1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-19756
PROTEIN DESIGN LABS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3023969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2375 Garcia Avenue
Mountain View, CA 94043
(Address of principal executive offices)
Telephone Number (415) 903-3700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and, (2) has been
subject to such filing requirements for the past 90 days:
Yes [X] No [ ]
As of March 31, 1997, there were 18,120,251 shares of the Registrant's
Common Stock outstanding.
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PROTEIN DESIGN LABS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
ITEM 1. FINANCIAL STATEMENTS
Statements of Operations
Three months ended March 31, 1997 and 1996 3
Balance Sheets
March 31, 1997 and December 31, 1996 4
Statements of Cash Flows
Three months ended March 31, 1997 and 1996 5
Notes to Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - RISK FACTORS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signatures 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three months Ended March 31,
1997 1996
------------ ------------
Revenues:
Research and development revenue under
agreements with third parties $ 2,291,074 $ 4,000,000
($0 and $4,000,000 from related parties in 1997
and 1996, respectively)
Interest and other income 1,593,864 1,548,421
------------ ------------
Total revenues 3,884,938 5,548,421
Costs and expenses:
Research and development 6,503,614 6,471,347
General and administrative 1,470,786 1,276,603
------------ ------------
Total costs and expenses 7,974,400 7,747,950
------------ ------------
Net loss $ (4,089,462) $ (2,199,529)
============ ============
Net loss per share $ (0.26) $ (0.14)
============ ============
Shares used in computation of net loss
per share 16,000,000 15,506,000
See accompanying notes
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PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
March 31, December 31,
1997 1996
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 69,836,079 $ 14,141,184
Short-term investments 59,841,987 64,050,165
Other current assets 2,196,571 1,249,772
------------- -------------
Total current assets 131,874,637 79,441,121
Property and equipment, net 8,680,702 8,589,555
Long-term investments 34,216,558 21,475,483
Other assets 865,374 825,246
------------- -------------
$ 175,637,271 $ 110,331,405
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,063,308 $ 1,029,157
Accrued compensation 617,907 635,729
Accrued clinical trials 1,855,522 1,843,206
Other accrued liabilities 1,885,567 1,711,663
------------- -------------
Total current liabilities 5,422,304 5,219,754
Stockholders' equity:
Preferred stock, par value $0.01 per share,
10,000,000 shares authorized; no
shares issued and outstanding -- --
Common stock, par value $0.01 per share,
40,000,000 shares authorized;
18,120,251 and 15,759,089 issued
and outstanding at March 31, 1997 and
December 31, 1996, respectively 181,203 157,591
Additional paid-in capital 209,789,391 140,328,297
Accumulated deficit (39,596,616) (35,507,154)
Unrealized (loss) gain on investments (159,011) 132,916
------------- -------------
Total stockholders' equity 170,214,967 105,111,650
------------- -------------
$ 175,637,271 $ 110,331,404
============= =============
See accompanying notes
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PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(unaudited)
Three months ended March 31,
1997 1996
------------- -------------
Cash flows from operating activities:
Net loss $ (4,089,462) $ (2,199,529)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 789,072 767,677
Changes in assets and liabilities:
Other current assets (946,798) (439,787)
Accounts payable 34,151 (128,404)
Accrued liabilities 168,399 (10,811)
Interest receivables (91,261) (214,680)
------------- -------------
Total adjustments (46,437) (26,005)
------------- -------------
Net cash used in operating activities (4,135,899) (2,225,534)
Cash flows from investing activities:
Purchases of short- and long-term investments (22,821,656) (9,971,522)
Maturities of short- and long-term investments 14,050,000 10,000,000
Capital expenditures (842,127) (748,042)
Increase in other assets (40,128) (80,000)
------------- -------------
Net cash used in investing activities (9,653,911) (799,564)
Cash flows from financing activities:
Net proceeds from issuance of common stock 69,484,705 2,013,887
------------- -------------
Net cash provided by financing activities 69,484,705 2,013,887
Net increase/decrease in cash and cash equivalents 55,694,895 (1,011,211)
Cash and cash equivalents at beginning of period 14,141,184 4,686,259
------------- -------------
Cash and cash equivalents at end of period $ 69,836,079 $ 3,675,048
============= =============
See accompanying notes
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PROTEIN DESIGN LABS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
1. Summary of Significant Accounting Policies
Organization and Business
Since the Company's founding in 1986, a primary focus of its operations has been
research and development. Achievement of successful research and development and
commercialization of products derived from such efforts is subject to high
levels of risk and significant resource commitments. The Company has a history
of operating losses and expects to incur substantial additional expenses over at
least the next few years, as it continues to develop its proprietary products
and devote significant resources to preclinical studies, clinical trials, and
manufacturing. The Company's revenues to date have consisted, and for the near
future are expected to consist, principally of research and development funding,
signing and licensing fees and milestone payments from pharmaceutical companies
under collaborative research and development agreements and patent licensing
agreements. These revenues may vary considerably from quarter to quarter and
from year to year. Revenues in any period may not be predictive of revenues
in any subsequent period, and variations may be significant depending on the
terms of the particular agreements. For example, revenues for the first quarter
of 1997, which included several non-recurring payments in connection with new
humanization and patent licensing agreements, may not be indicative of revenues
in future quarters.
While the Company historically has received significant revenue pursuant to
certain of its research and development agreements, the Company has recognized
substantially all of the research and development and milestone revenue due
under these agreements. Although the Company anticipates entering into new
relationships from time to time, the Company presently does not anticipate
realizing non-royalty revenue from its new and proposed collaborations at levels
commensurate with the non-royalty revenue historically
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recognized under its older collaborations. Moreover, the Company anticipates
that its operating expenses will continue to increase significantly as the
Company increases its research and development, manufacturing, preclinical and
clinical activities, and administrative and patent activities. Accordingly, in
the absence of substantial revenues from new corporate collaborations or
licensing arrangements, royalties on Zenapax sales, if any, or other sources,
the Company expects to incur substantial and increased operating losses in the
foreseeable future as certain of its earlier stage potential products move into
later stage clinical development, as additional potential products are selected
as clinical candidates for further development, as the Company invests in
additional laboratory and manufacturing facilities or 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 Interim Financial Statements
The balance sheet as of March 31, 1997 and the statements of operations and cash
flows for the three month periods ended March 31, 1997 and 1996 are unaudited
but include all adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such dates and the operating results and cash flows for those
periods. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote information normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the Company's Annual Report on Form 10-K, filed with
the Securities and Exchange Commission for the year ended December 31, 1996.
Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.
Cash Equivalents, Investments and Concentration of Credit Risk
The Company considers all highly liquid investments purchased with a maturity of
three months or less at the date of acquisition to be cash equivalents. The
Company places its cash and short-term and long-term investments with
high-credit-quality financial institutions and in securities of the U.S.
government and U.S. government agencies, and by policy, limits the amount of
credit exposure in any one financial instrument. To date, the Company has not
experienced credit losses on investments in these instruments.
Revenue Recognition Under Development Contracts
Nonrefundable signing or licensing fee payments that are not dependent on future
performance under agreements with third parties are recognized as revenue when
received. Payments for research and
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development performed by the Company under contractual arrangements are
recognized as revenue ratably over the quarter in which the related work is
performed. Revenue from achievement of milestone events is recognized when the
funding party agrees that the scientific or clinical results stipulated in the
agreement have been met.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from options are included in
the computation (using the treasury stock method) when their effect is dilutive.
New Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the old
and new requirements, there would be no change with respect to primary earnings
per share and fully diluted earnings per share for the quarters ended March 31,
1996 and March 31, 1997 since the Company had losses in those periods and the
dilutive effects of stock options under these methods do not apply.
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.
Pursuant to its agreement with Boehringer Mannheim, the Company may be
required to reimburse Boehringer Mannheim up to $2.0 million for certain Phase
II studies of OST 577 in the event that certain conditions are met. The
Company has estimated and recorded a liability related to this agreement.
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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 for the year ended December 31, 1996.
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 and devote significant resources to preclinical studies,
clinical trials, and manufacturing. The Company's revenues to date have
consisted, and for the near future are expected to consist, principally of
research and development funding, licensing and signing fees and milestone
payments from pharmaceutical companies under collaborative research and
development and licensing agreements. These revenues may vary considerably from
quarter to quarter and from year to year. Revenues in any period may not be
predictive of revenues in any subsequent period, and variations may be
significant depending on the terms of the particular agreements. For example,
revenues for the first quarter of 1997, which included several non-recurring
payments in connection with new licensing agreements, may not be indicative of
revenues in future quarters.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The Company's total revenues for the three months ended March 31, 1997 were
$3.9 million, as compared to $5.5 million in 1996. Research and development
revenues from signing and patent licensing fees were $2.3 million in the first
quarter in 1997. In the comparable period of 1996, the Company received research
and development reimbursement funding and milestone payments of $4.0 million.
Interest and other income of $1.6 million in the first quarter of 1997
approximately equaled the year-earlier period.
The Company's research and development revenues under agreements with third
parties primarily consisted of signing and licensing fees, research and
development reimbursement funding and milestone payments. Research and
development revenues for the three months ended March 31, 1997 consisted of
signing and patent licensing fees from three unrelated parties compared to none
in the same period in 1996. In the 1996 first quarter, all $4.0 million of such
revenues were from a related party, Boehringer Mannheim
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GmbH ("Boehringer Mannheim"), including $3.0 million under a research and
development funding commitment that expired as scheduled in October 1996.
Total costs and expenses for the three months ended March 31, 1997
increased to $8.0 million from $7.7 million in the comparable period in 1996.
The increase in costs and expenses was primarily due to increases in staffing
and related expenses.
Research and development expenses for the three months ended March 31, 1997
of $6.5 million approximately equaled the amount in the comparable period in
1996. Although research and development expenses did not increase significantly
from the prior period, the 1997 expenses included fewer clinical trial expenses
as the Company terminated its CMV retinitis clinical trials and completed
enrollment in its CMV bone marrow transplantation clinical trial in 1996. These
expenses also included the addition of staff, the continuation of other clinical
trials, costs of conducting preclinical tests, expansion of pharmaceutical
development capabilities, including support for both clinical development and
manufacturing process development, and higher costs in the expanded operation of
the manufacturing facility.
General and administrative expenses for the three months ended March 31,
1997 increased to $1.5 million from $1.3 million in the comparable period in
1996. These increases were primarily the result of increased staffing and
associated expenses necessary to manage and support the Company's expanding
operations.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has financed its operations primarily through public
and private placements of equity, research and development revenue and interest
income on invested capital. At March 31, 1997, the Company had cash, cash
equivalents and investments in the aggregate of $163.9 million, compared to
$99.7 million at December 31, 1996. This increase is primarily attributable to
the completion of a follow-on public offering of 2.275 million shares of the
Company's common stock in the first quarter of 1997. The net proceeds of this
offering to the Company were $68.2 million.
Pursuant to its agreement with Boehringer Mannheim, the Company may be
required to reimburse Boehringer Mannheim up to $2.0 million for Phase II
studies and up to $8.8 million for Phase III studies of OST 577 in the event
certain conditions are met.
Net cash used in operating activities was approximately $4.1 million for
the three months ended March 31, 1997 compared to $2.2 million for the
comparable period in 1996. The Company's future capital requirements will depend
on numerous factors, including, among others, the progress of the Company's
product candidates in clinical trials; the ability of the Company's
collaborative partners to obtain regulatory approval and successfully
manufacture and market the Company's products; the continued or additional
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support by collaborative partners or other third parties of research and
clinical trials; enhancement of research and development programs; the time
required to gain regulatory approvals; the resources the Company devotes to
self-funded products, manufacturing methods and advanced technologies; third
party manufacturing commitments; the ability of the Company to obtain and retain
funding from third parties under collaborative agreements; the development of
internal marketing and sales capabilities; the demand for the Company's
potential products, if and when approved; potential acquisitions of technology,
product candidates or businesses by the Company; and the costs of defending or
prosecuting any patent opposition or litigation necessary to protect the
Company's proprietary technology. In order to develop and commercialize its
potential products the Company may need to raise substantial additional funds
through equity or debt financings, collaborative arrangements, the use of
sponsored research efforts or other means. No assurance can be given that such
additional financing will be available on acceptable terms, if at all, and such
financing may only be available on terms dilutive to existing stockholders. The
Company believes that existing capital resources will be adequate to satisfy its
capital needs through at least 2000.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION - RISK FACTORS
This Quarterly Report contains, in addition to historical information,
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in
forward-looking statements. Factors that may cause such a difference include
those discussed in the material set forth under "Risk Factors" and elsewhere in
this document and the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
HISTORY OF LOSSES; FUTURE PROFITABILITY UNCERTAIN. The Company has a
history of operating losses and expects to incur substantial additional expenses
with resulting quarterly losses over at least the next several years as it
continues to develop its potential products and to devote significant resources
to preclinical studies, clinical trials, and manufacturing. As of March 31,
1997, the Company had accumulated net losses of approximately $39.6 million. To
date, the Company has not received regulatory approval to distribute any
products. The time and resource commitment required to achieve market success
for any individual product is extensive and uncertain and in some cases
controlled by the Company's collaborators. No assurance can be given that the
Company's, or any of its collaborative partners', product development efforts
will be successful, that required regulatory approvals can be obtained, that
potential products can be manufactured at an acceptable cost and with
appropriate quality, or that any approved products can be successfully marketed.
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The Company has not generated any material revenues from product sales or
royalties from licenses to the Company's technology, and potential products that
may be marketed by the Company, if any, are not expected to be approved for
marketing for at least the next several years. The Company's revenues to date
have consisted, and for the near future are expected to consist, principally of
research and development funding, licensing and signing fees and milestone
payments from pharmaceutical companies under collaborative research and
development 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 humanization agreements. For example,
revenues for the first quarter of 1997, which included several non-recurring
payments in connection with new humanization licensing agreements, may not be
indicative of revenues in future quarters. While the Company historically has
received significant revenue pursuant to certain of its research and development
agreements, the Company has recognized substantially all of the research and
development and milestone revenue due under these collaborations. Although the
Company anticipates entering into new collaborations from time to time, the
Company presently does not anticipate realizing 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 its operating expenses will continue to increase significantly as the
Company increases its research and development, manufacturing, preclinical,
clinical and administrative and patent activities. Accordingly, in the absence
of substantial revenues from new corporate collaborations or licensing
arrangements, royalties on Zenapax sales, if any, or other sources, the Company
expects to incur substantial and increased operating losses in the foreseeable
future as certain of its earlier stage potential products move into later stage
clinical development, as additional potential products are selected as clinical
candidates for further development, as the Company invests in additional
laboratory and manufacturing facilities or 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.
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 its 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.
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 clinical trials may not
be predictive of results that will be obtained in later-stage clinical trials.
Thus there can be no assurance that the Company's present or
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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, later-stage trials from those obtained in
earlier stage trials. For example, early stage trials usually involve a small
number of patients 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 later-stage trial. Also, differences in the clinical trial design
between an early-stage and late-stage trial 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 later stage trials
are generally required to be blinded in order to provide more objective data for
assessing the safety and efficacy of the product. The Company may at times elect
to aggressively enter potential products into Phase I/II trials to determine
preliminary efficacy in specific indications. In addition, in certain cases the
Company has commenced clinical trials without conducting preclinical animal
testing where an appropriate animal model does not exist. Similarly, the Company
or its partners at times will conduct potentially pivotal Phase II/III or Phase
III trials based on limited Phase I or Phase I/II data. As a result of these and
other factors, the Company anticipates that only some of its potential products
will show efficacy in clinical trials and that the number of products that fail
to show efficacy may be significant.
The Company is conducting a Phase II trial evaluating PROTOVIR(TM) for the
prevention of CMV infections in bone marrow transplant recipients based on very
limited and inconclusive data from Phase I trials primarily designed to obtain
safety data. Thus, there can be no assurance that the results of this trial will
be favorable.
The Company and a number of other companies in the biotechnology industry
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier-stage trials. For example, in June 1995, Roche
Holding Ltd and its subsidiary Hoffmann-La Roche Inc. ("Roche") and the Company
announced the results of a Phase II/III clinical trial using the Company's SMART
Anti-Tac Antibody, Zenapax, for the prevention of graft-versus-host disease
("GvHD"). The analysis of this data led Roche to conclude that Zenapax was not
effective in reducing the incidence of GvHD in the patient population studied.
In addition, in August 1996, the Company announced the halt of a Phase II/III
clinical trial using PROTOVIR for treatment of CMV retinitis in AIDS patients
conducted by the National Eye Institute ("NEI SOCA") due to lack of evidence of
efficacy. Based on the findings and actions in the above study, enrollment in a
Phase II clinical trial for treatment of CMV retinitis in AIDS patients
conducted by the National Institute of Allergy and Infectious Disease was
suspended, and the trial was subsequently terminated.
DEPENDENCE ON COLLABORATIVE PARTNERS. The Company has collaborative
agreements with several pharmaceutical companies to develop, manufacture and
market certain potential products, which include the most advanced products
under development by the Company. The Company granted to its
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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, including Zenapax
and the Company's Human Anti-Hepatitis B Virus Antibody (OST 577). As a result,
the Company often has little or no control over the development 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 not only on the timely achievement of
research and development objectives by the Company and the successful
achievement of clinical trial goals, neither of which can be assured, but also
on each collaborative partner's own financial, competitive, marketing and
strategic considerations. Such considerations include, among other things, the
commitment of management of the collaborative partners to the continued
development of the licensed products, the relationships among the individuals
responsible for the implementation and maintenance of the collaborative efforts,
the relative advantages of alternative products being marketed or developed by
the collaborators or by others, including their relative patent and proprietary
technology positions, and their ability to manufacture potential products
successfully. In this regard, the Company has, at times, experienced difficulty
in its continuing relationship with Boehringer Mannheim GmbH ("Boehringer
Mannheim") due to a number of factors, including disagreements regarding
reimbursement for certain costs related to and the timing of the initiation and
design of certain proposed clinical trials involving the development of certain
products licensed to Boehringer Mannheim, particularly OST 577.
In addition, certain collaborative partners have developed and may be
developing competitive products that may result in delay or a relatively smaller
resource commitment to product launch and support efforts than might otherwise
be obtained if the potentially competitive product were not under development or
being marketed. For example, Roche controls the development of Zenapax, the most
advanced of the Company's products in development, and the Company is dependent
upon the resources and activities of Roche to pursue commercialization of
Zenapax in order for the Company to achieve milestones or royalties from the
development of this product. There can be no assurance that Roche will proceed
to bring this product to market in a rapid and timely manner, if at all, or if
marketed, that other independently developed products of Roche (including
CellCept(R)) or others will not compete with or prevent Zenapax from achieving
meaningful sales. Also, Roche has stated that it plans to conduct or support
other clinical trials of Zenapax in autoimmune indications. There can be no
assurance that Roche will continue or pursue additional clinical trials in these
indications or that, even if the additional clinical trials are completed,
Zenapax will be shown to be safe and efficacious, or that the trials will result
in approval to market Zenapax
15
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.
Further, because the Company expects, in some cases, to rely on its
contractual rights to access data collected by its collaborative partners in
various phases of its clinical development efforts, the Company is dependent on
the continued satisfaction by such parties of their contractual obligations to
provide such access and cooperate with the Company in the preparation and
submission of appropriate filings with the FDA and equivalent foreign government
regulatory agencies. The Company currently relies on Boehringer Mannheim for the
manufacturing and clinical development of OST 577. Boehringer Mannheim has
marketing rights to this antibody in countries outside of North America. There
can be no assurance that Boehringer Mannheim will provide timely access to the
manufacturing and clinical data, that the U.S. Food and Drug Administration
("FDA") will permit the Company to rely on that data or that the trials
conducted by Boehringer Mannheim will produce data appropriate for approval by
the FDA. If the Company were unable to rely on the clinical data collected by
Boehringer Mannheim or its other collaborative partners, the Company may be
required to repeat clinical trials or perform supplemental clinical trials in
order to achieve regulatory approval in North America. Compliance with these
requirements could significantly delay commercialization efforts and require
substantially greater investment by the Company, either of which would have a
material adverse effect on the business and financial condition of the Company.
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 is dependent upon, among other things, the Company's patent
position with respect to such products. In this regard, the Company recently was
issued patents by the U.S. Patent and Trademark Office ("PTO") and European
Patent Office ("EPO") with claims that the Company believes, based on its survey
of the scientific literature, cover most humanized antibodies. Eighteen notices
of opposition to the European patent have been filed with the EPO, and either or
both patents may be further challenged through administrative or judicial
proceedings. The Company has applied for similar patents in Japan and other
countries. The Company recently entered into several new collaborations related
to the humanization of certain antibodies whereby it granted nonexclusive
licenses to its patent rights relating to such antibodies, and the Company
anticipates entering into additional collaborations partially as a result of the
Company's patent and patent applications with respect to humanized antibodies.
As a result, the inability of the Company to successfully defend the opposition
proceeding before the EPO or, if necessary, to defend patents granted by the PTO
or EPO or to successfully prosecute the corresponding patent applications in
Japan or other countries could adversely affect the ability of the Company to
enter into additional collaborations and could therefore have a material adverse
effect on the Company's business or financial condition.
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
16
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. For example, patient accrual in the Company's ongoing
Phase II/III trial of the SMART M195 Antibody in myeloid leukemia has been
negatively affected by changes in referral patterns, with such patients now more
commonly being treated in local hospitals rather than being referred to tertiary
care hospitals where the Company's trial is being conducted. There can be no
assurance that any actions by the Company to accelerate accrual in this trial
will be successful or, to the extent that they involve modifications in the
design of the trial, will not cause that trial to be considered a Phase II
clinical trial and thereby require one or more additional potentially pivotal
trials to be conducted.
UNCERTAINTY OF PATENTS AND PROPRIETARY TECHNOLOGY; OPPOSITION PROCEEDINGS.
The Company's success is significantly dependent on its ability to obtain patent
protection for its products and technologies and to preserve its trade secrets
and operate without infringing on the proprietary rights of third parties. PDL
files and prosecutes patent applications to protect its inventions. No assurance
can be given that the Company's pending patent applications will result in the
issuance of patents or that any patents will provide competitive advantages or
will not be invalidated or circumvented by its competitors. Moreover, no
assurance can be given that patents are not issued to, or patent applications
have not been filed by, other companies which would have an adverse effect on
the Company's ability to use, manufacture or market its products or maintain its
competitive position with respect to its products. Other companies obtaining
patents claiming products or processes useful to the Company may bring
infringement actions against the Company. As a result, the Company may be
required to obtain licenses from others or not be able to use, manufacture or
market its products. Such licenses may not be available on commercially
reasonable terms, if at all.
Patents in the U.S. are issued to the party that is first to invent the
claimed invention. Since patent applications in the U.S. are maintained in
secrecy until patents issue, PDL cannot be certain that it was the
17
first inventor of the inventions covered by its pending patent applications or
that it was the first to file patent applications for such inventions. The
patent positions of biotechnology firms generally are highly uncertain and
involve complex legal and factual questions. No consistent policy has emerged
regarding the breadth of claims in biotechnology patents, and patents of
biotechnology products are uncertain so that even issued patents may later be
modified or revoked by the PTO or the courts in proceedings instituted by third
parties. Moreover, the issuance of a patent in one country does not assure the
issuance of a patent with similar claims in another country and claim
interpretation and infringement laws vary among countries, so the extent of any
patent protection may vary in different territories.
PDL has several patents and has exclusively licensed certain patents from
Novartis Pharmaceuticals Corporation ("Novartis") (formerly known as Sandoz
Pharmaceuticals Corporation). In particular with respect to humanization
technology, in June 1996, PDL was issued a U.S. patent covering Zenapax and
certain related antibodies against the IL-2 receptor. In addition, PDL 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 PDL'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 PDL's compounds. However, PDL 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 PDL's patents will prevent others from developing competitive
products using related technology.
In January and December 1996, PDL was issued patents by the EPO and PTO,
respectively. PDL believes the patent claims cover Zenapax and, based on its
review of the scientific literature, most humanized antibodies. The EPO (but not
PTO) procedures provide for a nine-month opposition period in which other
parties may submit arguments as to why the patent was incorrectly granted and
should be withdrawn or limited. The entire opposition process, including
appeals, may take several years to complete, and during this lengthy process,
the validity of the EPO patent will be at issue, which may limit the Company's
ability to negotiate or collect royalties or to negotiate future collaborative
research and development agreements based on this patent. Eighteen notices of
opposition to PDL's European patent were filed during the opposition period,
including oppositions by major pharmaceutical and biotechnology companies, which
cited references and made arguments not considered by the EPO and PTO before
grant of the respective patents. PDL intends to vigorously defend the European
and, if necessary, the U.S. patent; however, there can be no assurance that the
Company will prevail in the opposition proceedings or any litigation contesting
the validity or scope of these patents. In addition, such proceedings or
litigation, or any other proceedings or litigation to protect the Company's
intellectual property rights or defend against infringement claims by others,
could result in substantial costs and a diversion of management's time and
attention, which could have a material adverse effect on the business and
financial condition of the Company.
18
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 PDL's programs. Some of these applications or patents may be
competitive with PDL's applications or contain claims that conflict with those
made under PDL's patent applications or patents. Such conflict could prevent
issuance of patents to PDL, provoke an interference with PDL's patents or result
in a significant reduction in the scope or invalidation of PDL's patents, if
issued. An interference is an administrative proceeding conducted by the PTO to
determine the priority of invention and other matters relating to the decision
to grant patents. Moreover, if patents are held by or issued to other parties
that contain claims relating to PDL's products or processes, and such claims are
ultimately determined to be valid, no assurance can be given that PDL would be
able to obtain licenses to these patents at a reasonable cost, if at all, or to
develop or obtain alternative technology.
The Company is aware that Celltech Limited ("Celltech") has been granted a
patent by the EPO covering certain humanized antibodies, which PDL has opposed,
and Celltech announced in September 1996 that it had received a notice of
allowance of a corresponding U.S. patent (the "U.S. Adair Patent"). There can be
no assurance that the claims in the European patent or, if issued, the U.S.
patent would not be interpreted to cover any or all of PDL's SMART antibodies or
be competitive with or conflict with claims in PDL's patents or patent
applications. If the U.S. Adair Patent issues and if it or any corresponding
international patent is determined to be valid and to cover any of PDL's SMART
antibodies, there can be no assurance that PDL would be able to obtain a license
on commercially reasonable terms, if at all. If the claims of the U.S. Adair
Patent conflict with claims in PDL'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 patents to PDL relating
to humanization of antibodies or result in a significant reduction in the scope
or invalidation of PDL's patents, if issued. Moreover, uncertainty as to the
validity or scope of patents issued to PDL 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.
PDL has obtained a nonexclusive license under a patent held by Celltech (the
"Boss Patent") relating to PDL's current process for producing SMART and human
antibodies. An interference proceeding was declared in early 1991 by the PTO
between the Boss Patent and a patent application filed by Genentech, Inc.
("Genentech") to which PDL does not have a license. PDL is not a party to this
proceeding, and the timing and outcome of the proceeding or the scope of any
patent that may be subsequently issued cannot be predicted. If the Genentech
patent application were held to have priority over the Boss Patent, and if it
were determined that PDL's processes and products were covered by a patent
issuing from such patent application, PDL may be required to obtain a license
under such patent or to significantly alter its processes or products. There can
be no assurance that PDL 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 PDL.
19
The Company is aware that Lonza Biologics, Inc. has a patent issued in
Europe to which PDL does not have a license (although Roche has advised the
Company that it has a license covering Zenapax), which may cover the process the
Company uses to produce its potential products. If it were determined that PDL's
processes were covered by such patent, PDL may 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 PDL would be able to successfully alter its processes or products
to avoid infringing such patent or to obtain such a license on commercially
reasonable terms, if at all, and the failure to do so could have a material
adverse effect on the business and financial condition of the Company.
Also, Genentech has patents in the U.S. and Europe that relate to chimeric
antibodies. Such European patent was revoked in May 1997 in connection with
European opposition proceedings. Genentech may choose to appeal that ruling and,
if so, revocation of the European patent would be stayed pending resolution of
the appeal. If Genentech were to assert that the Company's SMART antibodies
infringe these patents, PDL may have to choose whether to seek a license or to
challenge in court the validity of such patents or Genentech's claim of
infringement. There can be no assurance that PDL would be successful in either
obtaining such a license on commercially reasonable terms, if at all, or that it
would be successful in such a challenge of the Genentech patents, and the
failure to do so would have a material adverse effect on the business and
financial condition of the Company.
In addition to seeking the protection of patents and licenses, PDL 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 PDL would have adequate remedies for
any breach or that PDL's trade secrets will not otherwise become known or
independently developed by competitors.
ABSENCE OF MANUFACTURING EXPERIENCE; DEPENDENCE ON MANUFACTURING BY
BOEHRINGER MANNHEIM. Of the products developed by the Company which are
currently in clinical development, Roche is responsible for manufacturing
Zenapax and Boehringer Mannheim is responsible for manufacturing OST 577. The
Company intends to manufacture the SMART M195 Antibody, PROTOVIR and some of its
other products in preclinical development. PDL currently leases approximately
45,000 square feet housing its manufacturing facility in Plymouth, Minnesota.
PDL 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, PDL 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
20
impair their competitive position, which would have a material adverse effect on
the business and financial condition of the Company.
PDL has no experience in manufacturing commercial quantities of its
potential products and currently does not have sufficient capacity to
manufacture its potential products on a commercial scale. In order to obtain
regulatory approvals and to expand its capacity to produce its products for
commercial sale at an acceptable cost, PDL will need to improve and expand its
existing manufacturing capabilities, including demonstration to the FDA of its
ability to manufacture its products using controlled, reproducible processes.
Accordingly, the Company is evaluating plans to improve and expand the capacity
of its current manufacturing facility. Such plans, if instituted, would result
in substantial costs to the Company and may require a suspension of
manufacturing operations during construction. There can be no assurance that
construction delays would not occur, and any such delays could impair the
Company's ability to produce adequate supplies of its potential products for
clinical use or commercial sale on a timely basis. There can be no assurance
that PDL 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.
In addition, PDL and Boehringer Mannheim have agreed to negotiate
additional agreements under which each company could manufacture and supply the
other with certain of the antibodies covered by the agreement. There can be no
assurance that the parties will enter into an agreement that will provide for
the Company's potential product requirements to be met in a consistent, timely
and cost effective manner. Specifically, with respect to OST 577, the Company
currently does not manufacture this product and has no alternative manufacturing
sources for this product. In the event that Boehringer Mannheim and the Company
are unable to reach an acceptable agreement, or if material is not supplied in
accordance with such an agreement, there can be no assurance that the Company
could make alternative manufacturing arrangements on a timely basis, if at all,
and the inability to do so could have a material adverse effect on the business
and financial condition of the Company.
UNCERTAINTIES RESULTING FROM MANUFACTURING CHANGES. Manufacturing of
antibodies for use as therapeutics in compliance with regulatory requirements is
complex, time-consuming and expensive. When certain changes are made in the
manufacturing process, it is necessary to demonstrate to the FDA that the
changes have not caused the resulting drug material to differ significantly from
the drug material previously produced, if results of prior preclinical studies
and clinical trials performed using the previously produced drug material are to
be relied upon in regulatory filings. Such changes could include, for example,
changing the cell line used to produce the antibody, changing the fermentation
or purification process or moving the production process to a new manufacturing
plant. Depending upon the type and degree of differences between the newer and
older drug material, various studies could be required to demonstrate
21
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 PDL's products currently in clinical development. 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. Such delays 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.
Roche has equipped a manufacturing facility that is expected to be used to
produce Zenapax. Phase III trials of Zenapax in kidney transplantation were
conducted using material produced for Roche by a third party contract
manufacturer at a different facility using a different cell line and a different
manufacturing process. Roche has produced Zenapax at its facility using the new
cell line and process and has produced data indicating that the newly produced
material is substantially similar to the material used in the Phase III clinical
trials. However, there can be no assurance that changes in the manufacturing
site or any other manufacturing changes by Roche will not cause delays in the
development or commercialization of Zenapax. Such delays could have an adverse
effect on the competitive position of Zenapax and could have a material adverse
effect on the business and financial condition of the Company.
In addition, with respect to two of the antibodies in clinical development
licensed from Novartis, PROTOVIR and OST 577, the cell lines developed by PDL
for both antibodies and the production processes developed by PDL for PROTOVIR
and Boehringer Mannheim for OST 577 are different from those utilized by
Novartis for the manufacture of the antibody supplies used in earlier clinical
trials. There can be no assurance that this new material, when used in humans,
will have the same characteristics or produce results similar to the antibody
material originally developed and used by Novartis in earlier clinical trials.
Accordingly, Boehringer Mannheim or the Company may be required to conduct
additional laboratory or clinical testing, which could result in significant
delays and/or additional expenses and could have a material adverse effect on
the competitive position of these potential products and 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 its operations and have a material adverse effect on the
business and financial condition of the Company. A
22
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.
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 results of
clinical trials, delays in manufacturing or clinical trial plans, fluctuations
in the Company's operating results, disputes or disagreements with collaborative
partners, market reaction to announcements by other biotechnology or
pharmaceutical companies, announcements of technological innovations or new
commercial therapeutic products by the Company or its competitors, initiation,
termination or modification of agreements with collaborative partners, failures
or unexpected delays in manufacturing or in obtaining regulatory approvals or
FDA advisory panel recommendations, developments or disputes as to patent or
other proprietary rights, loss of key personnel, litigation, public concern as
to the safety of drugs developed by the Company, regulatory developments in
either the U.S. or foreign countries (such as opinions, recommendations or
statements by the FDA or FDA advisory panels, health care reform measures or
proposals), 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 PDL's common stock would likely
drop significantly. In the past, following significant drops in the price of a
company's common stock, securities class action litigation has often been
instituted against such a company. Such litigation against the Company could
result in substantial costs and a diversion of management's attention and
resources, which would have a material adverse effect on the Company's business
and financial condition.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Number Page
- ------ ----
10.1 Amendment No. 2 to Amended and Restated Agreement 23
between the Company and Sloan-Kettering Institute for
Cancer Research dated January 2, 1997
10.2* Outside Directors Stock Option Plan together with form
of nonqualified stock option agreement, as amended
effective February 6, 1997
10.3 Lease agreement between the Company and John Arrillaga,
Trustee or his Successor Trustee, et. al. dated February 20,
1997.
11.1 Statement of Computation of Earnings Per Share
(b) No Reports on From 8-K were filed during the quarter ended March 31,
1997.
*Management contract or compensation plan or arrangement
24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its be half by the
undersigned thereunto duly authorized.
Dated: May 13, 1997
PROTEIN DESIGN LABS, INC.
(Registrant)
/S/ Laurence Jay Korn
-------------------------------------------
Laurence Jay Korn
Chief Executive Officer, Chairperson
of the Board of Directors
(Principal Executive Officer)
/S/ Fred Kurland
-------------------------------------------
Fred Kurland
Chief Financial Officer
(Chief Accounting Officer)
25
EXHIBIT INDEX
Exhibit
No. Description
- -------- -----------
10.1 Amendment No. 2 to Amended & Restated Agreement between the Company
& Sloan-Kettering
10.2 Outside Directors Stock Option Plan
10.3 Lease Agreement between the Company and John Arrillaga, Trustee, or
his successor as trustee, et. al., dated February 20, 1997
11.1 Statement of Computation of Earnings per Share
27 Financial Data Schedule