance at December 31, 1997 18,347,977 183 227,093 (59,382) 574 168,468
Issuance of common stock to
employees, consultants and
outside directors for cash 247,272 3 3,942 3,945
Comprehensive Income
Net loss (9,502) (9,502) (9,502)
Other comprehensive income
Unrealized loss on securities (415) (415) (415)
------------
Comprehensive income ($9,917)
----------- --------- -------------- ------------- ------------ ============ -------------
Balance at December 31, 1998 18,595,249 $186 $231,035 ($68,884) $159 $162,496
=========== ========= ============== ============= ============ =============
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($9,502) ($23,875) ($11,796)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 3,690 3,244 3,242
Other 303 (706) 466
Special charge -- 11,887 --
Changes in assets and liabilities:
Other current assets (3,829) 470 (601)
Accounts payable 835 (554) 392
Accrued liabilities 1,330 289 2,272
Deferred revenue 631 1,604 (1,000)
------------- ------------- ------------
Total adjustments 2,960 16,234 4,771
------------- ------------- ------------
Net cash used in operating activities (6,542) (7,641) (7,025)
Cash flows from investing activities:
Purchases of short and long term investments (166,120) (317,482) (24,458)
Maturities of short and long term investments 204,300 249,681 39,900
Capital expenditures (16,751) (4,565) (3,699)
(Increase) decrease in other assets (191) 229 22
------------- ------------- ------------
Net cash provided by (used in) investing activities 21,238 (72,137) 11,765
Cash flows from financing activities:
Proceeds from issuance of capital stock 3,945 74,903 4,715
------------- ------------- ------------
Net cash provided by financing activities 3,945 74,903 4,715
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents 18,641 (4,875) 9,455
Cash and cash equivalents at beginning of year 9,266 14,141 4,686
------------- ------------- ------------
Cash and cash equivalents at end of year $27,907 $9,266 $14,141
============= ============= ============
</TABLE>
See accompanying notes
<PAGE>
PROTEIN DESIGN LABS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Summary of Significant Accounting Policies
Organization and Business
Since the Company's founding in 1986, a primary focus of its
operations has been research and development. Achievement of
successful research and development and commercialization of products
derived from such efforts is subject to high levels of risk and
significant resource commitments. The Company has a history of
operating losses and expects to incur substantial additional expenses
over at least the next few years as it continues to develop its
proprietary products, 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 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.
In 1998, the Company began receiving royalties from sales of
Zenapax[R]. Royalties on sales of Zenapax are payable under exclusive
license agreements with Hoffmann-La Roche Inc. and affiliates
("Roche"). The Company has also entered into non-exclusive licenses
under the Company's antibody humanization patents for other humanized
antibody products recently approved for marketing. Royalty revenues
from third party sales of 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 and the marketing
efforts of the Company's licensees. In addition, certain licensees
have rights to partially offset certain previously paid milestones
and third party royalties against royalties payable to the Company.
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 products licensed under the Company's
intellectual property rights or other sources, 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, product candidates or
businesses.
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 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"), 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 1998, 1997, and 1996 would have included an
additional 527,000, 1,052,000, and 964,000 shares, respectively,
related to the Company's outstanding stock options.
Comprehensive Income
Effective January 1, 1998, the Company adopted Financial
Accounting Standards Statement No. 130, "Reporting Comprehensive
Income," ("FAS 130"). Under 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. Comprehensive income for years ended December
31, 1998, 1997 and 1996 has been reflected in the Statements of
Stockholders' Equity.
Segment Disclosure
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Statement No. 131 "Disclosure about Segments of an
Enterprise and Related Information," ("FAS 131"). FAS 131 establishes
annual and interim reporting standards for an enterprise's operating
segments and related disclosures about its products, services,
geographic areas and major customers. The Company has no significant
product revenue and only has one segment with facilities solely
within the United States. As a result, the adoption of FAS 131 had no
impact on reporting by the Company.
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 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 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.
Property and Equipment
Property and equipment are stated at cost less accumulated
straight-line depreciation and amortization and consist of the
following:
(In thousands)
December 31,
---------------------------
1998 1997
------------- -------------
Laboratory and manufacturing equipment $16,468 $12,789
Office equipment 4,625 3,608
Furniture and fixtures 17,982 5,927
------------- -------------
39,075 22,324
Less accumulated depreciation and amortization (16,059) (12,328)
------------- -------------
$23,016 $9,996
============= =============
Laboratory, manufacturing, office equipment and furniture and fixtures
are depreciated over the estimated useful lives of the assets,
generally three to five years.
2. Collaborative, Humanization and Patent Licensing Arrangements
Roche
Roche and the Company have entered into a product licensing agreement
for Zenapax, a humanized antibody created by the Company. Since 1998,
the Company has received royalties from the sales of Zenapax by
Roche. Royalties payable to the Company are subject to certain
offsets for milestones, patent expenses and third party royalties
paid by Roche under the agreement. The product licensing agreement
may be terminated by Roche upon 90 days notice, in which event rights
licensed to Roche will revert to the Company.
Lilly
In December 1997, the Company entered into a research,
development and licensing agreement with Eli Lilly & Company
("Lilly"). The Company received a non-refundable licensing and
signing fee under the agreement of $3.0 million in 1997, of which the
Company recognized $1.35 million in 1997. The Company recognized $1.8
million in research and development funding under the agreement in
1998. Related costs under the agreement are anticipated to
approximate the related research and development funding revenue and
the costs incurred are included in research and development expenses
in the accompanying financial statements. The agreement further
provides for additional annual research funding of $2.4 million for
the second through fifth if the agreement is not earlier terminated.
In addition, under this agreement the Company can earn milestones,
receive royalty payments on net sales of licensed products and
negotiate co-promotion rights in the U.S. and Canada. The agreement
may be terminated by Lilly upon written notice ranging from 30-180
days upon the occurrence of certain events, including the event that
certain key personnel are no longer associated with the Company or
are unable to fulfill certain obligations under the agreement with
Lilly.
Humanization Agreements
Since December 31, 1994, PDL has entered into six antibody
humanization agreements pursuant to which the Company performed
antibody humanization services and granted patent licenses to
specified antibody targets with Roche, Mochida Pharmaceutical Co.,
Ltd., Toagosei Co., Ltd., Genetics Institute, Inc. (a wholly-owned
subsidiary of American Home Products Corporation), Teijin Limited and
Ajinomoto Co., Inc. Under each of these agreements, PDL received a
licensing and signing fee and the right to receive milestone payments
for achievement of certain specified milestones, as well as royalties
on product sales, if any. Under some of these agreements, PDL
received certain rights to co-promote the product. The Company
recognized $5.4 million in 1998, $4.0 million in 1997 and $4.5
million in 1996 under these arrangements.
Patent Licensing Arrangements
In 1998, Genentech, Inc. ("Genentech") and the Company entered
into an arrangement pursuant which either party may obtain a
nonexclusive license to certain intellectual property rights related
to monoclonal antibodies held by the other party. Under the
arrangement, the Company received a $6.0 million non-refundable
signing and licensing fee recognized as revenue and $1.0 million in
expenses in 1998. In 1998, Genentech exercised its rights to obtain a
license under the arrangement and entered into a nonexclusive license
agreement for Herceptin[R] pursuant to which the Company recognized an
additional $1.0 million in income. The license for Herceptin also
includes the payment of royalties to the Company based on product
sales.
Since November 1996, PDL has entered into thirteen patent
licensing agreements, including agreements with Sankyo Co., Ltd.,
Biogen, Inc., IDEC Pharmaceuticals Corporation, MedImmune, Inc. NeoRx
Corporation, Elan Corporation, Tanox Biosystems, Inc., and
Medarex, Inc. relating to antibodies humanized by or for those
companies. In each agreement, PDL granted a worldwide, nonexclusive
license under its humanized antibody patents to the other company for
an antibody to a specific target antigen. In each case, PDL received
a licensing and signing fee and the right to receive royalties on net
sales of licensed products. Under some of these agreements, PDL
could also receive milestone payments. The Company recognized a
total of $11.4 million in 1998, $5.4 million in 1997 and $1.0 million
in 1996 under the Genentech arrangement and other patent licensing
agreements during these periods.
3. Other Accrued Liabilities
At December 31, other accrued liabilities consisted of the following:
(In thousands)
1998 1997
------------- -------------
Employee stock purchase plan $443 $379
Clinical trials 1,293 1,434
Accrued rent 21 256
Construction payable 1,307 --
Other accrued liabilities 1,820 1,577
------------- -------------
$4,884 $3,646
============= =============
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.
4. Commitments
The Company occupies or is responsible for leased facilities under
agreements that expire in 1998, 2000 and 2004 and 2010. The Company
also has leased certain office equipment under operating leases. Rental
expense under these arrangements totaled approximately $2.5 miiilon,
$1.7 million and $1.3 million for the years ended December 31, 1998,
1997 and 1996, respectively.
At December 31, 1998 the total future minimum non-cancelable payments
under these agreements are approximately as follows:
(In thousands)
1999 $2,926
2000 2,785
2001 1,893
2002 1,935
2003 1,897
Thereafter 11,462
-------------
$22,898
=============
In September 1998, the Company began to relocate its
headquarters and research and development facilities to new buildings
in Fremont, California and invested approximately $12.2 million in
1998 in order to make the buildings suitable for its operations.
Lease commitments under this arrangement are included above.
Effective in June 1997, the Company entered into a Sponsored
Research Agreement with Stanford University ("Stanford") to provide
aggregate funding and equipment support of up to $3 million over a
period of 3 years for the laboratory of Stanley Falkow, Ph.D. In
1998, the Company provided approximately $0.6 million in funding as
compared to approximately $1.0 million in funding and equipment
support in 1997 under this commitment. Dr. Falkow resigned as a member
of the Board of Directors in September 1998 in connection with his
becoming an employee and assuming a more extensive role with the
Company in certain ongoing research programs. Dr. Falkow is currently
on leave of absence at Stanford as he makes the transition to more
extensive efforts at 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 at
Stanford during the funding period. The amount of annual funding from
the Company is subject to reduction in the event that Dr. Falkow
obtains other grants or financial support for his laboratory. The
agreement further provides that the Company may terminate the funding
arrangement upon 90 days written notice.
5. Short- and Long-Term Investments
The Company invests its excess cash balances in short-term and
long-term marketable securities and U.S. government and government
agency notes. These securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the
unrealized gains and losses reported in stockholders' equity. The
amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is
included in interest income. The cost of securities sold is based on
the specific identification method, when applicable.
The following is a summary of available-for-sale securities. Estimated
fair value is based upon quoted market prices for these or similar
instruments.
(In thousands)
Available-for-Sale Securities
-------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
December 31, 1998
Securities of the
U.S. Government and
its agencies $115,373 $232 ($99) $115,506
U.S. corporate
securities 13,922 27 (1) 13,948
------------- ------------- ------------- -------------
$129,295 $259 ($100) $129,454
============= ============= ============= =============
December 31, 1997
Securities of the
U.S. Government and
its agencies $139,815 $589 ($15) $140,389
Mortgage-backed
securities 14,000 -- -- 14,000
------------- ------------- ------------- -------------
$153,815 $589 ($15) $154,389
============= ============= ============= =============
During 1998 and 1997, there were no realized gains or losses on
the sale of available-for-sale securities, as all securities
liquidated in each of these years were held to maturity. The
remaining contractual period until maturity of short-term and long-
term investments generally range from 1 to 9 months, and 28 to 36
months, respectively.
6. Stockholders' Equity
1997 Public Offering
In March 1997, the Company completed a public offering in which
it sold 2,275,000 shares of common stock at a price per share of
$32.00. The net proceeds of this offering to the Company were
approximately $68.2 million.
1997 Private Placement
In October 1997, the Company entered into a Stock Purchase
Agreement with Toagosei pursuant to which the Company sold 44,568
shares of Common Stock to Toagosei at a price of $44.875. The net
proceeds of this offering to the Company were approximately $2.0
million.
1991 Stock Option Plan
In December 1991, the Board of Directors adopted the 1991 Stock
Option Plan (the "Option Plan"). As of December 31, 1998, the Company
has 4,000,000 shares of common stock reserved for the grant of
options under the Option Plan of which 658,376 shares are available
for grant.
At December 31, 1998, options to purchase 1,154,089 shares were
exercisable at prices ranging from $6.25 to $43.75. Options granted
under the Option Plan generally vest at the rate of 25 percent at the
end of the first year, with the remaining balance vesting monthly
over the next three years in the case of employees, and ratably over
two or five years in the case of advisors and consultants.
1992 Outside Directors' Stock Option Plan
In February 1992 the Board of Directors adopted the 1992 Outside
Directors' Stock Option Plan (the "Directors' Plan"). The Company has
reserved 200,000 shares of common stock for the grant of options
under the Directors' Plan. Through December 31, 1998, the Company
granted options to purchase 165,000 shares at exercise prices ranging
from $7.25 to $38.75 per share, of which 45,500 were exercisable at
December 31, 1998. Options granted pursuant to the Directors' Plan
vest ratably over five years. A total of 25,000 options were
exercised through December 31, 1998.
1993 Employee Stock Purchase Plan
In February 1993, the Board of Directors adopted the 1993
Employee Stock Purchase Plan (the "Employee Purchase Plan"). The
Company has reserved 300,000 shares of common stock for the purchase
of shares by employees under the Employee Purchase Plan. Eligibility
to participate in the Employee Purchase Plan is essentially limited
to full time employees of the Company who own less than 5% of the
outstanding shares of the Company. Under the Employee Purchase Plan,
eligible employees can purchase shares of the Company's common stock
based on a percentage of their compensation, up to certain limits.
The purchase price per share must equal at least the lower of 85% of
the market value on the date offered or on the date purchased. During
1998, an aggregate of 32,287 shares was purchased by employees under
the Employee Purchase Plan at prices ranging from $20.48 to $23.27
per share.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting of Stock Issued to Employees" ("APB 25") and
related interpretations, in accounting for stock-based awards to
employees, consultants and directors under the Option Plan and
Directors' Plan because, as discussed below, the alternative fair
value accounting provided for under Financial Accounting Standard 123
"Accounting for Stock-Based Compensation" ("FAS 123") requires use of
option valuation models that were not developed for use in valuing
employee stock-based awards. Under APB 25, because the exercise
price of the Company's stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized. Pro forma information regarding net income and earnings
per share in 1998, 1997 and 1996 has been determined as if the
Company had accounted for its stock-based awards under the fair value
method prescribed by FAS 123. The resulting effect on pro forma net
income and earnings per share on a pro forma basis disclosed for
1998, 1997 and 1996 is not likely to be representative of the effects
on net income and earnings per share on a pro forma basis in future
years, because 1998, 1997 and 1996 pro forma results include the
impact of only four years, three years and two years, respectively,
of options vesting, while subsequent years will include additional
years of vesting. The 1997 pro forma net loss excludes the $11.9
million non-cash special charge related to the extension of all stock
options granted prior to February 1995 except stock options granted
to one non-employee director (See Note 9). The special charge
represents the intrinsic value of the modified options calculated in
accordance with APB 25. Under FAS 123, only the additional
compensation cost related to the time value of the modified options
is included in pro forma net losses.
(In thousands, except per share data)
1998 1997 1996
------------- ------------- -------------
Net loss:
As reported ($9,502) ($23,875) ($11,796)
Pro forma ($17,626) ($17,727) ($14,399)
Loss per share:
As reported ($0.51) ($1.35) ($0.76)
Pro forma ($0.95) ($1.00) ($0.92)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following
weighted-average assumptions used for grants in 1998, 1997 and 1996,
respectively: (a) no dividends; (b) expected volatility of 75% for 1998
and 55% for prior years; (c) weighted-average risk-free interest rates of
5.45%, 6.22% and 5.93%; and (d) expected lives of 5 years.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996, and changes during the years ending
those dates is presented below.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
(In thousands, except exercise Exercise Exercise Exercise
prices) Shares Price Shares Price Shares Price
- --------------------------------- ---------- --------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,100 $22.25 1,941 $18.44 1,756 $15.61
Granted 803 32.70 448 36.25 608 24.90
Exercised (215) 15.06 (237) 17.16 (309) 13.23
Forfeited (200) 26.48 (52) 23.66 (114) 21.32
---------- ---------- ----------
Outstanding at end of year 2,488 25.90 2,100 22.25 1,941 18.44
========== ========== ==========
Weighted average fair value of
options granted during the year $21.23 $21.33 $14.23
========= ========= ==========
Exercisable at end of year 1,200 998 775
========= ========= ==========
</TABLE>
The following information applies to all stock options under the
Company's stock option plans at December 31, 1998:
<TABLE>
<CAPTION>
(In thousands, except exercise prices and remaining contractual life data)
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ----------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 6.25 - $10.50 108 3.63 $7.94 108 $7.94
$12.13 - $18.13 700 5.49 16.02 651 15.92
$19.06 - $29.25 794 8.28 23.11 307 24.04
$31.50 - $43.75 886 9.09 38.40 134 36.50
------------ ------------
2,488 $25.90 1,200 $19.58
============ ============
</TABLE>
7. Income Taxes
As of December 31, 1998 the Company had federal and state net
operating loss carryforwards of approximately $54.7 million and $4.1
million, respectively. Federal net operating loss carryforwards will
expire at various dates beginning in 2002 through 2018, if not
utilized.
The federal net operating loss carryforward differs from the
accumulated deficit principally due to temporary differences in the
recognition of certain revenue and expense items for financial and
federal tax reporting purposes, consisting primarily of in-process
technology capitalized for federal tax purposes.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31 are as
follows:
(In thousands)
1998 1997
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $18,800 $15,700
Research credits 5,600 3,400
Deferred revenue 900 600
Capitalized research and development 3,800 3,300
Special stock option charge -- 4,700
Other (100) 400
--------- ---------
Total deferred tax assets 29,000 28,100
Valuation allowance for deferred tax asset (29,000) (28,100)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
Because of the Company's lack of earnings history, the deferred
tax assets have been fully offset by a valuation allowance. The
valuation allowance increased by $11.0 million during the year ended
December 31, 1997.
Utilization of the net operating loss and credit carryforwards
may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result
in the expiration of net operating losses and credits before
utilization.
8. Legal Proceedings
The Company is involved in administrative opposition
proceedings being conducted by the European Patent Office with
respect to its European patent relating to humanized antibodies.
Eighteen oppositions were filed with respect to the issuance of the
patent to the Company in January 1996. The opposition briefs argue
that the patent was incorrectly granted and should be withdrawn or
limited. See "Business -- Patents and Proprietary Technology" and
"Risk Factors -- Uncertainty of Patents and Proprietary Technology;
Opposition Proceedings." The Company has submitted its response to
the briefs filed by these parties. The Company has recently entered
into a similar opposition period proceeding being conducted by the
Japanese Patent Office with respect to the Company's recently issued
Japanese patent relating to humanized antibodies. The time to file
oppositions in this proceeding has not yet expired but the Company
expects opposition briefs to be filed with respect to the issuance of
the Japanese patent to the Company in December 1998.
The Company believes that the outcome of these opposition
proceedings will not have a material adverse effect on the financial
position, results of operations or the cash flows of the Company.
However, if such outcomes 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 in the future have a material adverse effect on
the Company's results of operations, cash flows and financial
position.
In 1997, 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
terminated Phase II study of Ostavir for the treatment of chronic
active hepatitis B initiated by Boehringer Mannheim as well as
certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in early 1997. 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. In March 1998, Roche 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. Other than such legal
proceeding, the Company is not a party to any material legal
proceedings.
9. Special Charge
In 1997, the Company incurred a non-cash special charge of
approximately $11.9 million related to the extension of the term of
all stock options held by employees, officers, directors and
consultants of the Company that were granted prior to February 1995,
with the single exception of stock options granted to one non-
employee director. The non-cash special charge conforms the term of
previously granted stock options, which was six years, to those
granted since February 1995, ten years. The special charge resulted
in an increase in additional paid-in capital of approximately $11.9
million, although no proceeds were received by the Company.
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders Protein Design Labs, Inc.
We have audited the accompanying balance sheets of Protein Design
Labs, Inc., as of December 31, 1998 and 1997, and the related statements
of operations, stockholders' equity and cash flows for each of three
years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Protein
Design Labs, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 2, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
Certain information required by Part III is omitted from
this Report in that the Registrant will file a definitive proxy
statement pursuant to Regulation 14A for the 1999 Annual Meeting of
Stockholders (the "Proxy Statement") not later than 120 days after the
end of the fiscal year covered by this Report, and certain information
included therein is incorporated by reference.
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
The information concerning the Company's directors as
required by this Item is incorporated by reference to the Section
entitled "Nomination of Directors" of the Proxy Statement.
The information concerning the Company's executive officers as
required by this Item is incorporated by reference to the Section
entitled "Executive Officers of the Registrant" of the Proxy Statement.
The information concerning compliance with requirements regarding
reporting of timely filing of statements regarding changes in beneficial
ownership of securities of the Company as required by this Item is
incorporated by reference to the Section entitled "Section 16(a)
Reporting" of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by
reference to the Section entitled "Executive Compensation and Other
Matters" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated by
reference to the Section entitled "Security Ownership of Certain
Beneficial Owners and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
to the Section entitled "Executive Compensation and Other Matters -
Compensation Committee Interlocks and Insider Participation" of the
Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
(1) Index to financial statements
The following financial statements of the Company and the Report
of the Independent Auditors are included in Part II, Item 8.
Item
Page
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Report of Ernst & Young LLP, Independent Auditors
(2) All financial statement schedules are omitted
because the information is inapplicable or presented
in the Financial Statements or notes.
(3) The items listed on the Index to Exhibits on page __
are incorporated herein by reference.
(b) Reports on Form 8-K.
None.
(c) See (a)(3) above.
(d) See (a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PROTEIN DESIGN LABS, INC.
(Registrant)
By: /s/ LAURENCE JAY KORN
-------------------------------
Laurence Jay Korn,
Chief Executive Officer
and Chairperson of the Board
of Directors
March 30, 1999
--------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------- ------------------------------------- -------------
<S> <C> <C>
/s/ LAURENCE JAY KORN Chief Executive Officer and March 30, 1999
- -------------------------- Chairperson of the Board of Directors
(Laurence Jay Korn) (Principal Executive Officer)
/s/ JON S. SAXE President and Director March 30, 1999
- --------------------------
(Jon S. Saxe) (Principal Accounting Officer)
/s/ CARY L. QUEEN Director March 30, 1999
- --------------------------
(Cary L. Queen)
/s/ GEORGE M. GOULD Director March 30, 1999
- --------------------------
(George M. Gould)
/s/ MAX LINK Director March 30, 1999
- --------------------------
(Max Link)
</TABLE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title
3.1
Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to Annual Report on Form 10-K filed March 31, 1993.)
3.2
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.1
to Annual Report on Form 10-
Kfiled March 31, 1995.)
4.1
Registration Rights Agreement between the Company and certain holders
of Preferred Stock and Common Stock, dated August 21, 1986.
(Incorporated by reference to Exhibit 4.1 to Registration Statement
No. 33-44562 effective January 28, 1992, as amended.)
4.2
Amendment to Registration Rights Agreement between the Company and
certain holders of Preferred Stock and Common Stock, dated March 16,
1989. (Incorporated by reference to Exhibit 4.2 to Registration
Statement No. 33-44562 effective January 28, 1992, as amended.)
4.3
Registration Rights Agreement between the Company and Hoffmann-La
Roche Inc., dated March 16, 1989. (Incorporated by reference to
Exhibit 4.3 to Registration Statement No. 33-44562 effective January
28, 1992, as amended.)
4.4
Standstill Agreement between the Company and Hoffmann-La Roche Inc.,
dated March 16, 1989. (Incorporated by reference to Exhibit 4.4 to
Registration Statement No. 33-44562 effective January 28, 1992, as
amended.)
4.5
Registration Rights Agreement between the Company and Corange
International Limited, dated October 28, 1993. (Incorporated by
Reference to Exhibit 4.5 to Annual Report on Form 10-K filed March 31,
1994.)
4.6
Standstill Agreement between the Company and Corange International
Limited, dated October 28, 1993. (Incorporated by Reference to Exhibit
4.5 to Annual Report on Form 10-K filed March 31, 1994.)
4.7
Amendment No. 1 to Stock Purchase Agreement, Registration Rights
Agreement and Joint Development, Marketing and Licensing Agreement.
(Incorporated by Reference to Exhibit 5.2 to Current Report on Form 8-
K filed December 15, 1994.)
*10.1
1991 Stock Option Plan, as amended on October 20, 1992 and June 15,
1995, together with forms of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreements. (Incorporated by reference to
Exhibit 10.1 to Annual Report on Form 10-K filed March 31, 1996.)
*10.2
Founder Stock Purchase Agreement between the Company and Dr. Laurence
Jay Korn, dated August 21, 1986. (Incorporated by reference to
Exhibit 10.3 to Registration Statement No. 33-44562 effective January
28, 1992, as amended.)
*10.3
Founder Stock Purchase Agreement between the Company and Dr. Cary
Queen, dated January 1, 1987. (Incorporated by reference to Exhibit
10.4 to Registration Statement No. 33-44562 effective January 28,
1992, as amended.)
*10.4
1986 Stock Purchase Plan. (Incorporated by reference to Exhibit 10.18
to Registration Statement No. 33-44562 effective January 28, 1992, as
amended.)
*10.5
Forms of Stock Purchase Agreement under the 1986 Stock Purchase Plan.
(Incorporated by reference to Exhibit 10.19 to Registration Statement
No. 33-44562 effective January 28, 1992, as amended.)
*10.6
Outside Directors Stock Option Plan, together with form of
Nonqualified Stock Option Agreements. (Incorporated by reference to
Exhibit 10.31 to Annual Report on Form 10-K filed March 31, 1993.)
*10.7
1993 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.32 to Annual Report on Form 10-K filed March 31, 1993.)
*10.8
Letter Agreement between the Company and Saxe Associates, dated June 14,
1993 (with certain confidential information deleted and marked by a box
surrounding the deleted information). (Incorporated by reference to
Exhibit 10.9 to Annual Report on Form 10-K filed March 31, 1994.)
10.9
Lease Agreement between the Company and Charleston Properties, a
California general partnership, dated December 22, 1989. (Incorporated
by reference to Exhibit 10.5 to Registration Statement No. 33-44562
effective January 28, 1992, as amended.)
10.10
First Amendment of Lease between the Company and Charleston Properties, a
California general partnership, dated August 31, 1992. (Incorporated by
reference to Exhibit 10.26 to Annual Report on Form 10-K filed March 31,
1993.)
10.11
Lease Agreement between the Company and Plymouth Business Center I
Partnership, a Minnesota general partnership, dated February 10, 1992.
(Incorporated by reference to Exhibit 10.28 to Annual Report on Form 10-K
filed March 31, 1993.)
10.12
Amendment No. 1 to Lease Agreement between the Company and Plymouth
Business Center I Partnership, a Minnesota general partnership, dated
July 8, 1993. (Incorporated by reference to Exhibit 10.14 to Annual
Report on Form 10-K filed March 31, 1994.)
10.13
License Agreement between the Company and the National Technical
Information Service effective as of October 31, 1988 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.7 to
Registration Statement No. 33-44562 effective January 28, 1992, as
amended.)
10.14
License Agreement between the Company and Hoffmann-La Roche Inc.
effective January 31, 1989 (with certain confidential information deleted
and marked by a box surrounding the deleted information). (Incorporated
by reference to Exhibit 10.8 to Registration Statement No. 33-44562
effective January 28, 1992, as amended.)
10.15
License Agreement between the Company and F. Hoffmann-La Roche & Co.
effective January 31, 1989 (with certain confidential information deleted
and marked by a box surrounding the deleted information). (Incorporated
by reference to Exhibit 10.9 to Registration Statement No. 33-44562
effective January 28, 1992.)
10.16
License Agreement between the Company and the Medical Research Council of
the United Kingdom dated July 1, 1989, as amended on January 30, 1990
(with certain confidential information deleted and marked by a box
surrounding the deleted information). (Incorporated by reference to
Exhibit 10.10 to Registration Statement No. 33-44562 effective January
28, 1992.)
10.17
Software License Agreement among the Company, Molecular Applications
Group and Michael Levitt effective September 1, 1990 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.14 to
Registration Statement No. 33-44562 effective January 28, 1992, as
amended.)
10.18
Development and License Agreement between the Company and Yamanouchi
Pharmaceutical Company, Ltd. effective February 12, 1991, as amended on
February 12, 1991 (with certain confidential information deleted and
marked by a box surrounding the deleted information). (Incorporated by
reference to Exhibit 10.16 to Registration Statement No. 33-44562
effective January 28, 1992, as amended.)
10.19
Form of Director and Officer Indemnification Agreement. (Incorporated by
reference to Exhibit 10.1 to Registration Statement No. 33-44562
effective January 28, 1992, as amended.)
10.20
Stock Purchase Agreement between the Company and certain holders of
Preferred Stock and Common Stock dated August 21, 1986. (Incorporated by
reference to Exhibit 10.22 to Registration Statement No. 33-44562
effective January 28, 1992, as amended.)
10.21
Stock Purchase Agreement between the Company and Hoffmann-La Roche Inc.
dated March 16, 1989. (Incorporated by reference to Exhibit 10.25 to
Registration Statement No. 33-44562 effective January 28, 1992.)
10.22
Agreement for Purchase and Sale of Assets between the Company and Helix
BioCore, Inc., a Minnesota corporation, dated February 10, 1992.
(Incorporated by reference to Exhibit 10.27 to Annual Report on Form 10-K
filed March 31, 1993.)
10.23
Agreement between the Company and Kanebo, Ltd., a Japanese corporation,
dated February 29, 1992. (Incorporated by reference to Exhibit 10.29 to
Annual Report on Form 10-K filed March 31, 1993.)
10.24
Letter dated November 4, 1992 amending the License Agreement between the
Company and Hoffmann-La Roche Inc. effective January 21, 1989.
(Incorporated by reference to Exhibit 10.30 to Annual Report on Form 10-K
filed March 31, 1993.)
10.25
Asset Purchase and License Agreement among the Company, Sandoz Pharma
Ltd. and Sandoz Pharmaceuticals Corporation, dated April 13, 1993 (with
certain confidential information deleted and marked by a box surrounding
the deleted information). (Incorporated by reference to Exhibit 5.1 to
Current Report on Form 8-K filed April 28, 1993.)
10.26
License Agreement among the Company, Sandoz Pharma Ltd. and Sandoz Ltd.,
dated April 13, 1993 (with certain confidential information deleted and
marked by a box surrounding the deleted information). (Incorporated by
reference to Exhibit 5.2 to Current Report on Form 8-K filed April 28,
1993.)
10.27
Letter dated October 21, 1993 amending the Asset Purchase and License
Agreement among the Company, Sandoz Pharma Ltd. and Sandoz
Pharmaceuticals Corporation, dated April 13, 1993 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.31 to
Annual Report on Form 10-K filed March 31, 1994.)
10.28
Amended and Restated Agreement between the Company and Sloan-Kettering
Institute for Cancer Research, dated April 1, 1993 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.32 to
Annual Report on Form 10-K filed March 31, 1994.)
10.29
Stock Purchase Agreement between the Company and Corange International
Limited, dated October 28, 1993. (Incorporated by reference to Exhibit
5.1 to Current Report on Form 8-K filed November 12, 1993.)
10.30
Joint Development, Marketing and License Agreement between the Company
and Corange International Limited, dated October 28, 1993 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 5.2 to
Current Report on Form 8-K filed November 12, 1993.)
10.31
License Agreement between the Company and The Board of Trustees of Leland
Stanford Junior University effective as of June 30, 1993 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.35 to
Annual Report on Form 10-K filed March 31, 1994.)
10.32
Lease Agreement between the Company and Bio-Shore Holdings, Ltd. dated as
of May 16, 1994 (Incorporated by reference to Exhibit 10.1 to Quarterly
Report on Form 10-Q filed August 2, 1994.)
10.33
Amendment No. 2 to Lease Agreement between the Company and St. Paul
Properties, effective as of October 25, 1994. (Incorporated by reference
to Exhibit 10.36 to Annual Report on Form 10-K filed March 31, 1995.)
10.34
Amendment No. 1 to Lease Agreement between the Company and Bio-Shore
Holdings, Ltd. dated as of October 17, 1994. (Incorporated by reference
to Exhibit 10.38 to Annual Report on Form 10-K filed March 31, 1995.)
10.35
Patent License Agreement between the Company and Celltech Limited dated
as of September 30, 1994 (with certain confidential information deleted
and marked by a box surrounding the deleted information). (Incorporated
by reference to Exhibit 10.39 to Annual Report on Form 10-K filed March
31, 1995.)
10.36
Amendment No. 2 to Joint Development, Marketing and Licensing Agreement
between the Company and Boehringer Mannheim GmbH dated and effective as
of November 7, 1995 (with certain confidential information deleted and
marked by a box surrounding the deleted information). (Incorporated by
reference to Exhibit 10.37 to Annual Report on Form 10-K filed March 31,
1996.)
10.37
Development and License Agreement between the Company and an Unnamed
Japanese Pharmaceutical Company dated December 28, 1995 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by Reference to Exhibit 10.38 to
Annual Report on Form 10-K filed March 31, 1996.)
10.38
Amendment No. 3 to Joint Development, Marketing and Licensing Agreement
between the Company and Boehringer Mannheim GmbH dated and effective as
of May 31, 1996 (with certain confidential information deleted and marked
by a box surrounding the deleted information). (Incorporated by
Reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed August
14, 1996.)
10.39
Amendment No. 3 to Lease Agreement between the Company and St. Paul
Properties, effective as of November 27, 1996. (Incorporated by
Reference to Exhibit 10.39 to Annual Report on Form 10-K filed February
13, 1997.)
10.40
Amendment No. 2 to Amended and Restated Agreement between the Company and
Sloan-Kettering Institute for Cancer Research dated January 2, 1997.
(Incorporated by Reference to Exhibit 10.1 to Quarterly Report on Form
10-Q filed May 14, 1997.)
*10.41
Outside Directors Stock Option Plan together with form of nonqualified
stock option agreement as amended effective February 6, 1997.
(Incorporated by Reference to Exhibit 10.2 to Quarterly Report on Form
10-Q filed May 14, 1997.)
10.42
Lease agreement between the Company and John Arrillaga, Trustee or his
Successor Trustee, et al. dated February 20, 1997. (Incorporated by
Reference to Exhibit 10.3 to Quarterly Report on Form 10-Q filed May 14,
1997.)
10.43
Industrial Lease Agreement between the Company and Ardenstone LLC,
effective as of July 1, 1997. (Incorporated by Reference to Exhibit 10.40
to Quarterly Report on Form 10-Q filed August 14, 1997.)
10.44
Second Amendment of Lease Agreement between Bio-Shore Holdings, Ltd., and
the Company, dated February 25, 1998. (Incorporated by Reference to
Exhibit 10.40 to Annual Report on Form 10-K filed March 31, 1998.)
10.45
Patent Licensing Master Agreement between the Company and Genentech,
Inc., dated as of September 25, 1998 (with certain confidential
information deleted and marked by a box surrounding the deleted
information). (Incorporated by reference to Exhibit 10.10 to Quarterly
Report on Form 10-Q filed November 16, 1998.)
23.1
Consent of Ernst & Young LLP, Independent Auditors.
27.1
Financial Data Schedule.
____________
* Management contract or compensatory plan or arrangement
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 Nos. 33-65224, 33-50116, 33-50114, and 33-96318) pertaining to the
Employee Stock Purchase Plan, Outside Directors Stock Option Plan and 1991
Stock Option Plan of Protein Design Labs, Inc.of our report dated February 2,
1999 with respect to the financial statements of Protein Design Labs, Inc.
included in its Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Palo Alto, California
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in
the Company's Form 10-K for the year ended December 31, 1998 and
is qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 27,907
<SECURITIES> 59,233
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 91,748
<PP&E> 39,075
<DEPRECIATION> 16,059
<TOTAL-ASSETS> 171,850
<CURRENT-LIABILITIES> 9,354
<BONDS> 0
0
0
<COMMON> 186
<OTHER-SE> 162,310
<TOTAL-LIABILITY-AND-EQUITY> 171,850
<SALES> 0
<TOTAL-REVENUES> 30,828
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 40,330
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,502)
<EPS-PRIMARY> ($0.51)
<EPS-DILUTED> ($0.51)
</TABLE>
