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, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-19756
PROTEIN DESIGN LABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3023969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
34801 Campus Drive
Fremont, Ca. 94555
(Address of principal executive offices)
Telephone Number (510) 574-1400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
As of September 30, 1999, there were 18,723,114 shares of the Registrant's
Common Stock outstanding.
PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Operations
Three months ended September 30, 1999 and 1998 and
Nine months ended September 30, 1999 and 1998
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998
Notes to Unaudited Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - RISK FACTORS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Signatures
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTEIN DESIGN LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except net income (loss) per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenues:
Revenue under agreements
with third parties $8,401 $9,610 $20,902 $17,274
Interest and other income 2,172 2,268 6,795 7,198
---------- ---------- ---------- ----------
Total revenues 10,573 11,878 27,697 24,472
---------- ---------- ---------- ----------
Costs and expenses:
Research and development 7,944 8,949 24,738 22,683
General and administrative 2,448 2,240 7,343 6,040
---------- ---------- ---------- ----------
Total costs and expenses 10,392 11,189 32,081 28,723
---------- ---------- ---------- ----------
Net income (loss) $181 $689 ($4,384) ($4,251)
========== ========== ========== ==========
Net income (loss) per share:
Basic $0.01 $0.04 ($0.24) ($0.23)
Diluted $0.01 $0.04 ($0.24) ($0.23)
========== ========== ========== ==========
Weighted average number of shares:
Basic 18,668 18,545 18,637 18,506
Diluted 19,355 18,845 18,637 18,506
========== ========== ========== ==========
See accompanying notes
PROTEIN DESIGN LABS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value per share)
September 30, December 31,
1999 1998
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $14,341 $27,907
Short-term investments 6,538 59,233
Other current assets 3,000 4,608
------------ -----------
Total current assets 23,879 91,748
Property and equipment, net 37,727 23,016
Long-term investments 113,789 56,299
Other assets 550 787
------------ -----------
$175,945 $171,850
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $822 $1,310
Accrued compensation 1,156 925
Accrued clinical trials 203 1,293
Other accrued liabilities 1,700 3,591
Deferred revenue 3,169 2,235
Current portion of long-term debt 343 --
------------ -----------
Total current liabilities 7,393 9,354
Long-term debt 9,807 --
------------ -----------
Total liabilities 17,200 9,354
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; 18,723
and 18,595 issued and outstanding at
September 30, 1999 and December 31, 1998,
respectively 187 186
Additional paid-in capital 233,405 231,035
Accumulated deficit (73,269) (68,884)
Accumulated other comprehensive income (loss) (1,578) 159
------------ -----------
Total stockholders' equity 158,745 162,496
------------ -----------
$175,945 $171,850
============ ===========
See accompanying notes
PROTEIN DESIGN LABS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(unaudited)
(In thousands)
Nine Months Ended
September 30,
----------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss ($4,384) ($4,251)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,667 2,595
Other (175) 735
Changes in assets and liabilities:
Other current assets 1,608 (9,028)
Accounts payable (488) 700
Accrued liabilities (2,751) 2,508
Deferred revenue 934 1,125
---------- ----------
Total adjustments 1,795 (1,365)
---------- ----------
Net cash used in operating activities (2,589) (5,616)
Cash flows from investing activities:
Purchases of short- and long-term investments (81,336) (92,320)
Maturities of short- and long-term investments 74,900 145,000
Capital expenditures (17,624) (14,810)
Proceeds from sale of equipment 325 -
(Increase) decrease in other assets 237 (114)
---------- ----------
Net cash provided by (used in) investing activities (23,498) 37,756
Cash flows from financing activities:
Proceeds from issuance of capital stock 2,371 3,334
Proceeds from long-term debt 10,150 -
---------- ----------
Net cash provided by financing activities 12,521 3,334
---------- ----------
Net increase (decrease) in cash and cash equivalents (13,566) 35,474
Cash and cash equivalents at beginning of period 27,907 9,266
---------- ----------
Cash and cash equivalents at end of period $14,341 $44,740
========== ==========
See accompanying notes
PROTEIN DESIGN LABS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(unaudited)
Summary of Significant Accounting Policies
Organization and Business
Since the Company's founding in 1986, a primary focus of its operations has
been research and development. Achievement of successful research and
development and commercialization of products derived from such efforts is
subject to high levels of risk and significant resource commitments. The
Company has a history of operating losses and expects to incur substantial
additional expenses over at least the next few years as it continues to
develop its proprietary products, devote significant resources to
preclinical studies, clinical trials, and manufacturing and to defend its
patents and other proprietary rights. The Company's revenues to date have
consisted principally of research and development funding, licensing and
signing fees, milestone payments and royalties from pharmaceutical and
biotechnology companies under collaborative research and development,
humanization, patent licensing and clinical supply agreements. These
revenues may vary considerably from quarter to quarter and from year to
year, and revenues in any period may not be predictive of revenues in any
subsequent period, and variations may be significant depending on the terms
of the particular agreements.
The Company receives royalties on sales of Synagisr, Herceptinr and
Zenapaxr. Royalty revenues from third party sales of these licensed
humanized antibodies are subject to the specific terms of each agreement
and, under the Company's policy, are recognized by the Company during the
quarter such royalties are reported to PDL. This method of revenue
recognition may increase fluctuations reported in any particular quarter
since the agreements generally provide for royalty reports to the Company
following completion of each calendar quarter or semi-annual period.
Further, royalty revenues are unpredictable as they are dependent upon
numerous factors including the seasonality of sales of licensed products,
the existence of competing products, the marketing efforts of the Company's
licensees and the rights certain licensees have to partially offset certain
previously paid milestones and third party royalties against royalties
payable to the Company. In addition, expenses may fluctuate from quarter to
quarter due to the timing of certain expenses, including milestone payments
that may be payable by the Company under certain licensing arrangements.
Although the Company anticipates entering into new collaborations from time
to time, the Company presently does not know whether or not it will 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 significantly increases its
research and development, manufacturing, preclinical, clinical, marketing
and administrative and patent activities. In particular, the commitment of
resources to the development of Zenapax and the humanized anti-IL-4
antibody, two humanized antibodies with respect to which PDL recently
obtained development rights, taken together with the continued development
of the Company's existing products will require significant additional funds
for development. 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 the Company
undertakes development of Zenapax in autoimmune indications and the
humanized anti-IL-4 antibody, 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 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 consolidated balance sheet as of September 30, 1999, and the
consolidated statements of operations for the three and nine month periods
and cash flows for the nine month periods ended September 30, 1999 and 1998
are unaudited but include all adjustments (consisting only 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. During the third quarter of 1999,
the Company formed two wholly owned subsidiaries to facilitate the purchase
of the Company's Fremont, California facilities. Financial statements are
presented on a consolidated basis to include these subsidiaries. Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain
information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K, filed with the Securities and Exchange Commission, for
the year ended December 31, 1998. The balance sheet as of December 31, 1998
is derived from audited financial statements. 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. Included in the "Other" adjustments line item in the Statements
of Cash Flows is 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, 1999 decreased
primarily as a result of the purchases of short-term investments and long-
term investments. Long-term investments increased during the period as a
result of the Company purchasing investments with maturities longer than
twelve months.
Revenue Recognition
Contract revenues from research and development arrangements are recorded as
earned based on the performance requirements of the contracts. Revenues
from achievement of milestone events are recognized when the funding party
agrees that the scientific or clinical results stipulated in the agreement
have been met. Deferred revenue arises principally due to timing of cash
payments received under research and development contracts.
The Company's collaborative, humanization and patent licensing agreements
with third parties provide for the payment of royalties to the Company based
on net sales of the licensed product under the agreement. The agreements
generally provide for royalty payments to the Company following completion
of each calendar quarter or semi-annual period and royalty revenue is
recognized when royalty reports are received from the third party. Non-
refundable signing and licensing fees under these arrangements are
recognized as revenue when there are no future performance obligations
remaining with respect to such fees.
Net Income (Loss) Per Share
In accordance with Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share" ("FAS 128"), basic and diluted net income (loss) per
share amounts have been computed using the weighted average number of shares
of common stock outstanding during the periods presented. Calculation of
diluted net income per share includes the dilutive effect of stock options.
If the Company had a net loss position for the applicable period, as is the
case for the nine month periods ended September 30, 1999 and 1998, FAS 128
specifies that the Company shall not include the effect of stock options
outstanding for the applicable period as the effect would be antidilutive.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Numerator:
Net income (loss) $181 $689 $(4,384) $(4,251)
========== ========== ========== ==========
Denominator:
Basic net income (loss) per share -
weighted-average shares 18,668 18,545 18,637 18,506
Dilutive potential common shares:
Stock Options 687 300 -- --
---------- ---------- ---------- ----------
Denominator for diluted net
loss per share 19,355 18,845 18,667 18,506
========== ========== ========== ==========
Basic net income (loss) per share $0.01 $0.04 $(0.24) $(0.23)
========== ========== ========== ==========
Diluted net income (loss) per share $0.01 $0.04 $(0.24) $(0.23)
========== ========== ========== ==========
Comprehensive Income (Loss)
In accordance with Financial Accounting Standards Statement No. 130,
"Reporting Comprehensive Income," ("FAS 130"), the Company is required to
display comprehensive income (loss) 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 (loss) is
comprised of net loss and other comprehensive income (loss). Other
comprehensive income (loss) 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 (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, 1999 and 1998, total comprehensive income (loss) amounted to
($0.1) million and $0.9 million respectively. For the nine month periods
ended September 30, 1999 and 1998, total comprehensive income (loss)
amounted to ($6.1) million and ($4.2) million, respectively.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 is not required to be adopted until 2001. 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.
Property, Plant and Equipment
Property, plant and equipment increased at September 30, 1999 compared to
December 31, 1998 primarily as a result of the purchase of the Company's
Fremont, California facilities which has an estimated useful life of thirty
years.
Accrued Clinical Trials
Accrued clinical trials reflected a $1.1 million reduction associated with
the favorable resolution of a contract-related dispute with Boehringer
Mannheim GmbH (which was acquired by affiliates of F. Hoffmann-La Roche
Ltd).
Long-Term Debt
In September 1999, Fremont Holding L.L.C. (a wholly owned subsidiary of
Protein Design Labs, Inc.) obtained a $10.2 million term loan to purchase
its Fremont, California facilities. The loan bears interest at the rate of
7.64% per year amortized over 15 years with principal and interest payable
monthly beginning in October 1999. The loan is secured by the Company's
Fremont, California facilities and is subject to the terms and covenants of
the loan agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to
those discussed in "Risk Factors" as well as those discussed elsewhere in
this document and the Company's Annual Report on Form 10-K, filed with the
Securities and Exchange Commission for the year ended December 31, 1998.
OVERVIEW
Since the Company's founding in 1986, a primary focus of its
operations has been research and development. Achievement of successful
research and development and commercialization of products derived from such
efforts is subject to high levels of risk and significant resource
commitments. The Company has a history of operating losses and expects to
incur substantial additional expenses over at least the next few years as it
continues to develop its proprietary products, devote significant resources
to preclinical studies, clinical trials, and manufacturing and to defend its
patents and other proprietary rights. The Company's revenues to date have
consisted principally of research and development funding, licensing and
signing fees, milestone payments and royalties from pharmaceutical and
biotechnology companies under collaborative research and development,
humanization, patent licensing and clinical supply agreements. These
revenues may vary considerably from quarter to quarter and from year to
year, and revenues in any period may not be predictive of revenues in any
subsequent period, and variations may be significant depending on the terms
of the particular agreements.
The Company receives royalties on sales of Synagis[R], Herceptin[R] and
Zenapax[R]. Royalty revenues from third party sales of these licensed
humanized antibodies are subject to the specific terms of each agreement
and, under the Company's policy, are recognized by the Company during the
quarter such royalties are reported to PDL. This method of revenue
recognition may increase fluctuations reported in any particular quarter
since the agreements generally provide for royalty reports to the Company
following completion of each calendar quarter or semi-annual period.
Further, royalty revenues are unpredictable as they are dependent upon
numerous factors including the seasonality of sales of licensed products,
the existence of competing products, the marketing efforts of the Company's
licensees and the rights certain licensees have to partially offset certain
previously paid milestones and third party royalties against royalties
payable to the Company. In addition, expenses may fluctuate from quarter to
quarter due to the timing of certain expenses, including milestone payments
that may be payable by the Company under certain licensing arrangements.
Although the Company anticipates entering into new collaborations from
time to time, the Company presently does not know whether or not it will
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 significantly increases its
research and development, manufacturing, preclinical, clinical, marketing
and administrative and patent activities. In particular, the commitment of
resources to the development of Zenapax and the humanized anti-IL-4
antibody, two humanized antibodies with respect to which PDL recently
obtained development rights, taken together with the continued development
of the Company's existing products will require significant additional funds
for development. 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 the Company
undertakes development of Zenapax in autoimmune indications and the
humanized anti-IL-4 antibody, 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 manufacturing capacity, as the Company defends
or prosecutes its patents and patent applications and as the Company invests
in research or acquires additional technologies, product candidates or
businesses.
Contract revenues from research and development are recorded as earned
based on the performance requirements of the contracts. Revenues from
achievement of milestone events are recognized when the funding party agrees
that the scientific or clinical results stipulated in the agreement have
been met. Deferred revenue arises principally due to timing of cash payments
received under research and development contracts.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
The Company's total revenues for the three months ended September 30,
1999 were $10.6 million compared to $11.9 million in the third quarter of
1998. Total revenues recognized under agreements with third parties were
$8.4 million in the third quarter of 1999 compared to $9.6 million in the
comparable period in 1998. Interest and other income was $2.2 million in the
third quarter of 1999 compared to $2.3 million in the comparable period in
1998.
Revenues under agreements with third parties of $8.4 million for the
three months ended September 30, 1999 consisted principally of milestone
payments earned under licensing agreements, royalties, signing and licensing
fees and research and development reimbursement funding. In the third
quarter of 1998, revenues of $9.6 million under agreements with third
parties consisted principally of a $6.0 million 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.
Total costs and expenses for the three months ended September 30, 1999
were $10.4 million compared with $11.2 million in the comparable period in
1998. Total cost and expenses in the 1999 third quarter reflected a $1.1
million reduction associated with the favorable resolution of a contract
dispute with a third party. In 1998, total cost and expenses in the third
quarter included a $1.0 million licensing and signing fee paid to Genentech.
Excluding these non-recurring items in the third quarters of 1999 and
1998, total costs and expenses increased by $1.3 million, primarily due to
the addition of staff in the Company's pharmaceutical research and
development programs, administrative functions and associated expenses to
manage and support the Company's expanding operations.
Research and development expenses for the three month period ended
September 30, 1999 were $7.9 million compared with $8.9 million in the year-
earlier quarter. Excluding the two non-recurring items discussed above,
research and development costs increased by $1.1 million, 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 three months ended
September 30, 1999 increased to $2.4 million from $2.2 million in the
comparable period in 1998. These increases were primarily the result of
increased staffing and associated expenses to manage and support the
Company's expanding operations.
Nine Months Ended September 30, 1999 and 1998
The Company's total revenues for the nine months ended September 30,
1999 were $27.7 million compared with $24.5 million for the nine months
ended September 30, 1998. Total revenues recognized under agreements with
third parties were $20.9 million in the nine month period of 1999 compared
with $17.3 million in the comparable period in 1998. Interest and other
income was $6.8 million in the nine month period of 1999 compared with $7.2
million in the comparable period in 1998.
Revenues under agreements with third parties of $20.9 million for the
nine months ended September 30, 1999 consisted principally of royalties,
signing and licensing fees, maintenance fees and research and development
reimbursement funding. In the comparable period of 1998, revenues of $17.3
million under agreements with third parties consisted principally of signing
and licensing fees, milestone payments earned under licensing agreements,
manufacturing services revenues under clinical supply agreements, research
and development reimbursement funding and royalties.
Total costs and expenses for the nine months ended September 30, 1999
increased to $32.1 million from $28.7 million in the comparable period in
1998. Excluding non-recurring expense adjustments due to one-time events,
the increase in costs and expenses was primarily due to the addition of
staff in the Company's pharmaceutical research and development programs,
administrative functions and associated expenses to manage and support the
Company's expanding operations.
Research and development expenses for the nine month period ended
September 30, 1999 increased to $24.7 million from $22.7 million in the
comparable period in 1998. Excluding the two non-recurring items discussed
above, 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, 1999 increased to $7.3 million from $6.0 million in the
comparable period in 1998. These increases were primarily the result of
increased staffing and associated expenses to manage and support the
Company's expanding operations.
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, 1999, the
Company had cash, cash equivalents and investments in the aggregate of
$134.7 million, compared to $143.4 million at December 31, 1998.
As set forth in the Statements of Cash Flows, net cash used in
operating activities was $2.6 million for the nine months ended September
30, 1999 compared to $5.6 million in the same period in 1998. This change
was primarily the result of changes in other current assets and accrued
liabilities.
As set forth in the Statements of Cash Flows, net cash used in
investing activities for the nine months ended September 30, 1999 was $23.5
million resulting primarily from the reinvestment of maturing investments
and the purchase of the Company's Fremont, California facilities. Net cash
provided by investing activities for the comparable period in 1998 was $37.8
million resulting primarily from the maturities of short- and long-term
investments.
As set forth in the Statements of Cash Flows, net cash provided by
financing activities for the nine months ended September 30, 1999 was $12.5
million resulting primarily from the proceeds associated with the long-term
financing of the Company's purchase of its Fremont, California facilities.
Net cash provided by financing activities in the comparable period in 1998
was $3.3 million resulting primarily from the exercise of outstanding stock
options.
The Company's future capital requirements will depend on numerous
factors, including, among others, royalties from sales of products of third
party licensees, including Synagis, Herceptin and Zenapax; the ability of
the Company to enter into additional collaborative, humanization and patent
licensing arrangements; the progress of the Company's product candidates in
clinical trials; the ability of the Company's licensees to obtain regulatory
approval and successfully manufacture and market products licensed under the
Company's patents; the continued or additional support by collaborative
partners or other third parties of research and development efforts and
clinical trials; enhancement of existing and investment in new research and
development programs; the time required to gain regulatory approvals; the
resources the Company devotes to self-funded products, manufacturing
facilities and methods and advanced technologies; the ability of the Company
to obtain and retain funding from third parties under collaborative
arrangements; the continued development of internal marketing and sales
capabilities; the demand for the Company's potential products, if and when
approved; potential acquisitions of technology, product candidates or
businesses by the Company; and the costs of defending or prosecuting any
patent opposition or litigation necessary to protect the Company's
proprietary technology. In order to develop and commercialize its potential
products the Company may need to raise substantial additional funds through
equity or debt financings, collaborative arrangements, the use of sponsored
research efforts or other means. No assurance can be given that such
additional financing will be available on acceptable terms, if at all, and
such financing may only be available on terms dilutive to existing
stockholders. The Company believes that existing capital resources will be
adequate to satisfy its capital needs through at least 2001.
YEAR 2000 COMPLIANCE
As is true for most companies, the ability of the Company's systems
and equipment as well as those of its key suppliers to address the Year 2000
("Y2K") issue presents a potential risk for the Company. If systems software
and/or equipment containing embedded software or controllers do not
correctly recognize date information when the year changes to 2000, there
could be an adverse impact on the Company's operations. The risk for the
Company exists in two areas: systems used by the Company to run its
business and systems used by the Company's suppliers. The Company is
currently evaluating its exposure in these two areas and has completed a
review of at least 90% of potentially affected systems. 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 comprehensive assessment recently completed by an outside
consultant retained by the Company, the Company believes that its most
important information systems, equipment and facilities are Y2K-compliant.
To date, the Company has either received software or system 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 its
key systems.
The outside consultant retained by the Company performed a
comprehensive inventory and review of all significant systems and equipment
of the Company and is in the process of preparing a contingency plan for any
mission critical systems that may present 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 been advised that the need for
remediation or replacement plans for systems and equipment is minimal. 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 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 expected to be less than
the originally estimated $100,000 amount budgeted. However, if
implementation of scheduled replacement systems is significantly delayed, or
if any 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 ongoing inquiries of other suppliers in order to determine
whether the operations and the products or services provided by these
identified vendors are Y2K-compliant. Where practicable, the Company will
attempt to mitigate its risks with respect to the failure of vendors to be
Y2K-compliant. In the event that vendors are not compliant, the Company may
adjust its purchasing decisions or seek alternative sources of supplies or
services. However, many of the Company's vendors have been qualified for
regulatory purposes such that qualifying new vendors could involve
significant time and resource commitments by the Company. Failure of vendors
to be Y2K-compliant remains a possibility and could limit the ability of the
Company to manufacture material for clinical studies or timely conduct
regulatory compliance programs that would result in a delay in the
initiation or continuation of certain planned clinical studies. Significant
delays or expenditures due to vendors' failures to become Y2K-compliant
could have an adverse impact on the Company's results of operations or
financial condition.
With respect to research conducted by the Company in support of its
collaborative research customers, many of the systems and software used to
support such efforts are new. Where appropriate, the Company has, as a
condition to accepting such systems and software, required that the systems
be Y2K-compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company maintains a non-trading investment portfolio of investment
grade, highly liquid, debt securities which limits the amount of credit
exposure to any one issue, issuer, or type of instrument. The Company does
not use derivative financial instruments for speculative or trading
purposes. The securities in the Company's investment portfolio are not
leveraged and are classified as available for sale and therefore are subject
to interest rate risk. The Company does not currently hedge interest rate
exposure. As of September 30, 1999, there has been no material change in the
Company's interest rate exposure from that described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
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 in this document and in
the discussion captioned "Risk Factors" in the Company's Annual Report on
Form 10-K for the year ending December 31, 1998.
History Of Losses; Future Profitability Uncertain. The Company has a
history of operating losses and expects to incur substantial additional
expenses over at least the next several years as it continues to develop its
potential products, to invest in new research areas and to devote
significant resources to preclinical studies, clinical trials and
manufacturing. As of September 30, 1999, the Company had an accumulated
deficit of approximately $73.3 million. The time and resource commitment
required to achieve market success for any individual product is extensive
and uncertain. No assurance can be given that the Company, its collaborative
partners or licensees will successfully develop products, obtain required
regulatory approvals, manufacture products at an acceptable cost and with
appropriate quality, or successfully market such products.
The Company's revenues to date have consisted principally of research
and development funding, licensing and signing fees, milestone payments and
royalties from pharmaceutical and biotechnology companies under
collaborative research and development, humanization, patent licensing and
clinical supply agreements. These revenues may vary considerably from
quarter to quarter and from year to year, and revenues in any period may not
be predictive of revenues in any subsequent period, and variations may be
significant depending on the terms of the particular agreements. Further,
royalty revenues are unpredictable as they are dependent upon numerous
factors, including the seasonality of sales of licensed products, the
existence of competing products, the marketing efforts of the Company's
licensees and rights certain licensees may have to partially offset certain
previously paid milestones and third party royalties against royalties
payable to the Company. In addition, expenses may fluctuate from quarter to
quarter due to the timing of certain expenses, including milestone payments
that may be payable by the Company under licensing arrangements.
Although the Company anticipates entering into new collaborations from
time to time, the Company presently does not know whether or not it will
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 significantly increases its
research and development, manufacturing, preclinical, clinical, marketing
and administrative and patent activities. In particular, the commitment of
resources to the development of Zenapax and the humanized anti-IL-4
antibody, two humanized antibodies with respect to which PDL recently
obtained development rights, taken together with the continued development
of the Company's existing products, will require significant additional
funds for development. 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, which may or may
not occur, the Company expects to incur substantial operating losses in the
foreseeable future as the Company undertakes development of Zenapax in
autoimmune indications and the humanized anti-IL-4 antibody, 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
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 1999 included significant amounts from
certain milestones and non-refundable, non-creditable licensing and signing
fees. Moreover, expenses in the third quarter were also reduced by $1.1
million due to a favorable resolution of a contract dispute with a third
party. Revenues in the fourth quarter of 1999 are not expected to include
arrangements involving payments to the Company of a similar magnitude and
certain of the milestone payments in the third quarter which are
expected to be credited against royalties which otherwise would be due
to the Company in the fourth quarter of 1999. In the absence of substantial
non-recurring revenues or significant royalty revenues in any future period,
there can be no assurance that the Company's level of revenue in
any particular reporting period will be similar to or higher than that
reported for the prior corresponding period.
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, Inc. The Company
recognizes royalty revenues when royalty reports are received from its
collaborative partners, including Roche. With respect to royalties based on
revenue from sales of Zenapax by Roche, royalties based on U.S. sales are
reported to the Company on a quarterly basis and royalties based on sales
outside of the U.S. are currently 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 Royalties. 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 sales in transplantation depend upon the efforts of Roche and there
can be no assurance that Roche's development, regulatory and marketing
efforts will be successful, including without limitation, whether or how
quickly Zenapax might receive regulatory approvals in various countries
throughout the world and how rapidly it might be adopted by the medical
community. Moreover, Simulect[R], a product competitive with Zenapax, is
marketed in the U.S. and other countries and there can be no assurance that
Roche will successfully market and sell Zenapax against this and other
available competitive products. In addition, there can be no assurance that
other independently developed products of Roche, including CellCept[R], or
others will not compete with or prevent Zenapax from achieving meaningful
sales. Roche's development and marketing efforts for CellCept may result in
delays or a relatively smaller resource commitment to marketing and sales
support efforts than might otherwise be obtained for Zenapax if this
potentially competitive product were not under development or being
marketed. In addition, the Company recently obtained exclusive rights to
develop Zenapax in autoimmune indications. There can be no assurance that
the Company's development efforts in autoimmune indications will show that
Zenapax is safe and efficacious in this setting, or that the clinical trials
will result in approval to market Zenapax in these indications. Any adverse
event or announcement related to Zenapax would have a material adverse
effect on the business and financial condition of the Company.
The Company has also entered into non-exclusive patent licensing
arrangements for Synagis and Herceptin. The Company is dependent upon the
further development, regulatory and marketing efforts of its licensees with
respect to these products and there can be no assurance that the
development, regulatory and marketing efforts of these licensees will be
successful, including, without limitation, if and when regulatory approvals
in various countries may be obtained and whether or how quickly these
products might be adopted by the medical community.
Uncertainty Of Patents And Proprietary Technology; Opposition
Proceedings. The Company's success is significantly dependent on its ability
to obtain and maintain patent protection for its products and technologies
and to preserve its trade secrets and operate without infringing on the
proprietary rights of third parties. The Company files and prosecutes patent
applications to protect its inventions. No assurance can be given that the
Company's pending patent applications will result in the issuance of patents
or that any patents will provide competitive advantages or will not be
invalidated or circumvented by its competitors. Moreover, no assurance can
be given that patents are not issued to, or patent applications have not
been filed by, other companies which would have an adverse effect on the
Company's ability to use, import, manufacture, market or sell its products
or maintain its competitive position with respect to its products. Other
companies obtaining patents claiming products or processes useful to the
Company may bring infringement actions against the Company. As a result, the
Company may be required to obtain licenses from others or not be able to
use, import, manufacture, market or sell its products. Such licenses may not
be available on commercially reasonable terms, if at all.
Patents in the U.S. are issued to the party that is first to invent
the claimed invention. Since patent applications in the U.S. are maintained
in secrecy until patents issue, the Company cannot be certain that it was
the first inventor of the inventions covered by its pending patent
applications or patents or that it was the first to file patent applications
for such inventions. The patent positions of biotechnology firms generally
are highly uncertain and involve complex legal and factual questions. No
consistent policy has emerged regarding the breadth of claims in
biotechnology patents, and patents of biotechnology products are uncertain,
so that even issued patents may later be modified or revoked by the U.S.
Patent and Trademark Office ("PTO") or the courts. Moreover, the issuance of
a patent in one country does not assure the issuance of a patent with
similar claims in another country, and claim interpretation and infringement
laws vary among countries, so the extent of any patent protection may vary
in different countries.
The Company has a number of patents and has exclusively licensed
certain patents from third parties. In June 1996, the Company was issued a
U.S. patent covering Zenapax and certain related antibodies against the IL-2
receptor. The Company has been issued patents by the PTO, the Japanese
Patent Office ("JPO"), European Patent Office ("EPO") and other patent
offices around the world 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 two humanization patents issued by the EPO apply in the
United Kingdom, Germany, France, Italy and eight other European countries.
The EPO (but not PTO) procedures provide for an opposition period in which
other parties submit arguments as to why the patent was incorrectly granted
and should be withdrawn or limited. Eighteen notices of opposition to the
Company's first European patent were filed during the opposition period for
such patent, including oppositions by major pharmaceutical and biotechnology
companies, which cited references and made arguments not considered by the
EPO and PTO before grant of the respective patents. The Company submitted
its response to the briefs filed by these parties and a preliminary view
from the EPO was received in May 1999. The preliminary view represents the
initial non-binding statement from the EPO with respect to the issued
European patent and does not represent the final determination concerning
the patent. Complex preliminary views are common in EPO proceedings, and are
intended to set an agenda for discussion at the oral hearing. The final
determination from the EPO is expected to occur at an oral hearing currently
scheduled to take place in March 2000. At or following the oral hearing, the
Company expects that the European patent will either be maintained in full,
maintained in an amended version or revoked. Any of the parties to the
opposition may appeal a decision to a board of appeals within the EPO. Such
an appeal can take two or more years to be resolved.
The preliminary view from the EPO raises significant questions
regarding the validity of the first European patent, which, if not
satisfactorily responded to by the Company in the oral hearing, could result
in revocation of certain claims or the entire European patent. If the key
claims in the European patent are revoked following the oral hearing and the
Company's other humanization patents do not provide sufficient coverage of
certain products licensed under the Company's patents, then the Company's
ability to collect royalties on European sales of existing licensed products
and to license its patents relating to humanized antibodies may be
materially adversely affected, which would have a material adverse affect on
the business and financial condition of the Company. The Company is
currently reviewing the preliminary view with counsel in preparation for the
scheduled oral hearing. Although the entire opposition process, including
appeals, may take several years to complete, and although the European
patent remains issued and any revocation of the European patent is suspended
during the appeals process, the validity of the European patent will be at
issue, which may limit the Company's ability to collect royalties or to
negotiate future licensing or collaborative research and development
arrangements based on this patent. In addition, the Company may need to
initiate formal legal actions, if permissible, in order to enforce its
rights under its various humanization patents, including the European
patent, and there can be no assurance that the Company will successfully
enforce its rights under the European or similar U.S. and Japanese patents
of the Company. The nine month opposition period for the Company's second
European antibody humanization patent has recently begun and the Company
expects that, depending upon the outcome of the opposition proceedings for
the first European patent, a significant number of notices of opposition may
be filed with respect to the second European patent.
A similar opposition period in Japan has recently expired with respect
to the Company's humanization patent issued in Japan in late 1998. Similar
to the process in Europe, third parties had the opportunity to file their
opposition to the issuance of the JPO patent. The Company has been advised
that three opposition statements have been filed. The Company intends to
vigorously defend the European patent and the Japanese patent and, if
necessary, the 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. If it were determined that the Company's SMART antibodies were
covered by the European or U.S. Adair Patents, the Company might be required
to obtain a license under such patents or to significantly alter its
processes or products, if necessary to make, use or sell its products in
Europe and the U.S. There can be no assurance that the Company would be able
to successfully alter its processes or products to avoid infringing such
patents or to obtain such a license from Celltech on commercially reasonable
terms, if at all, and the failure to do so could have a material adverse
effect on the business and financial condition of the Company.
In addition, if the claims of the U.S. Adair Patent or any related
patent applications conflict with claims in the Company's U.S. patents or
patent applications, there can be no assurance that an interference would
not be declared by the PTO, which could take several years to resolve and
could involve significant expense to the Company. Also, such conflict could
prevent issuance of additional patents to the Company relating to
humanization of antibodies or result in a significant reduction in the scope
or invalidation of the Company's patents, if issued. Moreover, uncertainty
as to the validity or scope of patents issued to the Company relating
generally to humanization of antibodies may limit the Company's ability to
negotiate or collect royalties or to negotiate future collaborative research
and development agreements based on these patents.
The Company is aware that Lonza Biologics, Inc. has a patent issued in
Europe to which the Company does not have a license (although Roche has
advised the Company that it has a license covering Zenapax), which may cover
a process the Company uses to produce its potential products. If it were
determined that the Company's processes were covered by such patent, the
Company might be required to obtain a license under such patent or to
significantly alter its processes or products, if necessary to manufacture
or import its products in Europe. There can be no assurance that the Company
would be able to successfully alter its processes or products to avoid
infringing such patent or to obtain such a license on commercially
reasonable terms, if at all, and the failure to do so could have a material
adverse effect on the business and financial condition of the Company.
The Company is also aware of an issued U.S. patent assigned to
Stanford University and Columbia University to which the Company does not
have a license, which may cover a process the Company uses to produce its
potential products. The Company has been advised that an exclusive license
has been previously granted to a third party under this patent. If it were
determined that the Company's processes were covered by such patent, the
Company might be required to obtain a license under such patent or to
significantly alter its processes or products, if necessary to manufacture
or import its products in the U.S. There can be no assurance that the
Company would be able to successfully alter its processes or products to
avoid infringing such patent or to obtain such a license on commercially
reasonable terms, if at all, and the failure to do so could have a material
adverse effect on the business and financial condition of the Company.
Moreover, any alteration of processes or products to avoid infringing the
patent could result in a significant delay in achieving regulatory approval
with respect to the products affected by such alterations.
In addition to seeking the protection of patents and licenses, the
Company also relies upon trade secrets, know-how and continuing
technological innovation which it seeks to protect, in part, by
confidentiality agreements with employees, consultants, suppliers and
licensees. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known,
independently developed or patented by competitors.
Uncertainty Of Clinical Trial Results. Before obtaining regulatory
approval for the commercial sale of any of its potential products, the
Company must demonstrate through preclinical studies and clinical trials
that the product is safe and efficacious for use in the clinical indication
for which approval is sought. There can be no assurance that the Company
will be permitted to undertake or continue clinical trials for any of its
potential products or, if permitted, that such products will be demonstrated
to be safe and efficacious. Moreover, the results from preclinical studies
and early-stage clinical trials may not be predictive of results that will
be obtained in late-stage clinical trials. Thus, there can be no assurance
that the Company's present or future clinical trials will demonstrate the
safety and efficacy of any potential products or will result in approval to
market products.
In advanced clinical development, numerous factors may be involved
that may lead to different results in larger, late-stage clinical trials
from those obtained in early-stage trials. For example, early-stage clinical
trials usually involve a small number of patients, often at a single center,
and thus may not accurately predict the actual results regarding safety and
efficacy that may be demonstrated with a large number of patients in a late-
stage multi-center clinical trial. Also, differences in the clinical trial
design between early-stage and late-stage clinical trials may cause
different results regarding the safety and efficacy of a product to be
obtained. In addition, many early-stage trials are unblinded and based on
qualitative evaluations by clinicians involved in the performance of the
trial, whereas late-stage trials are generally required to be blinded in
order to provide more objective data for assessing the safety and efficacy
of the product. Moreover, preliminary results from clinical trials may not
be representative of results that may be obtained as the trial proceeds to
completion.
The Company may at times elect to aggressively enter potential
products into Phase I/II trials to determine preliminary safety and efficacy
in specific indications. In addition, in certain cases the Company has
commenced clinical trials without conducting preclinical animal testing
where an appropriate animal model does not exist. Similarly, the Company or
its partners at times will conduct potentially pivotal Phase II/III or Phase
III trials based on limited Phase I or Phase I/II data. As a result of these
and other factors, the Company anticipates that only some of its potential
products will show safety and efficacy in clinical trials and that the
number of products that fail to show safety and efficacy may be significant.
For example, the Company has entered the SMART M195 Antibody into a Phase
III clinical trial in acute myelogenous leukemia with a clinical regimen
that has not been tested previously with this antibody. Results from the
Company's prior Phase II and Phase II/III studies showed a limited number
of complete and partial remissions. In addition, the Phase III study was
initiated by the Company without a meeting with the FDA or European
regulatory authorities to discuss the protocol and its adequacy to support
registration of the SMART M195 Antibody. The Company believes that its Phase III
program is reasonable in view of the nature and severity of the disease.
However, there can be no assurance that the study will be successful or
that the FDA or European regulatory authorities will agree that the study
will be adequate to obtain regulatory approval, even if the study is successful.
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.
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.
No Sales And Marketing Experience; Further Development of Zenapax. 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 at this time, 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
pharmaceutical or biotechnology companies, the Company's revenues will be
subject to the payment provisions of such arrangements and dependent on the
efforts of third parties.
The Company has recently obtained rights from Roche to conduct
development activities for Zenapax in autoimmune indications. The Company
has no experience in conducting development activities for products that are
currently approved and marketed for use in other indications such as
Zenapax. U.S. Food and Drug Administration ("FDA") regulations prohibit
promotion of the use of Zenapax for unapproved indications until appropriate
clinical studies are conducted and the data from those studies is presented
for the FDA to review and approve. There can be no assurance that the
Company will be able to successfully develop Zenapax in autoimmune
indications and substantial investment by the Company in such development
may be required with no assurance that such efforts will be successful. Even
if such development efforts succeed, there can be no assurance that the
Company, by itself or with a collaborative partner, will successfully
market, promote and detail Zenapax in those countries where PDL has or
obtains such rights. The inability of the Company, Roche or its other
collaborators to develop, market and sell Zenapax could have a material
adverse effect on the business and financial condition of the Company.
Absence Of Manufacturing Experience. Of the products which are
currently in clinical development by the Company, Roche is responsible for
manufacturing Zenapax, Smithkline Beecham is responsible for manufacturing
the humanized anti-IL-4 antibody and BioNet is responsible for manufacturing
the SMART Anti-L-Selectin Antibody. The Company is responsible for
manufacturing the Company's other products for its own development. The
Company currently leases approximately 47,000 square feet housing its
manufacturing facilities in Plymouth, Minnesota. The Company intends to
continue to manufacture potential products for use in preclinical and
clinical trials using this manufacturing facility in accordance with
standard procedures that comply with current Good Manufacturing Practices
("cGMP") and appropriate regulatory standards. The manufacture of sufficient
quantities of antibody products in accordance with such standards is an
expensive, time-consuming and complex process and is subject to a number of
risks that could result in delays. For example, the Company has experienced
some difficulties in the past in manufacturing certain potential products on
a consistent basis. Production interruptions, if they occur, could
significantly delay clinical development of potential products, reduce third
party or clinical researcher interest and support of proposed clinical
trials, and possibly delay commercialization of such products and impair
their competitive position, which would have a material adverse effect on
the business and financial condition of the Company.
The Company has no experience in manufacturing commercial quantities
of its potential products and currently does not have sufficient capacity to
manufacture all of its potential products on a commercial scale. In order to
obtain regulatory approvals and to create capacity to produce its products
for commercial sale at an acceptable cost, the Company will need to improve
and expand its existing manufacturing capabilities, including demonstration
to the FDA and corresponding foreign authorities of its ability to
manufacture its products using controlled, reproducible processes. The
Company has approved plans to improve and expand the capacity of its current
manufacturing facility. Such plans, if fully implemented, will result in
substantial costs to the Company. There can be no assurance that
construction delays will not occur, and any such delays could impair the
Company's ability to produce adequate supplies of its potential products for
clinical use or commercial sale on a timely basis. Further, there can be no
assurance that the Company will successfully improve and expand its
manufacturing capability sufficiently to obtain necessary regulatory
approvals and to produce adequate commercial supplies of its potential
products on a timely basis. Failure to do so could delay commercialization
of such products and impair their competitive position, which could have a
material adverse effect on the business or financial condition of the
Company.
Uncertainties Resulting From Manufacturing Changes. Manufacturing of
antibodies for use as therapeutics in compliance with regulatory
requirements is complex, time-consuming and expensive. When certain changes
are made in the manufacturing process, it is necessary to demonstrate to the
FDA and corresponding foreign authorities that the changes have not caused
the resulting drug material to differ significantly from the drug material
previously produced, if results of prior preclinical studies and clinical
trials performed using the previously produced drug material are to be
relied upon in regulatory filings. Such changes could include, for example,
changing the cell line used to produce the antibody, changing the
fermentation or purification process or moving the production process to a
new manufacturing plant. Depending upon the type and degree of differences
between the newer and older drug material, various studies could be required
to demonstrate that the newly produced drug material is sufficiently similar
to the previously produced drug material, possibly requiring additional
animal studies or human clinical trials. Manufacturing changes have been
made or are likely to be made for the production of the Company's products
currently in clinical development, in particular the SMART M195 and SMART
Anti-CD3 Antibodies. There can be no assurance that such changes will not
result in delays in development or regulatory approvals or, if occurring
after regulatory approval, in reduction or interruption of commercial sales.
In addition, manufacturing changes to its manufacturing facility may require
the Company to shut down production for a period of time. There can be no
assurance that the Company will be able to reinitiate production in a timely
manner, if at all, following such shutdown. Delays as a result of
manufacturing changes or shutdown of the manufacturing facility could have
an adverse effect on the competitive position of those products and could
have a material adverse effect on the business and financial condition of
the Company.
Dependence On Suppliers. The Company is dependent on outside vendors
for the supply of raw materials used to produce its product candidates. The
Company currently qualifies only one or a few vendors for its source of
certain raw materials. Therefore, once a supplier's materials have been
selected for use in the Company's manufacturing process, the supplier in
effect becomes a sole or limited source of such raw materials to the Company
due to the extensive regulatory compliance procedures governing changes in
manufacturing processes. Although the Company believes it could qualify
alternative suppliers, there can be no assurance that the Company would not
experience a disruption in manufacturing if it experienced a disruption in
supply from any of these sources. Any significant interruption in the supply
of any of the raw materials currently obtained from such sources, or the
time and expense necessary to transition a replacement supplier's product
into the Company's manufacturing process, could disrupt the Company's
operations and have a material adverse effect on the business and financial
condition of the Company. A problem or suspected problem with the quality of
raw materials supplied could result in a suspension of clinical trials,
notification of patients treated with products or product candidates
produced using such materials, potential product liability claims, a recall
of products or product candidates produced using such materials, and an
interruption of supplies, any of which could have a material adverse effect
on the business or financial condition of the Company.
Competition; Rapid Technological Change. The Company's potential
products are intended to address a wide variety of disease conditions,
including autoimmune diseases, inflammatory conditions and cancers.
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 and cancers. 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. In
particular, the Company believes that certain companies that use alternative
technologies to produce human-like antibodies have recently entered into
collaborative arrangements that are competitive with and may negatively
impact the Company's efforts to enter into humanization and development
arrangements for early stage antibody research and development. There can be
no assurance that competitors will not succeed in more rapidly developing
and marketing technologies and products that are more effective than the
products being developed by the Company or that would render the Company's
products or technology obsolete or noncompetitive. Further, there can be no
assurance that the Company's collaborative partners will not independently
develop products competitive with those licensed to such partners by the
Company, thereby reducing the likelihood that the Company will receive
revenues under its agreements with such partners.
Any potential product that the Company or its collaborative partners
succeed in developing and for which regulatory approval is obtained must
then compete for market acceptance and market share. For certain of the
Company's potential products, an important factor will be the timing of
market introduction of competitive products. Accordingly, the relative speed
with which the Company and its collaborative partners can develop products,
complete the clinical testing and approval processes, and supply commercial
quantities of the products to the market compared to competitive companies
is expected to be an important determinant of market success. For example,
Novartis has received approval to market Simulect, a product competitive
with Zenapax, in the U.S. and Europe. In addition to an earlier launch in
Europe, Novartis has a significant marketing and sales force directed to the
transplantation market and there can be no assurance that Roche will
successfully market and sell Zenapax against this and other available
products.
Other competitive factors include the capabilities of the Company's
collaborative partners, product efficacy and safety, timing and scope of
regulatory approval, product availability, marketing and sales capabilities,
reimbursement coverage, the amount of clinical benefit of the Company's
products relative to their cost, method of administration, price and patent
protection. There can be no assurance that the Company's competitors will
not develop more efficacious or more affordable products, or achieve earlier
product development completion, patent protection, regulatory approval or
product commercialization than the Company. The occurrence of any of these
events by the Company's competitors could have a material adverse effect on
the business and financial condition of the Company.
Dependence on Key Personnel. The Company's success is dependent to a
significant degree on its key management personnel. To be successful, the
Company will have to retain its qualified clinical, manufacturing,
scientific and management personnel. The Company faces competition for
personnel from other companies, academic institutions, government entities
and other organizations. There can be no assurance that the Company will be
successful in hiring or retaining qualified personnel, and its failure to do
so could have a material adverse effect on the business and financial
condition of the Company.
Potential Volatility Of Stock Price. The market for the Company's
securities is volatile and investment in these securities involves
substantial risk. The market prices for securities of biotechnology
companies (including the Company) have been highly volatile, and the stock
market from time to time has experienced significant price and volume
fluctuations that may be unrelated to the operating performance of
particular companies. Factors such as disappointing sales of approved
products, approval or introduction of competing products and technologies,
results of clinical trials, delays in manufacturing or clinical trial plans,
fluctuations in the Company's operating results, disputes or disagreements
with collaborative partners, unfavorable news or information resulting in
the reduction in value of significant intellectual property assets, market
reaction to announcements by other biotechnology or pharmaceutical
companies, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, initiation,
termination or modification of agreements with collaborative partners,
failures or unexpected delays in manufacturing or in obtaining regulatory
approvals or FDA advisory panel recommendations, developments or disputes as
to patent or other proprietary rights, loss of key personnel, litigation,
public concern as to the safety of drugs developed by the Company,
regulatory developments in either the U.S. or foreign countries (such as
opinions, recommendations or statements by the FDA or FDA advisory panels,
health care reform measures or proposals), market acceptance of products
developed and marketed by the Company's collaborators, sales of the
Company's common stock held by collaborative partners or insiders and
general market conditions could result in the Company's failure to meet the
expectations of securities analysts or investors. In such event, or in the
event that adverse conditions prevail or are perceived to prevail with
respect to the Company's business, the price of the Company's common stock
would likely drop significantly. With respect to the possible sale of the
Company's common stock held by collaborative partners, Roche acquired
1,682,877 shares of the Company's common stock held by Corange Limited which
are no longer subject to the contractual limitations on disposition other
than certain restrictions on transfers of significant blocks of stock. 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
Exhibit 10.46 Agreement of Purchase and Sale between Fremont Holding
L.L.C., a Delaware limited liability company, as assignee
effective September 13, 1999, and Ardenstone LLC, a Delaware
limited liability company, effective June 21, 1999.
Exhibit 10.47 Promissory Note between Fremont Holding L.L.C., a Delaware
limited liability company and Wells Fargo Bank, National
Association, dated September 9, 1999.
Exhibit 10.48 Deed of Trust and Absolute Assignment of Rents and
Security Agreement (Fixture Filings) between Fremont Holding
L.L.C., a Delaware limited liability company and Wells Fargo
Bank, National Association, dated September 9, 1999.
Exhibit 10.49 Patent Rights Agreement between the Company and Smithkline
Beecham Corporation, effective as of September 28, 1999 (with
certain confidential portions deleted and marked by notation
indicating such deletion).
Exhibit 10.50 IL-5 Patent License Agreement between the Company and
Smithkline Beecham Corporation, effective as of September 28,
1999 (with certain confidential portions deleted and marked by
notation indicating such deletion).
Exhibit 10.51 Development and License Agreement between the Company and
Smithkline Beecham Corporation, effective as of September 28,
1999 (with certain confidential portions deleted and marked by
notation indicating such deletion).
Exhibit 10.52 Amended and Restated Agreement between the Company and
Hoffmann-La Roche Inc. and F. Hoffmann-La Roche Ltd, dated as of
October 20, 1999 (with certain confidential portions deleted and
marked by notation indicating such deletion).
Exhibit 10.53 Amended and Restated Agreement between the Company and F.
Hoffmann-La Roche Ltd, dated as of October 20, 1999 (with
certain confidential portions deleted and marked by notation
indicating such deletion).
Exhibit 21.1 Fremont Holding L.L.C., a Delaware limited liability
company. Fremont Management, Inc., a Delaware corporation, doing business
in California as Delaware Fremont Management.
(b) No Reports on Form 8-K were filed during the quarter ended June 30,
1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its be half by
the undersigned thereunto duly authorized.
Dated: November 15, 1999
PROTEIN DESIGN LABS, INC.
(Registrant)
/s/Laurence Jay Korn
Chief Executive Officer,
Chairperson of the
Board of Directors
(Principal Executive Officer)
/s/Robert Kirkman
Vice President Corporate
Communications and Business
Development
(Principal Accounting Officer)