SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-19756
PROTEIN DESIGN LABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3023969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
34801 Campus Drive
Fremont, Ca. 94555
(Address of principal executive offices)
Telephone Number (510) 574-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
As of September 30, 1998, there were 18,554,572 shares of the Registrant's
Common Stock outstanding.
PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations
Three months ended September 30, 1998 and 1997
Nine months ended September 30, 1998 and 1997
Balance Sheets
September 30, 1998 and December 31, 1997
Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
Notes to Unaudited Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - RISK FACTORS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except net loss per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Revenue under agreements
with third parties $9,610 $4,550 $17,274 $9,341
Interest and other income 2,268 2,485 7,198 6,608
---------- ---------- ---------- ----------
Total revenues 11,878 7,035 24,472 15,949
Costs and expenses:
Research and development 8,949 6,311 22,683 19,124
General and administrative 2,240 1,629 6,040 4,651
---------- ---------- ---------- ----------
Total costs and expenses 11,189 7,940 28,723 23,775
---------- ---------- ---------- ----------
Net income / (loss) $689 ($905) ($4,251) ($7,826)
========== ========== ========== ==========
Net income / (loss) per share:
Basic $0.04 ($0.05) ($0.23) ($0.45)
Diluted $0.04 ($0.05) ($0.23) ($0.45)
========== ========== ========== ==========
Weighted average number of shares:
Basic 18,545 18,170 18,506 17,433
Diluted 18,845 18,170 18,506 17,433
========== ========== ========== ==========
See accompanying notes
PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
(In thousands, except par value per share)
September 30,December 31,
1998 1997
------------ ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $44,740 $9,266
Short-term investments 78,106 63,003
Other current assets 9,808 779
------------ ----------
Total current assets 132,654 73,048
Property and equipment, net 22,169 9,996
Long-term investments 22,946 91,386
Other assets 710 596
------------ ----------
$178,479 $175,026
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,175 $475
Accrued compensation 962 833
Accrued clinical trials 1,126 1,434
Other accrued liabilities 4,899 2,212
Deferred revenue 2,729 1,604
------------ ----------
Total current liabilities 10,891 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; 18,555
and 18,348 issued and outstanding at
September 30, 1998 and December 31, 1997,
respectively 186 183
Additional paid-in capital 230,425 227,093
Accumulated deficit (63,633) (59,382)
Unrealized gain on investments 610 574
------------ ----------
Total stockholders' equity 167,588 168,468
------------ ----------
$178,479 $175,026
============ ==========
See accompanying notes
PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(unaudited)
(In thousands)
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net loss ($4,251) ($7,826)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,595 2,392
Other 735 (879)
Changes in assets and liabilities:
Other current assets (9,028) (476)
Accounts payable 700 (538)
Accrued liabilities 2,508 (356)
Deferred revenue 1,125 --
---------- ----------
Total adjustments (1,365) 143
---------- ----------
Net cash used in operating activities (5,616) (7,683)
Cash flows from investing activities:
Purchases of short- and long-term investments (92,320) (230,723)
Maturities of short- and long-term investments 145,000 192,758
Capital expenditures (14,810) (2,646)
Increase in other assets (114) (213)
---------- ----------
Net cash provided by (used in) investing activities 37,756 (40,824)
Cash flows from financing activities:
Proceeds from issuance of capital stock 3,334 71,332
---------- ----------
Net cash provided by financing activities 3,334 71,332
---------- ----------
Net increase in cash and cash equivalents 35,474 22,825
Cash and cash equivalents at beginning of period 9,266 14,141
---------- ----------
Cash and cash equivalents at end of period $44,740 $36,966
========== ==========
See accompanying notes
PROTEIN DESIGN LABS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
Summary of Significant Accounting Policies
Organization and Business
Since the Company's founding in 1986, a primary focus of its
operations has been research and development. Achievement of
successful research and development and commercialization of products
derived from such efforts is subject to high levels of risk and
significant resource commitments. The Company has a history of
operating losses and expects to incur substantial additional expenses
over at least the next few years as it continues to develop its
proprietary products, devote significant resources to preclinical
studies, clinical trials, and manufacturing and to defend its patents
and other proprietary rights. The Company's revenues to date have
consisted principally of research and development funding, licensing
and signing fees and milestone payments 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 licensing
arrangements for other products recently approved for marketing. The
Company is dependent upon the further development, regulatory and
marketing efforts of its licensees and there can be no assurance that
the development, regulatory and marketing efforts of its licensees
will be successful, including, without limitation, if and when
regulatory approvals in various countries may be obtained and whether
or how quickly products might be adopted by the medical community. In
addition, the Company recognizes royalty revenues when royalty
reports are received from Roche and the Company's other licensees.
This method of recognizing royalty revenues from the Company's
licensees, taken together with the unpredictable timing of payments
of non-recurring licensing and signing fees and milestones under new
and existing collaborative research and development, humanization,
patent licensing and clinical supply agreements, may result in
significant fluctuations in revenues in quarterly and annual periods.
Although the Company anticipates entering into new 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.
Basis of Presentation and Responsibility for Quarterly Financial
Statements
The balance sheet as of September 30, 1998 and the statements of
operations for the three month and nine periods and cash flows for
the nine month periods ended September 30, 1998 and 1997 are
unaudited but include all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair
presentation of the financial position at such dates and the
operating results and cash flows for those periods. Although the
Company believes that the disclosures in these financial statements
are adequate to make the information presented not misleading,
certain information and footnote information normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements should be read in conjunction with
the Company's Annual Report on Form 10-K, filed with the Securities
and Exchange Commission for the year ended December 31, 1997. Results
for any quarterly period are not necessarily indicative of results
for any other quarterly period or for the entire year.
Cash Equivalents, Investments and Concentration of Credit Risk
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of acquisition to be
cash equivalents. The "Other" adjustments line item in the Statements
of Cash Flows represents the accretion of the book value of certain
debt securities. The Company places its cash and short-term and long-
term investments with high-credit-quality financial institutions and
in securities of the U.S. government and U.S. government agencies
and, by policy, limits the amount of credit exposure in any one
financial instrument. To date, the Company has not experienced credit
losses on investments in these instruments.
Cash and cash equivalents for the period ended September 30, 1998
increased primarily as a result of maturities of short-term and
redemption of certain long-term investments. The changes in short-
and long-term investments were the result of certain long-term
investments reaching maturities of one year or less.
Revenue Recognition
Contract revenues from research and development are recorded as
earned based on the performance requirements of the contracts.
Revenues from achievement of milestone events are recognized when the
funding party agrees that the scientific, clinical or regulatory
results stipulated in the agreement have been met. Revenue recognized
under certain clinical supply agreements is based upon the percentage
of completion method. Deferred revenue arises principally due to the
timing of cash payments received under research and development
contracts.
The Company's collaborative, humanization and patent licensing
agreements with third parties provide for the payment of royalties to
the Company based on net sales of licensed products under the
agreements. Royalties, as reported to the Company, may include
deductions for creditable amounts related to third party royalties as
well as milestone payments, certain patent expense reimbursements and
maintenance fees previously received by the Company. The agreements
generally provide for royalty reports to the Company following
completion of each calendar quarter or semi-annual period and royalty
revenue is recognized when royalty reports are received from the
third party.
New Accounting Standards
Effective as of January 1, 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes new rules for
the reporting and display of comprehensive income (loss) and its
components; however, the adoption of FAS 130 had no impact on the
Company's net loss or stockholders' equity. FAS 130 requires
unrealized gains and losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income
(loss). FAS 130 permits the disclosure of this information in notes
to interim financial statements and the Company has elected this
approach. For the three month periods ended September 30, 1998 and
1997, total comprehensive income (loss) amounted to $0.9 million and
($0.6) million, respectively. For the nine month periods ended
September 30, 1998 and 1997, total comprehensive loss amounted to
$4.2 million and $7.3 million, respectively.
Effective December 31, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share" ("FAS 128").
FAS 128 requires the presentation of basic earnings (loss) per share
and diluted earnings (loss) per share for all periods presented. In
accordance with FAS 128, basic earnings (loss) per share have been
computed using the weighted average number of shares of common stock
outstanding during the periods presented and excluded the dilutive
effect of stock options. If the Company had a net loss position for
the applicable period, as is the case for the three month period
ended September 30, 1997 and the nine month periods ended September
30, 1998 and 1997, FAS 128 specifies that the Company shall not
include the effect of stock options outstanding for the applicable
period as the effect would be antidilutive.
Following is a reconciliation of the numerators and denominators of
the basic and diluted earnings (loss) per share computations for the
periods presented below:
(In thousands, except net income / loss per share)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Numerator:
Net income / (loss) $689 $(905) $(4,251) $(7,826)
========== ========== ========== ==========
Denominator:
Basic earnings / (loss) per share -
weighted-average shares 18,545 18,170 18,506 17,433
Dilutive potential common shares:
Stock Options 300 -- -- --
---------- ---------- ---------- ----------
Denominator for diluted earnings/
(loss) per share 18,845 18,170 18,506 17,433
========== ========== ========== ==========
Basic net income / (loss) per share $0.04 $(0.05) $(0.23) $(0.45)
========== ========== ========== ==========
Diluted net income / (loss) per share $0.04 $(0.05) $(0.23) $(0.45)
========== ========== ========== ==========
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. For example, the Company
has a policy of recording expenses for clinical trials based upon pro
rating estimated total costs of a clinical trial over the estimated
length of the clinical trial and the number of patients anticipated
to be enrolled in the trial. Expenses related to each patient are
recognized ratably beginning upon entry into the trial and over the
course of the trial. In the event of early termination of a clinical
trial, management accrues an amount based on its estimate of the
remaining non-cancellable obligations associated with the winding
down of the clinical trial. These estimates and assumptions could
differ significantly from the amounts which may actually be realized.
In 1997, Boehringer Mannheim GmbH ("Boehringer Mannheim") invoked the
dispute resolution provisions under its collaborative research
agreement to address the reimbursement of up to $2.0 million for the
Phase II study of OST 577 for the treatment of chronic hepatitis B
("CHB") then being conducted by Boehringer Mannheim as well as
certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in the first quarter of 1997. In
March 1998, Roche acquired Corange Limited, the parent company of
Boehringer Mannheim. The Company is unable to predict the outcome of
this proceeding but in any event has estimated and recorded a
liability with respect to this matter. The collaborative research
agreement with Boehringer Mannheim provides for reimbursement from
PDL of costs and expenses of up to $2.0 million for a Phase II study
of OST 577 in the event certain conditions were met with respect to
that study.
In June 1997, the Company entered into a Sponsored Research Agreement
with Stanford University to provide aggregate funding and equipment
support of up to $3.4 million over a period of 3 years for the
laboratory of Stanley Falkow, Ph.D., Distinguished Investigator
(consultant) of the Company. Dr. Falkow resigned as a member of the
Board of Directors in September 1998 in connection with his assuming
a more extensive role with the Company in certain ongoing research
programs. The funding arrangement provides the Company with certain
exclusive rights to intellectual property resulting from the research
efforts in Dr. Falkow's laboratory during the funding period. The
Company expensed approximately $0.5 and $0.2 million in connection
with this funding arrangement for the nine month periods ended
September 30, 1998 and 1997, respectively.
Other Current Assets
Other current assets increased for the period ended September 30,
1998 primarily as a result of an accounts receivable of $6.0 million
for a nonrefundable licensing and signing fee received in October
1998.
Property and Equipment
Property and equipment increased for the period ended September 30,
1998 primarily as a result of capital expenditures related to the
Company's new Fremont, California facilities.
Other Accrued Liabilities
Other accrued liabilities increased for the period ended September
30, 1998 primarily as a result of accruals of approximately $1.0
million each for (i) a signing and licensing fee paid in October
1998, and (ii) capital expenditures related to the Company's new
Fremont, California facilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are
not limited to those discussed in "Risk Factors" as well as those
discussed elsewhere in this document and the Company's Annual Report on
Form 10-K, filed with the Securities and Exchange Commission for the
year ended December 31, 1997.
OVERVIEW
Since the Company's founding in 1986, a primary focus of its
operations has been research and development. Achievement of successful
research and development and commercialization of products derived from
such efforts is subject to high levels of risk and significant resource
commitments. The Company has a history of operating losses and expects
to incur substantial additional 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. 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 licensing arrangements
for other products recently approved for marketing. The Company is
dependent upon the further development, regulatory and marketing efforts
of its licensees and there can be no assurance that the development,
regulatory and marketing efforts of its licensees will be successful,
including, without limitation, if and when regulatory approvals in
various countries may be obtained and whether or how quickly products
might be adopted by the medical community. In addition, the Company
recognizes royalty revenues when royalty reports are received from Roche
and the Company's other licensees. This method of recognizing royalty
revenues from the Company's licensees, taken together with the
unpredictable timing of payments of non-recurring licensing and signing
fees and milestones under new and existing collaborative research and
development, humanization, patent licensing and clinical supply
agreements, may result in significant fluctuations in revenues in
quarterly and annual periods.
Although the Company anticipates entering into new 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 generally continue
to increase significantly as the Company expands its business activities
and advances potential products in clinical development, dedicates more
resources to its research and development, manufacturing, preclinical
and clinical activity, and administrative and patent activities.
Accordingly, in the absence of substantial revenues from new corporate
collaborations, humanization and patent licensing agreements,
significant royalties on sales of Zenapax and other products licensed
under the Company's intellectual property rights, or other sources, the
Company expects to incur substantial operating losses in the foreseeable
future as certain of its earlier stage potential products move into
later stage clinical development, as additional potential products are
selected as clinical candidates for further development, as the Company
invests in additional facilities or manufacturing capacity, as the
Company defends or prosecutes its patents and patent applications and as
the Company invests in research or acquires additional technologies,
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, clinical or regulatory results
stipulated in the agreement have been met. Revenue recognized under
certain clinical supply agreements are based on the percentage of
completion method. Deferred revenue arises principally due to timing of
cash payments received under research and development contracts.
The Company's collaborative, humanization and patent licensing
agreements with third parties provide for the payment of royalties to
the Company based on net sales of the licensed product under the
agreement. Royalties, as reported to the Company, may include deductions
for creditable amounts related to third party royalties as well as
milestone payments, certain patent expense reimbursements and
maintenance fees previously received by the Company. The agreements
generally provide for royalty reports to the Company following
completion of each calendar quarter or semi-annual period and royalty
revenue is recognized when royalty reports are received from the third
party.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
The Company's total revenues for the three months ended September
30, 1998 were $11.9 million as compared to $7.0 million in 1997. Total
revenues recognized under agreements with third parties were $9.6
million in the third quarter of 1998 compared to $4.6 million in the
comparable period in 1997. Interest and other income amounted to $2.3
million in the third quarter of 1998 compared to $2.5 million in the
comparable period in 1997.
Revenues under agreements with third parties of $9.6 million for
the three months ended September 30, 1998 consisted principally of a
$6.0 million nonrefundable licensing and signing fee from Genentech,
Inc. ("Genentech"), milestone payments earned under licensing
agreements, manufacturing services revenues under clinical supply
agreements, research and development reimbursement funding and
royalties. In the third quarter of 1997, revenues under agreements with
third parties consisted principally of $4.6 million of licensing and
signing fees and milestone payments earned under licensing agreements.
Total costs and expenses for the three months ended September 30,
1998 increased to $11.2 million from $7.9 million in the comparable
period in 1997. The increase in costs was primarily due to the accrual
of a licensing and signing fee payable to Genentech, the addition of
staff in the Company's pharmaceutical research and development programs,
administrative functions and associated expenses desirable to manage and
support the Company's expanding operations.
Research and development expenses for the three month period ended
September 30, 1998 increased to $8.9 million from $6.3 million in the
comparable period in 1997. The increase in costs was primarily due to
the accrual of a licensing and signing fee payable to Genentech, the
addition of staff, the continuation of clinical trials, costs of
conducting preclinical tests and expansion of research and
pharmaceutical development capabilities, including support for both
clinical development and manufacturing process development.
General and administrative expenses for the three months ended
September 30, 1998 increased to $2.2 million from $1.6 million in the
comparable period in 1997. These increases were primarily the result of
increased staffing and associated expenses desirable to manage and
support the Company's expanding operations.
Nine Months Ended September 30, 1998 and 1997
The Company's total revenues for the nine months ended September
30, 1998 were $24.5 million as compared to $15.9 million in 1997. Total
revenues recognized under agreements with third parties were $17.3
million for the nine months ended September 30, 1998 compared to $9.3
million in the comparable period in 1997. This increase in total
revenues is primarily the result of increased licensing and signing fees
during the period. Interest and other income for the nine months ended
September 30, 1998 were $7.2 million compared to $6.6 million in the
comparable period in 1997. This increase in interest and other income is
primarily attributable to the increased interest earned on the Company's
higher cash and cash equivalents balances as a result of the Company's
follow-on public offering which was completed during the first quarter
of 1997.
Revenues under agreements with third parties of $17.3 million for
the nine months ended September 30, 1998 consisted principally of a $6.0
million nonrefundable licensing and signing fee from Genentech,
licensing and signing fees from other third parties, milestone payments
earned under licensing agreements, manufacturing services revenues under
clinical supply agreements, research and development reimbursement
funding and royalties. In the comparable period of 1997, revenues under
agreements with third parties consisted principally of $9.3 million of
licensing and signing fees and milestone payments earned under licensing
agreements.
Total costs and expenses for the nine months ended September 30,
1998 increased to $28.7 million from $23.8 million in the comparable
period in 1997. The increase in costs was primarily due to the addition
of staff in the Company's pharmaceutical research and development
programs, administrative functions and associated expenses desirable to
manage and support the Company's expanding operations.
Research and development expenses for the nine months ended
September 30, 1998 increased to $22.7 million from $19.1 million in the
comparable period in 1997. The increase in costs was primarily due to
the addition of staff, the continuation of clinical trials and expansion
of research and pharmaceutical development capabilities, including
support for both clinical development and manufacturing process
development.
General and administrative expenses for the nine months ended
September 30, 1998 increased to $6.0 million from $4.7 million in the
comparable period in 1997. These increases were primarily the result of
increased staffing and associated expenses desirable to manage and
support the Company's expanding operations.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through
public and private placements of equity securities, research and
development revenues and interest income on invested capital. At
September 30, 1998, the Company had cash, cash equivalents and
investments in the aggregate of $145.8 million, compared to $163.7
million at December 31, 1997. This decrease was due to the year to date
net loss and capital expenditures for the Company's new facility. Cash
and cash equivalents and investments for the period do not include the
$6.0 million licensing and signing fee received from Genentech in
October 1998.
In 1997, Boehringer Mannheim GmbH ("Boehringer Mannheim") invoked
the dispute resolution provisions under its collaborative research
agreement with the Company to address the reimbursement of up to $2.0
million for the Phase II study of OST 577 for the treatment of chronic
hepatitis B ("CHB") then being conducted by Boehringer Mannheim as well
as certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in the first quarter of 1997. In March
1998, Roche acquired Corange Limited, the parent company of Boehringer
Mannheim. The Company is unable to predict the outcome of this
proceeding but in any event has estimated and recorded a liability with
respect to this matter. The collaborative research agreement with
Boehringer Mannheim provides for reimbursement from PDL of costs and
expenses of up to $2.0 million for a Phase II study of OST 577 in the
event certain conditions were met with respect to that study.
As set forth in the Statements of Cash Flows, net cash used in
operating activities was $5.6 million for the nine months ended
September 30, 1998 compared to $7.7 million in the same period in 1997.
The decrease in 1998 was primarily due to a lower net loss for the
period, an increase in accounts receivable primarily due to the
Genentech licensing and signing fee, which is included in other current
assets, and the Company receiving research and development reimbursement
funding in advance of the related work to be performed by the Company.
As set forth in the Statements of Cash Flows, net cash provided by
investing activities for the nine months ended September 30, 1998 was
$37.8 million, resulting primarily from maturities of short-term
investments. Net cash used in investing activities for the comparable
period in 1997 was $40.8 million reflecting the purchase of short- and
long-term investments.
The Company has a twelve year lease of approximately 90,000 square
feet for its new headquarters and research and development facilities
in Fremont, California. The Company has invested approximately $13
million in order to make the facilities suitable for its operations,
including tenant improvements and equipment. As set forth in the
Statements of Cash Flows, capital expenditures increased to $14.8
million for the nine months ended September 30, 1998 compared to $2.6
million in the comparable period in 1997, primarily from its investment
in these facilities.
As set forth in the Statements of Cash Flows, net cash provided by
financing activities for the nine months ended September 30, 1998 was
$3.3 million resulting primarily from the exercise of outstanding stock
options. Net cash provided by financing activities for the comparable
period in 1997 was $71.3 million. The 1997 amount resulted primarily
from the completion of a public offering of 2.275 million shares of the
Company's common stock in the first quarter of 1997.
The Company's future capital requirements will depend on numerous
factors, including, among others, royalties from sales of products of
third party licensees, including Zenapax, Synagis[R] and Herceptin[R]; the
ability of the Company to enter into additional collaborative,
humanization and patent licensing arrangements; the progress of the
Company's product candidates in clinical trials; the ability of the
Company's licensees to obtain regulatory approval and successfully
manufacture and market products licensed under the Company's patents;
the continued or additional support by collaborative partners or other
third parties of research and development efforts and clinical trials;
enhancement of existing and investment in new research and development
programs; the time required to gain regulatory approvals; the resources
the Company devotes to self-funded products, manufacturing facilities
and methods and advanced technologies; the ability of the Company to
obtain and retain funding from third parties under collaborative
agreements; the continued development of internal marketing and sales
capabilities; the demand for the Company's potential products, if and
when approved; potential acquisitions of technology, product candidates
or businesses by the Company; and the costs of defending or prosecuting
any patent opposition or litigation necessary to protect the Company's
proprietary technology. In order to develop and commercialize its
potential products the Company may need to raise substantial additional
funds through equity or debt financings, collaborative arrangements, the
use of sponsored research efforts or other means. No assurance can be
given that such additional financing will be available on acceptable
terms, if at all, and such financing may only be available on terms
dilutive to existing stockholders. The Company believes that existing
capital resources will be adequate to satisfy its capital needs through
at least 2001.
YEAR 2000 READINESS DISCLOSURE
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 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. 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 expects to conclude its initial estimates of total anticipated
costs to become Y2K-compliant by the end of the calendar year. 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 critical suppliers and has plans to
initiate inquiries 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 will seek
alternative sources of supplies or services. However, many of the
Company's vendors have been qualified for regulatory purposes and
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 used to
support such efforts are new. Where appropriate, the Company has, as a
condition to accepting such systems, required that the systems be Y2K-
compliant.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - RISK FACTORS
This Quarterly Report contains, in addition to historical
information, forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly
from the results discussed in forward-looking statements. Factors that
may cause such a difference include those discussed in the material set
forth under "Risk Factors" and elsewhere in this document and in the
Company's Annual Report on Form 10-K for the year ending December 31,
1997.
History Of Losses; Future Profitability Uncertain. The Company has
a history of operating losses and expects to incur substantial
additional expenses with resulting quarterly losses over at least the
next several years as it continues to develop its potential products, to
invest in new research areas and to devote significant resources to
preclinical studies, clinical trials and manufacturing. As of September
30, 1998, the Company had an accumulated deficit of approximately $63.6
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
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[R] 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. 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[R], 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 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 Company anticipates that it will incur significant operating
expenses as the Company increases its research and development,
manufacturing, preclinical, clinical, marketing and administrative and
patent activities. Accordingly, in the absence of substantial revenues
from new corporate collaborations or patent licensing arrangements,
royalties on sales of Zenapax or other products licensed under the
Company's intellectual property rights or other sources, the Company
expects to incur substantial operating losses in the foreseeable future
as certain of its earlier stage potential products move into later stage
clinical development, as additional potential products are selected as
clinical candidates for further development, as the Company invests in
new headquarters and additional laboratory and manufacturing facilities
or capacity, as the Company defends or prosecutes its patents and patent
applications, and as the Company invests in continuing and new research
programs or acquires additional technologies, product candidates or
businesses. For example, the Company has invested approximately $13
million in order to make its new headquarters facilities located in
Fremont, California suitable for its operations, including investment in
tenant improvements and capital equipment. 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 development efforts of
Roche and there can be no assurance that Roche's development, regulatory
and marketing efforts will be successful, including without limitation,
whether or how quickly Zenapax might receive regulatory approvals in
various countries throughout the world and how rapidly it might be
adopted by the medical community. Moreover, Simulect[R], a product
competitive with Zenapax, 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
product launch and 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 Roche will continue or pursue additional clinical
trials in these indications or that, even if the additional clinical
trials are completed, Zenapax will be shown to be safe and efficacious,
or that the clinical trials will result in approval to market Zenapax in
these indications. Any adverse event or announcement related to Zenapax
would have a material adverse effect on the business and financial
condition of the Company.
The Company has also entered into non-exclusive patent licensing
arrangements for certain products recently approved for marketing,
specifically Synagis[R] and Herceptin[R]. 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 products might be adopted by the medical community.
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.
Uncertainty Of Patents And Proprietary Technology; Opposition
Proceedings. The Company's success is significantly dependent on its
ability to obtain patent protection for its products and technologies
and to preserve its trade secrets and operate without infringing on the
proprietary rights of third parties. The Company files and prosecutes
patent applications to protect its inventions. No assurance can be given
that the Company's pending patent applications will result in the
issuance of patents or that any patents will provide competitive
advantages or will not be invalidated or circumvented by its
competitors. Moreover, no assurance can be given that patents are not
issued to, or patent applications have not been filed by, other
companies which would have an adverse effect on the Company's ability to
use, manufacture or market its products or maintain its competitive
position with respect to its products. Other companies obtaining patents
claiming products or processes useful to the Company may bring
infringement actions against the Company. As a result, the Company may
be required to obtain licenses from others or not be able to use,
manufacture or market its products. Such licenses may not be available
on commercially reasonable terms, if at all.
Patents in the U.S. are issued to the party that is first to
invent the claimed invention. Since patent applications in the U.S. are
maintained in secrecy until patents issue, the Company cannot be certain
that it was the first inventor of the inventions covered by its pending
patent applications or that it was the first to file patent applications
for such inventions. The patent positions of biotechnology firms
generally are highly uncertain and involve complex legal and factual
questions. No consistent policy has emerged regarding the breadth of
claims in biotechnology patents, and patents of biotechnology products
are uncertain so that even issued patents may later be modified or
revoked by the U.S. Patent and Trademark Office ("PTO") or the courts in
proceedings instituted by third parties. Moreover, the issuance of a
patent in one country does not assure the issuance of a patent with
similar claims in another country and claim interpretation and
infringement laws vary among countries, so the extent of any patent
protection may vary in different territories.
The Company has several patents and exclusive licenses covering
its humanized and human antibody technology, respectively. With respect
to its human antibody technology and antibodies, the Company has
exclusively licensed certain patents from Novartis Pharmaceuticals
Corporation ("Novartis") (formerly known as Sandoz Pharmaceuticals
Corporation). With respect to its SMART[TM] antibody technology and
antibodies, the Company has been issued fundamental patents by the
European Patent Office ("EPO") and PTO. In addition, in June 1996 the
Company was issued a U.S. patent covering Zenapax and certain related
antibodies against the IL-2 receptor.
The Company is also currently prosecuting other patent applications with
the PTO and in other countries, including members of the European Patent
Convention, Canada, Japan and Australia. The patent applications are
directed to various aspects of the Company's SMART and human antibodies,
antibody technology and other programs, and include claims relating to
compositions of matter, methods of preparation and use of a number of
the Company's compounds. However, the Company does not know whether any
of these 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 or
other technology.
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 humanized
antibodies. The EPO (but not PTO) procedures provide that other parties
may submit arguments as to why the patent was incorrectly granted and
should be withdrawn or limited. Eighteen notices of opposition and
opposition briefs to the Company's European patent were filed, including
filings by major pharmaceutical and biotechnology companies, which cited
references and made arguments not considered by the EPO and PTO before
grant of the respective patents. The entire opposition process,
including appeals, may take several years to complete, and during this
lengthy process, the validity of the EPO patent will be at issue, which
may limit the Company's ability to negotiate or collect royalties or to
negotiate future collaborative research and development agreements based
on this patent. The Company intends to vigorously defend the European
patent and, if necessary, the U.S. patent; however, there can be no
assurance that the Company will prevail in the opposition proceedings or
any litigation contesting the validity or scope of these patents. If the
outcome of the European opposition proceeding or any litigation
involving the Company's antibody humanization patents were to be
unfavorable, the Company's ability to collect royalties on licensed
products and to license its patents relating to humanized antibodies may
be materially adversely affected, which could have a material adverse
affect on the business and financial conditions of the Company. In
addition, such proceedings or litigation, or any other proceedings or
litigation to protect the Company's intellectual property rights or
defend against infringement claims by others, could result in
substantial costs and a diversion of management's time and attention,
which could have a material adverse effect on the business and financial
condition of the Company.
A number of companies, universities and research institutions have
filed patent applications or received patents in the areas of antibodies
and other fields relating to the Company's programs. Some of these
applications or patents may be competitive with the Company's
applications or contain claims that conflict with those made under the
Company's patent applications or patents. Such conflict could prevent
issuance of patents to the Company, provoke an interference with the
Company's patents or result in a significant reduction in the scope or
invalidation of the Company's patents, if issued. An interference is an
administrative proceeding conducted by the PTO to determine the priority
of invention and other matters relating to the decision to grant
patents. Moreover, if patents are held by or issued to other parties
that contain claims relating to the Company's products or processes, and
such claims are ultimately determined to be valid, no assurance can be
given that the Company would be able to obtain licenses to these patents
at a reasonable cost, if at all, or to develop or obtain alternative
technology.
The Company is aware that Celltech Limited ("Celltech") has been granted
a patent by the EPO covering certain humanized antibodies, which PDL has
opposed, and that Celltech has a pending application for a corresponding
U.S. patent (the "U.S. Adair Patent Application"). Because U.S. patent
applications are maintained in secrecy, the U.S. Adair Patent
Application remains confidential. Accordingly, there can be no assurance
that claims in such a patent or application would not cover any of the
Company's SMART antibodies or be competitive with or conflict with
claims in the Company's patents or patent applications. If the U.S.
Adair Patent Application issues and if it is determined to be valid and
to cover any of the Company's SMART antibodies, there can be no
assurance that PDL would be able to obtain a license on commercially
reasonable terms, if at all. If the claims of the U.S. Adair Patent
Application conflict with claims in the Company's patents or patent
applications, there can be no assurance that an interference would not
be declared by the PTO, which could take several years to resolve and
could involve significant expense to the Company. Also, such conflict
could prevent issuance of additional patents to PDL relating to
humanization of antibodies or result in a significant reduction in the
scope or invalidation of the Company's patents, if issued. Moreover,
uncertainty as to the validity or scope of patents issued to the Company
relating generally to humanization of antibodies may limit the Company's
ability to negotiate or collect royalties or to negotiate future
collaborative research and development agreements based on these
patents.
The Company is aware that Lonza Biologics, Inc. has a patent
issued in Europe to which the Company does not have a license (although
Roche has advised the Company that it has a license covering Zenapax),
which may cover the process the Company uses to produce its potential
products. If it were determined that the Company's processes were
covered by such patent, the Company might be required to obtain a
license under such patent or to significantly alter its processes or
products, if necessary to manufacture or import its products in Europe.
There can be no assurance that the Company would be able to successfully
alter its processes or products to avoid infringing such patent or to
obtain such a license on commercially reasonable terms, if at all, and
the failure to do so could have a material adverse effect on the
business and financial condition of the Company. 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.
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 the 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.
Dependence On Collaborative Partners. The Company has
collaborative agreements with several pharmaceutical or other companies
to develop, manufacture and market certain potential products, which
include Zenapax, the most advanced product of the Company. The Company
granted its collaborative partners certain exclusive rights to
commercialize the products covered by these collaborative agreements. In
some cases, the Company is relying on its collaborative partners to
conduct clinical trials, to compile and analyze the data received from
such trials, to obtain regulatory approvals and, if approved, to
manufacture and market these licensed products. As a result, the Company
often has little or no control over the development and marketing of
these potential products and little or no opportunity to review clinical
data prior to or following public announcement.
The Company's collaborative research agreements are generally terminable
by its partners on short notice. Suspension or termination of certain of
the Company's current collaborative research agreements could have a
material adverse effect on the Company's operations and could
significantly delay the development of the affected products. 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 OST 577 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 OST 577 for the treatment of chronic hepatitis B
("CHB") conducted by Boehringer Mannheim. The Company is unable to
predict the outcome of this proceeding but in any event has estimated
and recorded a liability with respect to this matter.
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 and
EPO with claims that the Company believes, based on its survey of the
scientific literature, cover most humanized antibodies. Eighteen notices
of opposition and opposition briefs to the European patent have been
filed with the EPO, and either or both patents may be further challenged
through administrative or judicial proceedings. The Company has also
been allowed patents with similar claims in other countries and has
applied for similar patents in certain other countries. The Company has
entered into several collaborations related to both the humanization and
patent licensing of certain antibodies whereby it granted licenses to
its patent rights relating to such antibodies, and the Company
anticipates entering into additional collaborations and patent licensing
agreements partially as a result of the Company's patent and patent
applications with respect to humanized antibodies. As a result, the
inability of the Company to successfully defend the opposition
proceeding before the EPO or, if necessary, to defend patents granted by
the PTO or EPO, or to successfully prosecute the corresponding patent
applications in 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 OST 577 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 OST 577, 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 product. The Company believes
its most significant competitors may be fully integrated pharmaceutical
companies with substantial expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
securing eligibility for reimbursement or payment, and substantially
greater financial and other resources than the Company. Smaller
companies also may prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical companies.
Furthermore, academic institutions, governmental agencies and other
public and private research organizations conduct research, seek patent
protection, and establish collaborative arrangements for product
development, clinical development and marketing. These companies and
institutions also compete with the Company in recruiting and retaining
highly qualified personnel. The biotechnology and pharmaceutical
industries are subject to rapid and substantial technological change.
The Company's competitors may develop and introduce other technologies
or approaches to accomplishing the intended purposes of the Company's
products which may render the Company's technologies and products
noncompetitive and obsolete.
In addition to currently marketed competitive drugs, the Company
is aware of potential products in research or development by its
competitors that address all of the diseases being targeted by the
Company. These and other products may compete directly with the
potential products being developed by the Company. In this regard, the
Company is aware that potential competitors are developing antibodies or
other compounds for treating autoimmune diseases, inflammatory
conditions, cancers and viral infections. In particular, a number of
other companies have developed and will continue to develop human and
humanized antibodies. In addition, protein design is being actively
pursued at a number of academic and commercial organizations, and
several companies have developed or may develop technologies that can
compete with the Company's SMART and human antibody technologies. There
can be no assurance that competitors will not succeed in more rapidly
developing and marketing technologies and products that are more
effective than the products being developed by the Company or that would
render the Company's products or technology obsolete or noncompetitive.
Further, there can be no assurance that the Company's collaborative
partners will not independently develop products competitive with those
licensed to such partners by the Company, thereby reducing the
likelihood that the Company will receive revenues under its agreements
with such partners.
Any potential product that the Company or its collaborative
partners succeed in developing and obtaining regulatory approval for
must then compete for market acceptance and market share. For certain of
the Company's potential products, an important factor will be the timing
of market introduction of competitive products. Accordingly, the
relative speed with which the Company and its collaborative partners can
develop products, complete the clinical testing and approval processes,
and supply commercial quantities of the products to the market compared
to competitive companies is expected to be an important determinant of
market success. For example, Novartis has received approval to market
Simulect[R], a product competitive with Zenapax, in the U.S. and
Switzerland. Novartis has a significant marketing and sales force
directed to the transplantation market and there can be no assurance
that Roche will successfully market and sell Zenapax against this and
other available products. With respect to the speed of development of
OST 577, the Company is aware that other drugs such as lamivudine from
Glaxo Wellcome plc 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 Company's current clinical plans for OST 577 involve a
study of the combination of OST 577 and nucleoside analogs such as
lamivudine. 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 OST 577.
Other competitive factors include the capabilities of the
Company's collaborative partners, product efficacy and safety, timing
and scope of regulatory approval, product availability, marketing and
sales capabilities, reimbursement coverage, the amount of clinical
benefit of the Company's products relative to their cost, method of
administration, price and patent protection. There can be no assurance
that the Company's competitors will not develop more efficacious or more
affordable products, or achieve earlier product development completion,
patent protection, regulatory approval or product commercialization than
the Company. The occurrence of any of these events by the Company's
competitors could have a material adverse effect on the business and
financial condition of the Company.
Dependence on Key Personnel. The Company's success is dependent to
a significant degree on its key management personnel. To be successful,
the Company will have to retain its qualified clinical, manufacturing,
scientific and management personnel. The Company faces competition for
personnel from other companies, academic institutions, government
entities and other organizations. There can be no assurance that the
Company will be successful in hiring or retaining qualified personnel,
and its failure to do so could have a material adverse effect on the
business and financial condition of the Company.
Potential Volatility Of Stock Price. The market for the Company's
securities is volatile and investment in these securities involves
substantial risk. The market prices for securities of biotechnology
companies (including the Company) have been highly volatile, and the
stock market from time to time has experienced significant price and
volume fluctuations that may be unrelated to the operating performance
of particular companies. Factors such as disappointing sales of approved
products, approval or introduction of competing products, results of
clinical trials, delays in manufacturing or clinical trial plans,
fluctuations in the Company's operating results, disputes or
disagreements with collaborative partners, market reaction to
announcements by other biotechnology or pharmaceutical companies,
announcements of technological innovations or new commercial therapeutic
products by the Company or its competitors, initiation, termination or
modification of agreements with collaborative partners, failures or
unexpected delays in manufacturing or in obtaining regulatory approvals
or FDA advisory panel recommendations, developments or disputes as to
patent or other proprietary rights, loss of key personnel, litigation,
public concern as to the safety of drugs developed by the Company,
regulatory developments in either the U.S. or foreign countries (such as
opinions, recommendations or statements by the FDA or FDA advisory
panels, health care reform measures or proposals), market acceptance of
products developed and marketed by the Company's collaborators, sales of
the Company's common stock held by collaborative partners or insiders
and general market conditions could result in the Company's failure to
meet the expectations of securities analysts or investors. In such
event, or in the event that adverse conditions prevail or are perceived
to prevail with respect to the Company's business, the price of the
Company's common stock would likely drop significantly. In the past,
following significant drops in the price of a company's common stock,
securities class action litigation has often been instituted against
such a company. Such litigation against the Company could result in
substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's
business and financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
10.10 Patent Licensing Master Agreement between the Company and
Genentech, Inc., dated as of September 25, 1998 (with certain
confidential information deleted and marked by brackets surrounding
the deleted portions).
(b) No Reports on Form 8-K were filed during the quarter ended
September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its be half by
the undersigned thereunto duly authorized.
Dated: November 13, 1998
PROTEIN DESIGN LABS, INC.
(Registrant)
/s/ Laurence Jay Korn
Laurence Jay Korn
Chief Executive Officer,
Chairperson of the Board
of Directors
(Principal Executive Officer)
/s/ Jon Saxe
Jon Saxe
President
(Chief Accounting Officer)