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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 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 No.)
2375 Garcia Avenue
Mountain View, CA 94043
(Address of principal executive offices)
Telephone Number (650) 903-3700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on December
31, 1997, as reported on the NASDAQ National Market System, was approximately
$733,919,080.
As of December 31, 1997, registrant had outstanding 18,347,977 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's 1998
Annual Meeting of Stockholders, to be filed with the Commission on or
prior to April 30, 1998, are incorporated by reference into Part III of
this report.
PART I
This Annual Report for Protein Design Labs, Inc. ("PDL" or the
"Company"), in addition to historical information, contains forward-
looking statements which involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a
difference include, but are not limited to those discussed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" as well as those discussed
elsewhere in this document. Actual events or results may differ
materially from those discussed in this Annual Report.
ITEM 1. BUSINESS
OVERVIEW
PDL is a leader in the development of humanized and human
monoclonal antibodies for the prevention and treatment of a variety of
disease conditions, including autoimmune diseases, inflammatory
conditions, cancers and viral infections. The Company uses proprietary
computer software and other technologies to develop its SMART[TM]
humanized antibodies for potential use as effective pharmaceuticals
without the limitations of traditional mouse-derived (murine)
antibodies. PDL believes that its technologies are broadly applicable to
a variety of diseases, as demonstrated by the Company's diverse product
development pipeline and its collaborative arrangements with numerous
pharmaceutical companies. The Company and its collaborative partners
currently have multiple product candidates in clinical development and
numerous additional product candidates in preclinical studies. The
Company's most advanced product, Zenapax[R], has been approved for
marketing in the United States ("U.S.") and Switzerland for the
prophylaxis of acute organ rejection in patients receiving renal
transplantations. This product is exclusively licensed to Hoffmann-La
Roche Inc. and its affiliates ("Roche"). PDL has received U.S. and
European patents that the Company believes cover most humanized
antibodies and that may lead to additional corporate partnering, patent
licensing and other revenue opportunities.
Antibodies have long had promise as therapeutic compounds to treat
a variety of disease conditions. Traditional murine antibodies, however,
have significant drawbacks which in most cases prevent them from
becoming effective therapeutics. The most important of these is the
human anti-mouse antibody ("HAMA") response, in which the murine
antibody is recognized by the body's immune system as foreign and is
rapidly neutralized and rendered ineffective. PDL's antibodies are
designed to avoid these drawbacks, including the HAMA response. PDL's
SMART antibodies are predominantly human antibodies that incorporate the
structural information from the binding region of promising murine
antibodies. By applying its proprietary SMART antibody technology,
the Company is able to create recombinant antibodies with molecular
structures that are approximately 90% human and 10% murine. The Company
also has technologies to produce fully human antibodies to treat
additional diseases using antibody therapy.
PDL's business strategy is to leverage its technologies, research
expertise and intellectual property in the field of antibodies to become
a profitable, research-based biotechnology company that manufactures
and, in North America, markets its own products. Key aspects of PDL's
strategy are to: (i) expand the Company's product portfolio to provide
multiple product candidates to treat a variety of diseases and
conditions; (ii) establish collaborative relationships with
pharmaceutical companies to reduce development costs and risks and to
enhance commercial opportunities; (iii) leverage its patent position by
providing humanization services for promising murine antibodies of other
parties and/or licensing certain rights in exchange for near-term
revenues and future royalty opportunities; and (iv) retain North American
marketing rights to certain products to provide for greater revenue
opportunities.
The Company actively seeks partnerships with pharmaceutical, chemical and
biotechnology companies. The breadth of the Company's antibody
technology and its patent position are key assets in attracting such
companies to enter into various types of collaborative relationships. In
one type of collaborative arrangement, the Company licenses certain
marketing rights to one or more potential products developed by PDL in
return for a licensing and signing fee, research funding and
milestone payments, and royalties on potential product sales. In another
type of arrangement, PDL uses its proprietary technology to develop a
SMART antibody based on a promising murine antibody developed by a
corporate partner. In such cases, PDL typically receives a licensing and
signing fee and other payments, royalties on potential sales and, in
some cases, an option to co-promote in North America.
PRODUCTS AND PRODUCT CANDIDATES
The Company believes it is a leader in the development of
antibody-based therapeutics and has one of the broadest product
pipelines in this area. One antibody product created by the Company has
been approved for marketing by the U.S. Food and Drug Administration
("FDA") and the Swiss regulatory authorities, and the Company has
several other product candidates in clinical development and a number
of product candidates in preclinical development for the treatment of a
variety of disease conditions, including autoimmune diseases,
inflammatory conditions, cancers and viral infections.
Clinical Product Candidates
Table One summarizes the potential therapeutic indications, development status
and commercial rights for PDL product candidates that have entered clinical
trials. The development and commercialization of the Company's clinical
product candidates are subject to numerous risks and uncertainties. See
"Risk Factors."
Table One
POTENTIAL
THERAPEUTIC DEVELOPMENT COMMERCIAL
PRODUCT INDICATIONS STATUS (1) RIGHTS(2)
- --------------------- ---------------------- -------------------- ----------------
Zenapax (daclizumab) Organ transplant Approved for Roche
rejection marketing (kidney)
Tropical spastic
paraparesis Phase I/II
Uveitis Phase I/II
Psoriasis Phase I/II
Certain blood cancers Phase II
SMART M195 Acute myelogenous Phase II/III PDL and Kanebo
Antibody leukemia
Acute promyelocytic Phase II
leukemia
OST 577 (Human Treatment of chronic Phase II PDL and Novartis
Anti-Hepatitis B hepatitis B
Antibody, Ostavir
(TM))
PROTOVIR[TM](Human Cytomegalovirus Phase II PDL and Novartis
Anti-Cytomegalovirus infections in bone
Antibody) marrow transplantation
SMART Anti-CD3 Organ transplantation Phase I PDL
Antibody rejection and certain
autoimmune diseases
(1) The development status identifies the most advanced development
status achieved for at least one of the listed potential therapeutic
indications but not all potential therapeutic indications have achieved the
development status specified. Unless otherwise noted, development
status refers to the stage of U.S. development.
(2) Marketing rights for each of these products differ. See "--
Collaborative and Licensing Arrangements."
ZENAPAX (daclizumab). Zenapax is a humanized antibody, created by
PDL and licensed exclusively to Roche, which binds to the IL-2 receptor
on T cells. IL-2 is a lymphokine which stimulates T cells to divide and
participate in an immune response. By blocking the binding of IL-2 to
its receptor, Zenapax inhibits the proliferation of activated T cells
and can suppress the immune response. As described below, in December
1997, the FDA approved the marketing of Zenapax for the prophylaxis of
acute organ rejection in patients receiving renal (kidney)
transplantations. Zenapax may also be useful for the treatment of
certain autoimmune diseases, and is currently being tested clinically
for several such indications. Zenapax is more specific and less toxic
than other immunosuppressive drugs such as cyclosporine or Orthoclone
OKT[R]3 ("OKT3"), because Zenapax suppresses only activated T cells
involved in an immune response rather than all T cells and possibly
other unrelated cells. See "Risk Factors -- Dependence on Roche with
Respect to Zenapax."
Organ Transplantation. In September 1996, the Company's corporate
partner, Roche, announced results from two multinational Phase III
studies of Zenapax for the prevention of acute rejection episodes in a
total of 535 cadaveric kidney transplantation recipients. As set forth
in the following table, analysis of the data by Roche indicated that,
when administered with a standard immunosuppressive regimen, Zenapax is
effective in reducing the incidence of acute rejection episodes that
occur within six months of transplantation, the primary endpoint of
these two trials. In the double therapy trial, in which all patients
received an immunosuppressive regimen of cyclosporine and prednisone,
acute rejection episodes were reduced by 40% in patients treated with
Zenapax. In the triple therapy trial, in which all patients received
cyclosporine, prednisone and azathioprine, the incidence of acute
rejection episodes was reduced by 37% in patients treated with Zenapax.
The results are presented in Table Two.
Table Two
Incidence of Kidney Rejection Episodes
Without With Reduction with
Trial Zenapax Zenapax Zenapax p Value
Double Therapy .... 47% 28% 40% 0.001
Triple Therapy ... 35% 22% 37% 0.03
Roche also noted that secondary endpoints of reduction in the total
number of rejection episodes per patient and increase in the time
to first rejection episode were achieved with Zenapax in both clinical
trials. In addition, in pooled data from the studies, there were a total
of 31 kidneys lost and 10 deaths in the groups not treated with Zenapax,
but only 16 kidneys lost and 1 death in the Zenapax-treated groups. The
addition of Zenapax to the standard immunosuppressive regimen did not
result in an increase in drug-related serious adverse events.
Based on these trials, Roche filed a Biologics License Application
("BLA") for Zenapax with the FDA in June 1997, and has also filed for
regulatory approval to market Zenapax in Canada, Europe and other
countries. In October 1997, the Biological Response Modifiers Advisory
Committee unanimously recommended to the FDA that marketing clearance
for Zenapax be granted, and the FDA granted such approval in December
1997. Zenapax is the first humanized antibody to be approved for
marketing by the FDA. In March 1998, Zenapax was also approved for
marketing in Switzerland. Roche's regulatory submissions are currently
under review in Canada and other countries.
In addition to the studies described above, a randomized, double-
blind study has been conducted with 75 evaluable patients to assess
Zenapax in combination with CellCept[R], plus cyclosporine and steroids,
in kidney transplantation patients. CellCept, marketed by Roche, is also
used to prevent kidney transplantation rejection. In this study, 12% of
Zenapax-treated patients had an acute rejection episode, compared to 20%
of patients not receiving Zenapax, and the combination of CellCept and
Zenapax was well-tolerated. Preliminary results of a single-arm Phase
II study of Zenapax in liver transplantation have been published. In
this study, only one in 28 patients (3.6% of the patients studied)
treated with Zenapax together with cyclosporine and corticosteroids had
a rejection episode within three months of the liver transplantation.
A preliminary study is also being conducted to determine whether
the combination of Zenapax and CellCept is sufficient to allow the
elimination of cyclosporine, a widely used but more toxic drug, from the
standard immunosuppressive regimen for kidney transplantation patients.
Preliminary results in this single-arm, multi-center study of 99 patients
from 23 patients in a single center participating in this study
were presented in February 1998. These preliminary results showed 6
rejection episodes among the 23 reported patients, for a 26% incidence
rate. Patients have been followed for two to eight months after kidney
transplantation, and patient followup is continuing. The study is
continuing and final results from all patients may differ significantly
from these preliminary results from a single center. A study of Zenapax
in pediatric kidney transplantation is also being conducted.
According to industry sources, approximately 20,000 solid organs
are transplanted into patients in the U.S. each year, with kidney
transplantations accounting for about 12,000 of the total. A comparable
number of kidney transplantations are performed in Europe. The majority
of kidney transplantation patients receive cadaveric kidneys.
Autoimmune Diseases. Because of the ability of Zenapax to inhibit
the proliferation of T cells, the Company believes that Zenapax may have
potential for the treatment of certain autoimmune diseases.
Investigators at the National Institutes of Health ("NIH") are
evaluating Zenapax in a preliminary clinical trial for uveitis, an
autoimmune disease of the eye and in patients with tropical spastic
paraparesis, a rare autoimmune disease of the nerves considered by these
investigators to be a model for multiple sclerosis. In addition, a
proof-of-concept clinical trial of Zenapax is in progress for psoriasis.
Cancer. The Company believes that Zenapax may also have potential
for the treatment of certain blood cancers, because the IL-2 receptor is
present on these types of cancer cells. The murine antibody from which
Zenapax was originally created has been tested at NIH in patients with
adult T-cell leukemia, and several of the patients experienced
remissions, especially when the antibody was linked to a radioisotope. A
pilot Phase I clinical trial of Zenapax for the treatment of certain
cancers was completed in 1993 at the National Cancer Institute ("NCI")
of NIH, and a Phase II trial of a radiolabeled form of Zenapax for
certain blood cancers is in progress at NCI.
There can be no assurance that Roche will successfully market
Zenapax for use in preventing kidney transplantation rejections in a
timely manner, or that Roche will pursue or continue clinical trials in
autoimmune diseases or other indications. See "Risk Factors--
Dependence on Roche with Respect to Zenapax."
SMART M195 ANTIBODY. The SMART M195 Antibody is a humanized
antibody that binds to the cancer cells of most patients with myeloid
leukemia. Myeloid leukemia, the major form of leukemia in adults, is
classified into two types -- acute myelogenous leukemia ("AML") and
chronic myelogenous leukemia ("CML"). There are at least 11,000 new
cases of myeloid leukemia in the U.S. each year, of which more than half
are AML. Currently, the survival rate of myeloid leukemia patients is
very low, despite aggressive chemotherapy and multiple, expensive
hospitalizations.
PDL has adopted strategies designed to achieve improved efficacy
of antibodies in certain cancers. First, PDL's anti-cancer antibodies
are humanized, which allows for longer term treatment by minimizing the
HAMA response and potentially makes the antibodies more effective in
killing cancer cells. Second, the Company is initially focusing on
treatment of blood cancers, such as myeloid leukemia, which may be more
susceptible to antibody therapy than solid tumors because the cancer
cells are more readily accessible. Third, PDL generally plans to conduct
trials of its antibodies in combination with, or following, other
chemotherapeutic agents. Thus, by applying its antibodies in a "minimal
residual disease" setting, the Company hopes SMART antibodies will
eliminate or suppress the cancer cells remaining after chemotherapy,
leading to longer disease-free survival.
PDL is conducting a randomized Phase II/III trial of the SMART
M195 Antibody for AML, which was initiated in June 1994. Patients in the
trial first receive a specific regimen of chemotherapy. Those patients
entering clinical remission are randomized either to observation or to
receive 20 doses of the SMART M195 Antibody given over an eight month
period. The primary clinical endpoint is the median duration of disease-
free survival, which in the absence of SMART M195 Antibody therapy has
historically been about eight months. The study is planned to evaluate
144 patients in remission, but a substantially larger number will need
to receive chemotherapy in order to reach that number of patients in
remission. The study is currently expected to require several additional
years to complete. The Company has added other U.S. medical centers and
taken other actions to accelerate patient accrual in the study. However,
patient accrual has not increased to the level desired by the Company.
The Company intends to review the status of the clinical trial in the
second half of 1998 and there can be no assurance that the trial will be
continued or, if continued, that patient accrual can be completed in a
timely fashion, if at all. See "Risk Factors -- Limited Experience with
Clinical Trials; Risk of Delay."
In 1997, the Company initiated a Phase II trial of the SMART M195
Antibody in patients with relapsed AML. The Company plans to enroll 40
patients in this trial. The goal of the study is to determine whether
high doses of the SMART M195 Antibody, administered as a single agent,
can induce any complete remissions in this patient population.
The SMART M195 Antibody is also being studied in a Phase II trial
under a physician-sponsored Investigational New Drug Application ("IND")
at the Memorial Sloan-Kettering Cancer Center ("Sloan-Kettering"), in
patients with acute promyelocytic leukemia ("APL"), one of several types
of AML. This trial is designed to examine whether the SMART M195
Antibody can improve elimination of minimal residual leukemia that
remains after treatment with retinoic acid, a drug approved to treat
APL. The effectiveness is measured by elimination of cells having the
characteristic genetic mutation found in APL to below detectable levels
("molecular remission"). Normally, up to three rounds of expensive and
toxic chemotherapy are required to bring newly diagnosed APL patients
into molecular remission after therapy with retinioc acid. Of the patients
in the APL study, thirteen were evaluable for molecular remission and fifteen
were evaluable for clinical remission. All thirteen of the evaluable patients
entered complete molecular remission. All fifteen of the evaluable patients
entered complete clinical remission after treatment with retinoic acid,
the SMART M195 Antibody and one round of chemotherapy. All evaluable
patients entering complete clinical and/or complete molecular remission
remain in complete remission with a median duration of more than 20 months.
More patients and longer-term follow up are necessary to evaluate the
significance of the observed remissions. While these results suggest that the
SMART M195 Antibody may be biologically active in APL, the Company currently
has no plans to conduct pivotal clinical trials in this subpopulation of AML
patients.
A Phase I clinical trial of the SMART M195 Antibody linked to 213-
Bismuth, an alpha particle-emitting isotope, was initiated in 1996 and
completed in 1998 under a physician-sponsored IND at Sloan-Kettering in
advanced myeloid leukemia patients. The Company supported this trial to
obtain preliminary evidence of the safety and potential efficacy of the
SMART M195 Antibody-213-Bismuth used as a single agent to induce
remissions of advanced myeloid leukemia. Generators to produce the 213-
Bismuth isotope were supplied by the European Commission Directorate-
General JRC Institute for Transuranium Elements in conjunction with
PharmActinium, Inc. and associated companies. The Company believes that
this study was the first clinical trial of an antibody combined with an
alpha-emitting isotope. In previous clinical trials of radiolabeled
antibodies, the antibodies have been linked to radioisotopes that emit
beta or gamma particles. Alpha particles release more energy over
a shorter path than beta or gamma particles and, therefore, may be more
effective in destroying the targeted cancer cells without damaging
nearby normal cells.
Exclusive development and marketing rights to the SMART M195
Antibody in Asia have been licensed to PDL's collaborative partner,
Kanebo.
OST 577 (HUMAN ANTI-HEPATITIS B ANTIBODY, OSTAVIR). OST 577 is
a human antibody, developed using the trioma technology and licensed by
PDL from Novartis Pharmaceuticals Corporation ("Novartis") (formerly
known as Sandoz Pharmaceuticals Corporation). OST 577 binds to the major
protein present on hepatitis B virus ("HBV"), the hepatitis B surface
antigen. Infection with HBV is a common cause of liver disease. In
most cases of infection, the patient's immune response is sufficient to
ultimately eliminate the virus. However, an estimated 2% to 10% of HBV-
infected patients become chronic carriers of the virus, and about one-
fourth of these patients develop chronic hepatitis B ("CHB"), which is
characterized by progressive liver damage and often cirrhosis and liver
cancer. In the U.S. there are an estimated one million chronic carriers
of HBV, with 300,000 new HBV infections and more than 10,000 patients
hospitalized due to HBV infections each year. While interferon-alpha is
approved in the U.S. for treatment of CHB, only 30-40% of treated
patients respond to this treatment, which must be given over four months
and has significant side effects.
In patients receiving liver transplantations due to end-stage CHB,
the virus remaining after the transplantation usually will rapidly
infect and in many cases destroy the new liver. An initial Phase I/II
clinical trial of OST 577 enrolled five patients receiving liver
transplantations due to end-stage CHB. In the clinical trial, each
patient received doses of OST 577 for up to 18 months
after transplantation. Three of the five treated patients showed no
evidence of viral recurrence more than one year after transplantation.
The other two patients developed recurrence but remained asymptomatic
for four years, after which one of them developed symptoms.
A Phase I/II clinical trial of OST 577 has also been completed in
12 patients with CHB. OST 577 was well tolerated by patients treated at
the two lower dose levels, but some reversible side effects were seen at
the highest level. Key markers for HBV infection decreased at least
temporarily by 50% or more in many of the patients during treatment.
Specifically, such reductions were seen in 5 of 10 patients for liver
enzyme levels; in 10 of 12 for hepatitis B surface antigen; and in 5 of
9 for viral DNA levels. Results obtained in early clinical trials may
not be predictive of results in larger, later-stage trials. See "Risk
Factors -- Uncertainty of Clinical Trial Results."
In 1996, PDL's former development partner for this antibody,
Boehringer Mannheim, initiated a multinational, controlled Phase II
trial of OST 577 to evaluate the antibody for use both as a single agent
and in combination with interferon-alpha. In December 1997, after 16 of
a planned 200 patients had been enrolled in this study, Boehringer
Mannheim concluded, based on its analysis of the data, that when used as
defined in the study, treatment with OST 577 gave rise, in certain
patients, to self-resolving side effects induced by immune complex
formation such as proteinuria and fever. Based on its analysis,
Boehringer Mannheim terminated the study and returned all rights to this
product to PDL. PDL is currently planning to conduct clinical trials of
OST 577 in combination with a nucleoside analog, which may reduce
circulating levels of HBV and therefore reduce or eliminate the
formation of immune complexes and associated side effects. However,
there can be no assurance that supplies of a nucleoside analog will be
available for such studies, that the studies will be initiated or
completed in a timely manner, if at all, that side effects will be
reduced to an acceptable level in this setting, or that OST 577 will be
found safe and effective in such trials. See "Risk Factors --
Uncertainty of Clinical Trial Results." Novartis has certain rights to
co-promote or co-market this antibody in North America or to receive
royalties on product sales, if any. See "-- Collaborative and Licensing
Arrangements -- Novartis."
PROTOVIR (HUMAN ANTI-CMV ANTIBODY). PROTOVIR is a human antibody
derived using the trioma technology and licensed by PDL from Novartis.
PROTOVIR binds to all tested strains of human cytomegalovirus ("CMV").
CMV is an important cause of morbidity and death in patients with
suppressed immune systems, such as AIDS patients and recipients of solid
organ and bone marrow transplantations ("BMT").
Bone Marrow Transplantation. The Company has completed a
randomized, placebo-controlled, double-blinded Phase II trial to assess
the potential safety and efficacy of PROTOVIR for the prevention of CMV
infections in allogeneic bone marrow transplantation patients, which
compared two dose levels of PROTOVIR against placebo in 179 evaluable
patients. Preliminary analysis of the data showed that patients in the
PROTOVIR treatment group who did not have a CMV infection prior to
transplantation and received grafts from CMV positive donors (a
prospectively defined subgroup) demonstrated a statistically significant
lower incidence of the primary endpoint (CMV infection, death or disease
relapse) relative to the control group at 98 days post-transplantation.
However, there was no significant difference in this endpoint for all
patients in the study. The Company is currently considering whether the
market size for the CMV negative recipient/CMV positive donor subgroup
is sufficient to justify further clinical trials of PROTOVIR.
CMV Retinitis. The potential safety and efficacy of PROTOVIR was
evaluated in a Phase II/III clinical trial conducted by the National Eye
Institute Studies of Ocular Complications of AIDS ("NEI SOCA") for the
treatment of CMV retinitis, a common ophthalmic condition in AIDS
patients that often leads to blindness. In August 1996, NEI SOCA, acting
on the recommendation of an independent data and safety monitoring
board, halted the study based on lack of evidence of efficacy.
Concurrently with the NEI SOCA trial, PROTOVIR also was being evaluated
in a Phase II clinical trial being conducted by the National Institute
of Allergy and Infectious Diseases AIDS Clinical Trial Group ("NIAID
ACTG") for treatment of CMV retinitis. Based on the NEI SOCA findings
and actions, the NIAID ACTG Phase II trial was also terminated.
There can be no assurance that the Company will continue further
development of PROTOVIR, whether by seeking to out-license or
terminating further clinical trials of this antibody. Exclusive rights
for the therapeutic application of PROTOVIR outside of North America and
Asia had been licensed to Boehringer Mannheim, which returned all rights
to PDL in December 1997. Novartis, from whom PDL licensed the antibody,
has certain rights to co-promote or co-market this antibody in North
America and Asia or to receive royalties on product sales. See "--
Collaborative and Licensing Arrangements."
SMART Anti-CD3 Antibody. This antibody binds to the CD3 antigen, a
key receptor for stimulation of T cells. A competitive murine antibody,
the OKT3 antibody, binds to the same target antigen. OKT3 is being
marketed for the treatment of acute organ transplantation rejection.
While highly effective, OKT3 is hampered by the often serious toxicity
associated with its use, as well as by the HAMA response. In addition to
being humanized, PDL's SMART Anti-CD3 Antibody has been engineered to
reduce interactions with the immune system that may contribute to the
toxicity of OKT3. The Company has retained worldwide rights to the SMART
Anti-CD3 antibody and believes that potential indications for
this antibody may include treatment of organ transplantation rejection
and certain severe autoimmune diseases.
The Company is currently conducting a Phase I, open-label dose
escalation trial of the SMART Anti-CD3 Antibody. The purpose of the
study is to determine preliminary tolerability, pharmacokinetics and
bioactivity of the drug candidate. To date, enrollment and treatment
have been completed at the first three dose levels, and are in progress
at the fourth dose level. At the highest dose levels tested thus
far, there was a profound, temporary depletion of the patients' T cells
(an indication of bioactivity) with only mild to moderate side effects.
The most frequent side effect observed was transient headache, which was
readily treated with acetaminophen or codeine. A multiple-dose study of
the antibody is currently being planned. While the results obtained in
the ongoing Phase I trial have been encouraging thus far, there can be
no assurance that the antibody will be found to be safe and effective in
the current study at higher dose levels or in future studies. See "Risk
Factors -- Uncertainty of Clinical Trial Results."
Yamanouchi Humanized Antibody. Yamanouchi Pharmaceutical Co.,
Ltd. ("Yamanouchi") has in progress a Phase I clinical trial in Europe
of an antibody humanized by the Company, a SMART anti-gpIIb/IIIa
monoclonal antibody fragment, for the potential treatment of certain
cardiovascular disorders.
PRECLINICAL PRODUCT CANDIDATES
Table Three summarizes the potential therapeutic indications and
commercial rights for certain of PDL's preclinical product candidates.
"Preclinical" development includes in vitro testing, efficacy and
toxicology testing in animals, process development and manufacturing
scale-up prior to initiation of clinical trials. The Company has other
compounds in development in addition to those listed below and is
conducting research in other areas. The development and
commercialization of the Company's preclinical product candidates are
subject to numerous risks and uncertainties. See "Risk Factors."
Table Three
POTENTIAL
THERAPEUTIC COMMERCIAL
PRODUCT INDICATIONS RIGHTS(1)
- --------------------- ---------------------- --------------------
Autoimmune and
Inflammatory conditions
SMART Anti-L-Selectin Trauma PDL and Roche
Antibody (Boehringer Mannheim)
SMART Anti-E/P- Stroke, certain PDL
Selectin Antibody autoimmune diseases
(e.g. psoriasis), asthma
SMART Anti-Gamma Certain autoimmune PDL
Interferon Antibody diseases (e.g. Crohn's
disease)
Cancer
SMARTABL 364 Certain epithelial cell PDL and Novartis
cancers
Viral Infections
Human Anti-Varicella Shingles (herpes zoster) PDL and Novartis
Zoster Antibody
Human Anti-Herpes Neonatal and genital PDL and Novartis
Antibody herpes
(1) The development and marketing rights for each of these products
differ. See "-- Collaborative and Licensing Arrangements."
AUTOIMMUNE DISEASE AND INFLAMMATION. Discoveries in immunology
have made possible a new therapeutic approach to inflammation resulting
from causes such as injury or autoimmune disease. Certain proteins
called adhesion molecules, located on the surface of various types of
cells, play a key role in inflammation by directing the movement of
white blood cells from the bloodstream into the sites of tissue
inflammation. In laboratory experiments conducted by PDL and others,
antibodies have been shown to block the function of these adhesion
molecules. PDL has developed several SMART antibodies against adhesion
molecules.
PDL's SMART Anti-L-Selectin Antibody binds to L-selectin, an adhesion
molecule on the surface of white blood cells. The Company believes
that potential indications for this antibody may include trauma,
ARDS, reperfusion injury (e.g., due to myocardial infarction) and possibly
certain autoimmune diseases. In studies conducted by independent
investigators, treatment with the SMART Anti-L-Selectin Antibody
resulted in a statistically significant improvement in survival
in a primate model that simulates severe trauma. Boehringer Mannheim has
licensed rights to this antibody from PDL outside of North America and
Asia.
PDL's SMART Anti-E/P-Selectin Antibody binds to two different
adhesion molecules, E- and P-selectin, that occur on the surface of the
cells on the inner lining of blood vessels. The Company believes that
potential indications for such an antibody may include stroke and
certain autoimmune diseases including psoriasis and asthma.
PDL's SMART Anti-Gamma-Interferon Antibody binds to and
neutralizes gamma interferon, a lymphokine that stimulates several types
of white blood cells. The Company believes that potential indications
for this antibody may include inflammatory bowel disease, type I
diabetes mellitus, multiple sclerosis, and other autoimmune diseases.
CANCERS. PDL's SMART ABL 364 Antibody has potential for the
treatment of many solid tumors, including colon, lung and breast cancer.
Initial laboratory tests have shown that the SMART ABL 364 Antibody, in
conjunction with other components of the immune system, can kill cancer
cells.
VIRAL INFECTIONS. Varicella zoster virus ("VZV") is the virus
responsible for causing chickenpox and shingles (herpes zoster).
Shingles, a painful blistering condition of the skin, results from
reactivation of the latent VZV that initially infected the patient years
earlier. In the U.S., 10-20% of the population will develop shingles,
with the incidence and severity of the condition increasing with age. A
significant percentage of patients with shingles experience post-
herpetic neuralgia, a very painful nerve condition which may last
from weeks to years in some patients. Current anti-viral therapies are
moderately effective in treating shingles, but have little or no effect
on post-herpetic neuralgia. PDL's Human Anti-Varicella Zoster Antibody
effectively neutralizes all tested strains of VZV in in vitro studies.
Herpes simplex virus ("HSV") causes a painful recurring genital
infection. The virus also causes neonatal herpes, an uncommon but very
serious disease of newborn infants. PDL's Human Anti-Herpes Antibody
binds to and effectively neutralizes all strains of HSV tested, and is
well-tolerated and non-immunogenic in primates. In animal studies
sponsored by the National Institute of Allergy and Infectious Disease
Collaborative Antiviral Studies Group ("NIAID-CASG"), the antibody
effectively protected mice from a lethal herpes infection
when administered up to 72 hours after exposure to the virus. The
Company believes that competition from antiviral drugs and the present
reimbursement environment may limit the market opportunities for the
Human Anti-Herpes Antibody in treating genital herpes. The Company has
signed a Collaborative Research and Development Agreement with NIAID-
CASG to provide the antibody primarily for clinical studies in neonatal
herpes, but there can be no assurance NIAID-CASG will initiate or
complete such studies in a timely manner, if at all.
PDL TECHNOLOGIES
BACKGROUND ON ANTIBODIES. Antibodies are protective proteins
released by the immune system's B cells, a type of white blood cell, in
response to the presence of a foreign substance in the body, such as a
virus. B cells produce millions of different kinds of antibodies, which
have slightly different shapes that enable them to bind to and thereby
inactivate different targets. Antibodies of identical molecular
structure that bind to a specific target are called monoclonal
antibodies. Typically, mice have been used to produce
monoclonal antibodies to a wide variety of molecular targets, including
targets to which the human body does not normally produce antibodies. In
particular, many murine antibodies have been developed as potential
therapeutics to neutralize viruses, destroy cancer cells or inhibit
immune function.
Although murine monoclonal antibodies are relatively easy to
generate, they have significant drawbacks as therapeutics. Murine
antibodies have a relatively short half-life in human patients,
requiring them to be administered frequently. Moreover, murine
antibodies are not adapted to work effectively with the human immune
system and therefore often have limited ability to destroy the
target, such as cancer cells. Most importantly, when injected into
humans, a murine antibody is usually recognized by the body's immune
system as foreign. The immune system therefore responds with a HAMA
response, which rapidly neutralizes the murine antibody and renders it
ineffective for further therapy. These problems have largely prevented
murine antibodies from fulfilling their promise as therapeutics.
More recently, improved forms of antibodies, such as humanized and
chimeric antibodies, have been developed using recombinant DNA
technology. These new antibodies can minimize or avoid many of the
problems associated with murine antibodies and have led to a resurgence
of interest in antibody therapeutics by the pharmaceutical and
biotechnology industries. As a result of these advances, many monoclonal
antibodies are now progressing into clinical trials. In a list of
biotechnology medicines under clinical development in the U.S. published
in 1996 by the Pharmaceutical Research and Manufacturers of America,
antibodies comprised the single largest category, representing 78 of 284
products listed. In particular, PDL is aware of more than twenty
humanized antibodies in clinical trials, including several antibodies
addressing large markets that are being developed by major
pharmaceutical companies. Three humanized or chimeric antibodies have
already been approved for marketing by the FDA.
PDL'S SMART ANTIBODY TECHNOLOGY. PDL believes that its patented
SMART antibody technology has positioned the Company as a leader in the
development of therapeutic antibodies that overcome the problems
associated with murine antibodies. PDL's SMART antibodies are human-like
antibodies designed using structural information from promising murine
antibodies to capture the benefits of such antibodies while overcoming
many of their limitations in treating humans. Clinical trials and
preclinical studies have shown that PDL's SMART antibodies generally
avoid a HAMA response and have a longer half-life than murine
antibodies.
Every antibody contains two regions, a variable domain that binds
to the target antigen and a constant domain that interacts with other
portions of the immune system. The variable domain is composed of the
complementarity determining regions ("CDRs") that directly bind to the
target antigen and the framework region that holds the CDRs in position
and helps maintain their required shape. Researchers have used genetic
engineering to construct "humanized" antibodies that consist of the CDRs
from a murine antibody with the framework region and constant domain
from a human antibody. However, when the CDRs from the murine antibody
are combined with the framework of the human antibody, the human
framework often distorts the shape of the CDRs so they no longer bind
well to the target. Therefore, it is usually necessary to substitute one
or more amino acids from the murine antibody into the framework of the
humanized antibody for it to maintain the binding ability of the murine
antibody.
A SMART antibody is a humanized antibody designed by using
PDL's proprietary computer technology to guide the choice of
substitutions of amino acids from the murine antibody into the human
antibody framework, based on structural information derived from the
murine antibody. The construction of a SMART antibody starts with the
identification of a murine antibody that has demonstrated favorable
results in laboratory, animal or human studies. A model of the murine
antibody is generated using proprietary computer modeling software that
predicts the shapes of antibodies and eliminates the need for more time-
consuming laboratory techniques. The resulting model is carefully
analyzed to identify the few key amino acids in the framework most
responsible for maintaining the shape of the CDRs. Software developed at
PDL as well as the experience of the Company's computational chemists is
important in this analysis. These few key murine amino acids are
substituted into the human framework of the SMART antibody along with
the murine CDRs in order to maintain their ability to bind well to the
target. The resulting SMART antibody retains most or all of the binding
ability of the murine antibody, but is about 90% human.
In 1996, the Company was issued U.S. and European patents which
cover, in most circumstances, humanized antibodies that contain amino
acid substitutions from the murine antibody in their framework. The
Company believes that most humanized antibodies require such amino acid
substitutions in order to maintain high binding ability. The patents
also cover pharmaceutical compositions containing such humanized
antibodies and other aspects of PDL's SMART antibody technology. Two
additional U.S. patents that cover other aspects of PDL's humanization
technology were issued in 1997. PDL has filed similar patent
applications in Japan and other countries. See "-- Patents and
Proprietary Technology."
OTHER PDL TECHNOLOGIES. In addition to its SMART antibody
technology, PDL employs additional antibody-based drug development
technologies to overcome shortcomings of murine antibodies. The Company
is also pursuing a rational drug design program that leverages its
computer expertise to potentially develop new drug candidates.
Human Antibodies. The use of fully human monoclonal antibodies is
another approach to avoiding many of the problems associated with murine
antibodies. In April 1993, PDL exclusively licensed from Novartis its
patented "trioma" technology to generate certain human antibodies, along
with four human anti-viral antibodies. The trioma technology is used to
produce fully human antibodies against viruses and potentially other
organisms which infect humans. A key aspect of the technology is the use
of a mouse-human hybrid cell line as the fusion partner to immortalize
human antibody-producing B cells. Trioma cell lines generated in this
manner often stably produce human antibodies. As with SMART antibodies,
clinical trials and preclinical studies have shown that PDL's human
antibodies generally avoid a HAMA response and have a longer half-
life than murine antibodies. See "-- Collaborative and
Licensing Arrangements -- Novartis."
Other New Technologies. The Company is pursuing a rational drug
design program focusing on small molecules by extending the Company's
computer modeling tools originally developed for its SMART antibody
program. Rational drug design utilizes computer models of proteins and
their interactions with smaller molecules to accelerate discovery and
optimization of new drug compounds. Although PDL's technology is at an
early stage, the Company believes that this application of its modeling
algorithms may ultimately be used to develop non-antibody, small-
molecule drug candidates. For that purpose, PDL has initiated a program
in medicinal and combinatorial chemistry.
As one aspect of its small-molecule program, PDL has begun a
research program to discover and develop new antibiotics for the
treatment of certain microbial infections, including infections caused
by microbes that have developed resistance to available antibiotics.
This program, which utilizes technology to identify microbial genes that
are differentially expressed when microbes infect a host, was developed
by Stanley Falkow, Ph.D., Professor of Microbiology, Immunology and
Medicine at Stanford University School of Medicine and a PDL
Distinguished Investigator and Director, who will direct the program. If
discovered, these microbial genes and their products may become
potential targets for novel antibiotics, which may be identified by high
throughput screening and medicinal chemistry. It is anticipated that
much or all of those aspects of the work will be conducted by PDL's
corporate partners. PDL has entered into a collaborative agreement with
Eli Lilly & Company ("Lilly"), under which Lilly will receive rights to
products generated under this research program through research
involving seven specific genera of bacteria. See "-- Collaborative and
Licensing Arrangements."
BUSINESS STRATEGY
PDL's objective is to leverage its research expertise and
intellectual property primarily in the field of antibodies to become a
profitable, research-based biotechnology company that manufactures and,
in North America, markets its own products. PDL's strategy to achieve
this objective involves the following elements:
Expand Product Portfolio. The Company believes that its SMART
antibody technology is capable of converting essentially any promising
murine antibody into a humanized antibody better suited for therapeutic
use. As a result, the Company has been able to rapidly develop a broad
portfolio of product candidates with potential applications to the
prevention and treatment of autoimmune and inflammatory conditions,
cancers, viral infections, and other diseases. This diverse product
pipeline enhances commercial opportunities and reduces the Company's
reliance on individual products.
Establish Collaborative Arrangements. The Company actively seeks
corporate partnerships with pharmaceutical companies, and to date has
entered into partnerships with numerous such companies, including Roche
and Lilly. Typically, the Company receives a licensing and signing fee,
research funding and/or milestone payments, and the rights to royalties
on product sales, if any, in return for certain marketing rights to one
or more potential products developed at PDL. These revenues help to
defray PDL's own product development expenses, while the partner
typically bears significant direct responsibility for certain product
development activities and expenses.
Leverage Patent Position. An important aspect of PDL's business
strategy is to obtain both near-term revenues and potential royalties by
providing humanization services for promising murine antibodies of other
parties and/or licensing limited rights under its issued humanized
antibody patents and corresponding patent applications to other
companies developing humanized antibodies. These arrangements typically
involve a combination of licensing and signing fees, milestone payments,
annual maintenance fees and royalties on product sales, if any. Since
December 1996, PDL has also entered into seven patent licensing
agreements with other companies developing humanized antibodies. The
Company's patents are also helpful in inducing other companies to enter
into collaborative relationships with the Company, in which PDL uses its
proprietary technology to develop SMART antibodies based on promising
murine antibodies developed by the other companies. PDL has entered into
eight such humanization relationships, including six since December
1995. In addition to paying PDL licensing and signing and other fees and
royalties on product sales, if any, in some cases the other companies
have granted PDL options to obtain North American co-promotion rights.
Retain North American Marketing Rights. Where appropriate, PDL
retains North American marketing rights to its potential products. This
strategy provides the Company with future revenue opportunities.
COLLABORATIVE, HUMANIZATION AND PATENT LICENSING ARRANGEMENTS
Roche. In 1989, PDL entered into agreements with Roche to
collaborate on the research and development of SMART antibodies against
the IL-2 receptor, including Zenapax. Under these agreements, Roche has
exclusive, worldwide rights to manufacture, market and sell Zenapax. The
arrangement provides for research and development funding, milestone and
bonus payments and royalties to PDL under the agreements. Most of such
milestone and bonus payments have already been received from Roche, and
Roche has completed its research funding to PDL under these agreements,
although Roche will continue to fund its own clinical development
activities. PDL has begun to receive royalties on sales of Zenapax in
1998. Royalties to PDL are subject to certain offsets for milestones
and third party royalties paid by Roche under the arrangement. See
"Risk Factors -- Dependence on Roche with Respect to Zenapax."
Corange/Boehringer Mannheim. In October 1993, PDL and Corange
entered into a collaborative arrangement providing for the grant of
exclusive marketing rights in certain territories for a number of
products in development. In consideration for these rights, Corange paid
to PDL a $10 million licensing and signing fee and $30 million in
research and development funding over three years and agreed to certain
milestone payments and the payment of royalties on future product sales,
if any. Product rights and duties under this arrangement were
subsequently assigned and delegated to Corange's subsidiary, Boehringer
Mannheim. In conjunction with this collaborative arrangement, PDL and
Corange also entered into a stock purchase agreement, a standstill
agreement and a registration rights agreement pursuant to which Corange
invested an aggregate of $75 million in PDL through the purchase of
approximately 2.433 million newly issued shares of common stock in
December 1993 and 1994. In March 1997, Corange sold 750,000 of those
shares as part of a registered public offering filed by the Company. In
addition, the agreement with Corange providing for restrictions on
disposition of the remaining 1,682,877 shares held by Corange expired in
March 1998.
In 1994 and 1995, the parties amended certain of the agreements in
this collaborative arrangement. As part of these amendments, the parties
agreed to terminate Boehringer Mannheim's rights to certain preclinical
products. In addition, in December 1997, Boehringer Mannheim notified
PDL that it was terminating its rights to OST 577 and PROTOVIR. As a
result, Boehringer Mannheim currently has exclusive marketing rights
outside of North America and Asia for the SMART Anti-L-Selectin Antibody
and North American co-promotion rights and exclusive marketing rights
outside of North America for an additional antibody to an undisclosed
cardiovascular target.
Further, in March 1998, Roche completed the acquisition of Corange.
The Company expects that Roche will review the drug development
programs of the Company and Boehringer Mannheim. The Company cannot
predict the outcome or timing of such review or whether or not it will
occur and in particular, whether Roche will decide to continue, modify
or terminate either or both of the remaining Boehringer Mannheim
development programs under the collaborative agreement with the Company.
In addition, Roche acquired 1,682,877 shares of the Company's common
stock held by Corange. These shares are no longer subject to
contractual limitations on disposition. See "Risk Factors -- Dependence
on Collaborative Partners."
Lilly. In December 1997, PDL entered into a collaborative agreement
with Lilly to discover and develop new antimicrobial agents
for the treatment of certain microbial infections, including those
caused by microbes that have developed resistance to available
antibiotics. The agreement involves a program to identify microbial
genes that are differentially expressed when microbes infect a host. PDL
received an initial payment of $3 million under the agreement. The
agreement further provides for additional research funding of up to $9.6
million in the second through fifth years of the agreement, if the
agreement is not earlier terminated. PDL can also receive milestone
payments for identification of gene targets and for each compound
selected for development by Lilly, Lilly will receive exclusive
worldwide rights to gene targets and human pharmaceutical and related
diagnostic products generated under the research program directed to
seven specific genera of bacteria. PDL is entitled to royalties on Lilly
sales of such products, if any, and the parties have agreed to negotiate
co-promotion rights in the U.S. and Canada. In addition, under certain
conditions, PDL will have an option to develop certain compounds
identified through the collaboration.
Novartis. In April 1993, PDL and Novartis entered into agreements
providing for the grant of exclusive licenses to PDL of four human anti-
viral antibodies and other related technology and antibodies from
Novartis. The four human monoclonal antibodies target cytomegalovirus,
the hepatitis B virus, herpes simplex viruses, and varicella zoster
virus, respectively. In addition, PDL received an exclusive license to
the SMART ABL 364 Antibody, an antibody previously humanized by PDL for
Novartis. This arrangement also included exclusive licenses to the
Novartis trioma human antibody technology and patents as well as the
purchase of certain antibody supplies and related manufacturing
equipment. In consideration for the licenses and assets transferred, PDL
initially paid Novartis $5 million and agreed to provide up to an
additional $5 million in future milestone payments in the event of
certain product approvals under the agreements.
Under the terms of the Novartis agreements, PDL has the right to
manufacture and market the antibodies acquired from Novartis throughout
the world. Novartis retained certain co-promotion and co-marketing
rights, and rights to royalties on sales by PDL of licensed products in
countries where Novartis does not sell these antibodies with PDL under
the co-promotion and co-marketing arrangements. In November 1993, PDL
paid Novartis an additional $2.75 million to amend the April 1993
agreement relating to the human antibodies in order to terminate certain
of Novartis' co-promotion and co-marketing rights in countries outside
of the U.S., Canada and Asia and to reduce royalties Novartis may earn
from the sale of human antibody products in countries outside of the
U.S., Canada and Asia.
Kanebo. In February 1992, PDL and Kanebo, Ltd. ("Kanebo") entered
into a product licensing agreement whereby Kanebo received an exclusive
license to the SMART M195 Antibody for therapeutic uses in certain Asian
countries, including Japan, in exchange for a licensing and signing fee,
research funding, milestone payments and royalties on product sales, if
any. The research funding period under the agreement expired in
September 1993. Also in September 1993 and May 1995, PDL entered into
purchase agreements with Kanebo pursuant to which PDL sold Kanebo
preclinical and clinical quantities of the SMART M195 Antibody. Kanebo
is currently in the clinical stage of development with this antibody.
Yamanouchi. In February 1991, PDL and Yamanouchi entered into a
collaborative agreement providing for the humanization of a murine anti-
platelet (anti-gpIIb/IIIa) antibody developed by Yamanouchi for
potentially treating certain cardiovascular disorders. Yamanouchi is
currently conducting Phase I clinical trials in Europe with this
humanized antibody. Yamanouchi has exclusive, worldwide rights to this
antibody and is responsible for all clinical trials and for obtaining
necessary government regulatory approvals. The agreement provides for
milestone payments, all of which have been received by the Company, and
royalties on product sales, if any.
Mochida. In December 1995, PDL and Mochida Pharmaceutical Co.,
Ltd. ("Mochida") entered into an agreement providing for the
humanization by PDL of a murine antibody that has potential for treating
certain infectious diseases. PDL received a licensing and signing fee
and milestone payments and can earn royalties on product sales, if any.
In addition, PDL has an option to co-promote the antibody in North
America.
Toagosei. In September 1996, PDL and Toagosei Co., Ltd.
("Toagosei") entered into an agreement providing for the humanization by
PDL of a murine antibody that has potential for treating cancer. PDL
received a licensing and signing fee and milestone payments and can earn
royalties on product sales, if any. PDL also has an option to co-promote
the compound in North America. In addition, in the fourth quarter of
1997, Toagosei made a $2.0 million private equity investment in PDL in
return for 44,568 newly issued shares of PDL common stock at a purchase
price of $44.875 per share.
Roche. In October 1996, PDL entered into an agreement with Roche
providing for the humanization by PDL of an additional murine antibody
to a different target than Zenapax. PDL received a licensing and signing
fee and a milestone payment under this agreement. Roche, however,
recently discontinued development of this antibody.
Genetics Institute. In December 1996, PDL and Genetics Institute,
Inc. ("Genetics Institute"), a wholly-owned subsidiary of American Home
Products, entered into an agreement pursuant to which PDL will initially
develop three humanized monoclonal antibodies based on murine antibodies
developed by Genetics Institute that modulate the immune co-stimulatory
pathway. In addition, Genetics Institute received a worldwide,
nonexclusive license for those antibodies under PDL's humanized antibody
patents. To date, PDL has received a $2.5 million licensing and signing
fee and a milestone payment and is entitled to receive additional
milestone payments and royalties on product sales, if any. In addition,
PDL received an option to co-promote the products in North America. The
agreement contemplates that PDL may collaborate with Genetics Institute
to humanize additional antibodies in the field.
Teijin. In March 1997, PDL and Teijin Limited ("Teijin") entered
into an agreement providing for the humanization by PDL of a murine
antibody to a toxin produced by the E. coli O157 bacteria that can cause
serious illness or death from the consumption of contaminated food. To
date, PDL has received a licensing and signing fee and milestone payment
and can earn further milestone payments and royalties on product sales,
if any.
Ajinomoto. In July 1997, PDL and Ajinomoto Co., Inc. ("Ajinomoto")
entered into an agreement providing for the humanization by PDL of a
murine antibody directed at cardiovascular conditions. To date, PDL has
received a licensing and signing fee and can earn milestone payments and
royalties on product sales, if any. In addition, PDL received certain
rights to obtain co-promotion rights to the potential product in North
America.
Patent Licenses. Since December 1996, PDL has entered into seven
patent licensing agreements with five companies relating to antibodies
humanized by those companies. In each agreement, PDL granted a
worldwide, nonexclusive license under its humanized antibody patents to
the other company for an antibody to a specific target antigen. In each
case, PDL received a licensing and signing fee and the right to receive
royalties on product sales, if any. Under some of these agreements, PDL
can also receive milestone payments.
For a discussion of certain risks related to the Company's
humanization and patent licensing arrangements, see "-- Uncertainty of
Patents and Proprietary Technology; Opposition Proceedings" and "--
Dependence on Collaborative Partners."
MANUFACTURING
PDL currently leases approximately 47,000 square feet housing its
manufacturing facilities in Plymouth, Minnesota. PDL intends to continue
to manufacture potential products for use in preclinical studies and
clinical trials using this manufacturing facility in accordance with
standard procedures that comply with current Good Manufacturing
Practices ("cGMP") and appropriate regulatory standards. Roche is
responsible for manufacturing Zenapax.
In order to obtain regulatory approvals and to expand its capacity
to produce its products for commercial sale at an acceptable cost, PDL
will need to improve and expand its existing manufacturing capabilities
and demonstrate to the FDA its ability to manufacture its products using
controlled, reproducible processes. Accordingly, the Company is evaluating
plans to improve and expand the capacity of its current facility.
Such plans, if fully implemented, would result in substantial
costs to the Company and may require a suspension of manufacturing
operations during construction. See "Risk Factors -- Absence of
Manufacturing Experience" and "-- Uncertainties Resulting From
Manufacturing Changes."
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success is significantly dependent on its ability to
obtain 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.
PDL has a number of patents and has exclusively licensed certain
patents regarding the trioma technique and related antibodies from
Novartis. In June 1996, PDL was issued a U.S. patent covering Zenapax
and certain related antibodies against the IL-2 receptor. PDL has been
issued a patent by the European Patent Office ("EPO") and three patents
by the U.S. Patent and Trademark Office ("PTO"). PDL believes, based on
its review of the scientific literature, that most humanized antibodies
are covered by one or more of these patents. 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.
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 first inventor of the invention 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 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 territories.
The EPO patent applies in the United Kingdom, Germany, France,
Italy and eight other Western European countries. The EPO (but not PTO)
procedures provide for a nine-month opposition period in which other
parties may submit arguments as to why the patent was incorrectly
granted and should be withdrawn or limited. Eighteen notices of
opposition to 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. 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. PDL intends to
vigorously defend the European 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
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
effected, 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 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 conflicts 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 has been granted a patent by
the EPO covering certain humanized antibodies, which PDL has opposed,
and Celltech has a pending application for a corresponding U.S. patent
(the "U.S. Adair Patent Application"). Because U.S. patent applications
are maintained in secrecy, the U.S. Adair Patent Application remains
confidential. Accordingly, there can be no assurance that such claims
would not cover any 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 Application issues and if it 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
Application 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 additional 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 the interference 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 might 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
the business and financial condition of the Company.
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 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 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. Although Genentech's European patent was declared
invalid by the EPO in the opposition process, Genentech has appealed
that decision, thereby staying that decision. If Genentech were to
assert that the Company's SMART antibodies infringe these patents, PDL
might 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 could 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, independently developed or patented by
competitors.
GOVERNMENT REGULATION
The manufacturing, testing and marketing of PDL's products are
subject to regulation by numerous governmental authorities in the U.S.
and other countries based upon their pricing, safety and efficacy. In
the U.S., pharmaceutical (biologic) products are subject to rigorous FDA
regulation. The federal Food, Drug and Cosmetic Act ("FD&C Act"), Public
Health Service Act ("PHS Act") and other federal, state and local
regulations govern the manufacture, testing, labeling, storage, record
keeping, clinical and nonclinical studies to assess safety and efficacy,
approval, advertising and promotion of pharmaceutical products. The
process of developing and obtaining approval for a new pharmaceutical
product within this regulatory framework requires a number of years and
the expenditure of substantial resources. There can be no assurance that
necessary approvals will be obtained on a timely basis, if at all.
In addition to the requirement for FDA approval of each
pharmaceutical product, each pharmaceutical product manufacturing
facility must be registered with, and approved by, the FDA. The
manufacturing and quality control procedures must conform to cGMP in
order to receive FDA approval. Pharmaceutical product manufacturing
establishments are subject to inspections by the FDA and local
authorities as well as inspections by authorities of other countries. To
supply pharmaceutical products for use in the U.S., foreign
manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies
in such countries under reciprocal agreements with the FDA. Moreover,
pharmaceutical product manufacturing facilities may also be regulated by
state, local and other authorities.
For marketing of pharmaceutical products outside the U.S., PDL is
subject to foreign regulatory requirements governing marketing approval
and pricing, and FDA and other U.S. export provisions should the
pharmaceutical product be manufactured in the U.S. Requirements relating
to the manufacturing, conduct of clinical trials, product licensing,
promotion, pricing and reimbursement vary widely in different countries.
Difficulties or unanticipated costs or price controls may be encountered
by PDL or its licensees or its marketing partners in their respective
efforts to secure necessary governmental approvals to market potential
pharmaceutical products, which could delay or preclude PDL or its
licensees or its marketing partners from marketing their potential
pharmaceutical products.
The basic steps required by the FDA before a new pharmaceutical
product for human use may be marketed in the U.S. include (i)
preclinical laboratory and animal tests, (ii) submission to the FDA of
an application for an Investigational New Drug ("IND") which must be
reviewed by the FDA before clinical trials may begin, (iii) completion
of adequate and well-controlled human clinical trials to establish the
safety and efficacy of the pharmaceutical product for its intended use,
(iv) for therapeutic monoclonal antibodies, submission of a Biologics
License Application ("BLA") to the FDA, and (v) FDA approval of the BLA
prior to any commercial sale or shipment of the pharmaceutical product.
Preclinical tests for safety are conducted in the laboratory and
in animals in compliance with FDA good laboratory practices regulations.
Other additional tests are conducted to assess the potential safety and
biological activity of the pharmaceutical product in order to support a
sponsor's contention that it is reasonably safe to conduct proposed
clinical investigations. The results of these studies are submitted to
the FDA as part of an IND. Testing in humans may begin 30 days after
filing an IND unless the FDA requests additional information or raises
questions or concerns that must be resolved before the FDA will permit
the study to proceed. In such cases, there can be no assurance that
resolution will be achieved in a timely manner, if at all.
Clinical trials are conducted in accordance with good clinical
practices based on regulations promulgated by the FDA and under
protocols that include detail on the objectives of the trial, the
parameters to be used to monitor safety, and the efficacy criteria to be
evaluated. Each protocol must be submitted to the FDA as part of an IND.
Further, each clinical trial must be reviewed and approved by an
independent institutional review board ("IRB") at each of the medical
institutions at which the trial will be conducted. There can be no
assurance that submission of a protocol to an IRB or an IND to the FDA
will result in the initiation or completion of a clinical investigation.
Clinical trials are typically conducted in three sequential phases,
although the phases may overlap. In Phase I, the pharmaceutical product
is typically tested in a small number of healthy people or patients to
initially determine safety, dose tolerance (including side effects
associated with increasing doses), metabolism, distribution and
excretion. Phase II usually involves studies in a limited patient
population to obtain a preliminary determination of efficacy, to
identify an optimal dose and to further identify safety risks. Phase III
trials are larger, multi-center trials undertaken to provide further
confirmation of efficacy and provide additional safety information in a
specific patient population. The FDA reviews the results of the trials
and may discontinue them at any time for safety reasons or other reasons
if they are deemed to be non-compliant with FDA regulations. There can
be no assurance that Phase I, II or III clinical trials will be
completed successfully within any specific time period, if at all, with
respect to any of the Company's or its collaborators' pharmaceutical
products that are subject to such testing requirements.
Recently, the FDA has been engaged in regulatory reform efforts
aimed at reducing the regulatory burden on manufacturers of certain
biotechnology products. For example, in May 1996, the FDA issued
regulations that eliminate the previous requirement of a separate
establishment license application, in addition to the product license
application, for certain categories of biotechnology products, including
the pharmaceutical products of the Company. Furthermore, the FDA has
announced its intention to adopt a single approval application for all
pharmaceutical products. There can be no assurance, however, that
implementation of these changes will benefit the Company or otherwise
reduce the regulatory requirements applicable to the Company or that
these changes will not result in the imposition of other, more
burdensome obligations on the Company in connection with regulatory
review of the Company's products. In any event, the results of the
preclinical and clinical trials and a description of the manufacturing
process and tests to control the quality of the pharmaceutical product
must be submitted to the FDA in a BLA for approval. The approval process
is likely to require substantial time and resource commitment by an
applicant. Approval is influenced by a number of factors, including the
severity of the disease being treated, availability of alternative
treatments, and the risks and benefits of the proposed therapeutic as
demonstrated in the clinical trials. Additional data or clinical trials
may be requested by the FDA and may delay approval. There is no
assurance that FDA approval will be granted on a timely basis, if at
all.
After FDA approval for the initial indications and dosage forms,
further studies may be required by the FDA to gain approval for labeling
of the pharmaceutical product for other disease indications or dosage
forms, or to monitor for adverse effects. Both before and after approval
is obtained, a pharmaceutical product, its manufacturer and the holder
of the BLA for the pharmaceutical product are subject to comprehensive
regulatory oversight. The FDA may deny a BLA if applicable regulatory
criteria are not satisfied, require additional testing or information or
require postmarketing testing and surveillance to monitor the safety or
efficacy of the pharmaceutical product. Moreover, even if regulatory
approval is granted, such approval may be subject to limitations on the
indicated uses for which the pharmaceutical product may be marketed.
Approvals may be withdrawn if compliance with regulatory standards
is not maintained or if problems with the pharmaceutical product occur
following approval. Among the conditions for BLA approval is the
requirement that the manufacturer of the pharmaceutical product comply
with cGMP. In addition, under a BLA, the manufacturer continues to be
subject to facility inspection and the applicant must assume
responsibility for compliance with applicable pharmaceutical product and
establishment standards. Violations of regulatory requirements at any
stage may result in various adverse consequences, including FDA refusal
to accept a license application, total or partial suspension of
licensure, delay in approving or refusal to approve the pharmaceutical
product or pending marketing approval applications, warning letters,
fines, injunctions, withdrawal of the previously approved pharmaceutical
product or marketing approvals and/or the imposition of criminal
penalties against the manufacturer and/or BLA holders. In addition,
later discovery of previously unknown problems may result in new
restrictions on such pharmaceutical product, manufacturer and/or BLA
holders, including withdrawal of the pharmaceutical product or marketing
approvals and pharmaceutical product recalls or seizures.
In addition to regulations enforced by the FDA, the Company is
subject to federal, state and local laws and regulations governing the
use, generation, manufacture, storage, discharge, handling and disposal
of certain materials and wastes used in its operations, some of which
are classified as "hazardous." There can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental laws, the Occupational Safety and Health Act, and state,
local and foreign counterparts to such laws, rules and regulations as
its manufacturing and research activities are increased or that the
operations, business and future profitability of the Company will not be
adversely affected by current or future laws, rules and regulations.
Although the Company believes that its safety processes and
procedures and its handling and disposing of materials and wastes comply
with applicable laws, rules and regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. In
the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of
the Company. In addition, the Company cannot predict the extent of the
adverse effect on its business or the financial and other costs that
might result from any new government requirements arising out of future
legislative, administrative or judicial actions. Compliance with such
laws, rules and regulations does not have, nor is such compliance
presently expected to have, a material adverse effect on the Company's
business. However, the Company cannot predict the extent of the adverse
effect on its business or the financial and other costs that might
result from any new government requirements arising out of future
legislative, administrative or judicial actions.
COMPETITION
The Company's potential products are intended to address a wide
variety of disease conditions, including autoimmune diseases,
inflammatory conditions, cancers and viral infections. Competition with
respect to these disease conditions is intense and is expected to
increase. This competition involves, among other things, successful
research and development efforts, obtaining appropriate regulatory
approvals, establishing and defending intellectual property rights,
successful product manufacturing, marketing, distribution, market and
physician acceptance, patient compliance, price and potentially securing
eligibility for reimbursement or payment for the use of the Company's
product. The Company believes its most significant competitors may be
fully integrated pharmaceutical companies with substantial expertise in
research and development, manufacturing, testing, obtaining regulatory
approvals, marketing and securing eligibility for reimbursement or
payment, and substantially greater financial and other resources than
the Company. Smaller companies also may prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical companies. Furthermore, academic institutions,
governmental agencies and other public and private research
organizations conduct research, seek patent protection, and establish
collaborative arrangements for product development, clinical development
and marketing. These companies and institutions also compete with the
Company in recruiting and retaining highly qualified personnel. The
biotechnology and pharmaceutical industries are subject to rapid and
substantial technological change. The Company's competitors may develop
and introduce other technologies or approaches to accomplishing the
intended purposes of the Company's products which may render the
Company's technologies and products noncompetitive and obsolete.
In addition to currently marketed competitive drugs, the Company
is aware of potential products in research or development by its
competitors that address all of the diseases being targeted by the
Company. These and other products may compete directly with the
potential products being developed by the Company. In this regard, the
Company is aware that potential competitors are developing antibodies or
other compounds for treating autoimmune diseases, inflammatory
conditions, cancers and viral infections. In particular, a number of
other companies have developed and will continue to develop human
antibodies and humanized antibodies. In addition, protein design is
being actively pursued at a number of academic and commercial
organizations, and several companies have developed or may develop
technologies that can compete with the Company's SMART and human
antibody technologies. There can be no assurance that competitors will
not succeed in more rapidly developing and marketing technologies and
products that are more effective than the products being developed by
the Company or that would render the Company's products or technology
obsolete or noncompetitive. Further, there can be no assurance that the
Company's collaborative partners will not independently develop products
competitive with those licensed to such partners by the Company, thereby
reducing the likelihood that the Company will receive revenues under its
agreements with such partners.
Any potential product that the Company succeeds in developing and
for which it gains regulatory approval must then compete for market
acceptance and market share. For certain of the Company's potential
products, an important factor will be the timing of market introduction
of competitive products. Accordingly, the relative speed with which the
Company and competing companies can develop products, complete the
clinical testing and approval processes, and supply commercial
quantities of the products to the market is expected to be an important
determinant of market success. Other competitive factors include the
capabilities of the Company's collaborative partners, product efficacy
and safety, timing and scope of regulatory approval, product
availability, marketing and sales capabilities, reimbursement coverage,
the amount of clinical benefit of the Company's products relative to
their cost, method of administration, price and patent protection. There
can be no assurance that the Company's competitors will not develop more
efficacious or more affordable products, or achieve earlier product
development completion, patent protection, regulatory approval or
product commercialization than the Company. The occurrence of any of
these events by the Company's competitors could have a material adverse
effect on the business and financial condition of the Company.
HUMAN RESOURCES
As of December 31, 1997, PDL had 217 full-time employees, of whom
29 hold Ph.D. and/or M.D. degrees. Of the total, 76 employees were engaged
in research and development, 47 in quality assurance and compliance, 19
in clinical and regulatory, 40 in manufacturing and 35 in general and
administrative functions. PDL's scientific staff members have
diversified experience and expertise in molecular and cell biology,
biochemistry, virology, immunology, protein chemistry, computational
chemistry and computer modeling. PDL's success will depend in large
part on its ability to attract and retain skilled and experienced
employees. None of PDL's employees are covered by a collective
bargaining agreement, and PDL considers its relations with its employees
to be good.
ENVIRONMENT
PDL seeks to comply with environmental statutes and the regulations
of federal, state and local governmental agencies. PDL has put
into place processes and procedures and maintains records in order
to monitor its environmental compliance. PDL may invest additional
resources, if required, to comply with applicable regulations, and the
cost of such compliance may increase significantly.
RISK FACTORS
This Annual Report contains, in addition to historical information,
forward-looking statements which involve risks and uncertainties. The
Company's actual results may differ significantly from the results
discussed in forward-looking statements. Factors that may cause such a
difference include those discussed in the material set forth below and
elsewhere in this document.
History Of Losses; Future Profitability Uncertain. The Company
has a history of operating losses and expects to incur substantial
additional expenses with resulting quarterly losses over at least the
next several years as it continues to develop its potential products, to
invest in new research areas and to devote significant resources to
preclinical studies, clinical trials and manufacturing. As of December
31, 1997, the Company had an accumulated deficit of approximately $59.4
million. The time and resource commitment required to achieve market
success for any individual product is extensive and uncertain. No
assurance can be given that the Company, its collaborative partners or
licensees will successfully develop products, obtain required regulatory
approvals, manufacture products at an acceptable cost and with
appropriate quality, or successfully market such products.
The Company's revenues to date have consisted principally of research
and development funding, licensing and signing fees and milestone
payments from pharmaceutical, chemical and biotechnology companies
under collaborative, humanization and patent licensing agreements.
These revenues may vary considerably from quarter to quarter and from
year to year, and revenues in any period may not be predictive of
revenues in any subsequent period, and variations may be significant
depending on the terms of the particular agreements. In addition,
revenues from patent licensing arrangements and royalties are expected
to 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, with significant variations depending on the terms of
the particular agreements. For example, revenues in each of the quarters
of 1997 included several non-recurring payments in connection with new
humanization, patent licensing and other research and development
agreements, which payments resulted in significant variations in
revenues in each of the quarters in 1997.
Hoffmann-La Roche Inc., including its affiliates ("Roche") has
received regulatory approval to distribute Zenapax[R] in the U.S. and
Switzerland. Zenapax, a product created by the Company, is licensed
exclusively to Roche and the Company is dependent upon the efforts of
Roche to obtain additional regulatory approvals and market Zenapax. The
Company has begun receiving royalties in 1998 based on revenue from sales of
Zenapax by Roche, with royalties based on U.S. sales paid to the Company on a
quarterly basis and sales outside of the U.S. on a semi-annual basis.
The Company intends to recognize royalty revenues when royalty reports
are received from its collaborative partners, including Roche. 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 and milestones under new and
existing collaborative, humanization and patent licensing 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.
Although the Company anticipates entering into new collaborations
from time to time, the Company presently does not anticipate continuing
to realize non-royalty revenue from its new and proposed collaborations
at levels commensurate with the revenue historically recognized under
its older collaborations. Moreover, the Company anticipates that it will
incur significant operating expenses as the Company increases its
research and development, manufacturing, preclinical, clinical and
administrative and patent activities. Accordingly, in the absence of
substantial revenues from new corporate collaborations or patent
licensing arrangements, royalties on sales of Zenapax or other products
licensed under the Company's intellectual property rights or other
sources, the Company expects to incur substantial operating losses in
the foreseeable future as certain of its earlier stage potential
products move into later stage clinical development, as additional
potential products are selected as clinical candidates for further
development, as the Company invests in new headquarters and additional
laboratory and manufacturing facilities or capacity, as the Company
defends or prosecutes its patents and patent applications, and as the
Company invests in continuing and new research programs or acquires
additional technologies, product candidates or businesses. For example,
the Company expects to invest approximately $13 million related to the
construction of its new headquarters facilities located in Fremont,
California, which improvements will include the expansion of laboratory
and development facilities. 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 Roche With Respect To Zenapax. Roche controls the
development and marketing 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 receive royalties or additional milestone payments
from the marketing and development of this product. There can be no
assurance that Roche's further development, regulatory and marketing
efforts will be successful, including without limitation, whether or how
quickly Zenapax might receive regulatory approvals in addition to those
in the U.S. and Switzerland and how rapidly it might be adopted by the
medical community. In addition, there can be no assurance that other
independently developed products of Roche, including CellCept[R], or
others will not compete with or prevent Zenapax from achieving
meaningful sales. Roche's development and marketing efforts for CellCept
may result in delays or a relatively smaller resource commitment to
product launch and support efforts than might otherwise be obtained for
Zenapax if this potentially competitive product were not under
development or being marketed.
Moreover, 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 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.
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
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. Moreover,
preliminary results from early stage trials may not be representative of
results that may obtained as the trial proceeds to completion. For
example, with respect to the preliminary results of the study of the
elimination of cyclosporine through the use of the combination of
Zenapax and CellCept presented in February 1998, there can be no
assurance that the preliminary results with limited patient followup
from a single center will be representative of the results that may be
obtained as additional data is obtained from other centers participating
in the study and final results from all patients are compiled.
The Company may at times elect to aggressively enter potential
products into Phase I/II trials to determine preliminary efficacy in
specific indications. In addition, in certain cases the Company has
commenced clinical trials without conducting preclinical animal testing
where an appropriate animal model does not exist. Similarly, the Company
or its partners at times will conduct potentially pivotal Phase II/III
or Phase III trials based on limited Phase I or Phase I/II data. As a
result of these and other factors, the Company anticipates that only
some of its potential products will show safety and efficacy in clinical
trials and that the number of products that fail to show safety and
efficacy may be significant.
Limited Experience With Clinical Trials; Risk Of Delay. The
Company has conducted only a limited number of clinical trials to date.
There can be no assurance that the Company will be able to successfully
commence and complete all of its planned clinical trials without
significant additional resources and expertise. In addition, there can
be no assurance that the Company will meet its contemplated development
schedule for any of its potential products. The inability of the Company
or its collaborative partners to commence or continue clinical trials as
currently planned, to complete the clinical trials on a timely basis or
to demonstrate the safety and efficacy of its potential products, would
have a material adverse effect on the business and financial condition
of the Company.
The rate of completion of the Company's or its collaborators'
clinical trials is significantly dependent upon, among other factors,
the rate of patient enrollment. Patient enrollment is a function of many
factors, including, among others, the size of the patient population,
perceived risks and benefits of the drug under study, availability of
competing therapies, access to reimbursement from insurance companies or
government sources, design of the protocol, proximity of and access by
patients to clinical sites, patient referral practices, eligibility
criteria for the study in question and efforts of the sponsor of and
clinical sites involved in the trial to facilitate timely enrollment in
the trial. Delays in the planned rate of patient enrollment may result
in increased costs and expenses in completion of the trial or may
require the Company to undertake additional studies in order to obtain
regulatory approval if the applicable standard of care changes in the
therapeutic indication under study. These considerations may lead the
Company to consider the termination of ongoing clinical trials or
halting further development of a product for a particular indication.
For example, despite modifications to the clinical trial design in order
to increase the rate of enrollment, patient accrual in the Company's
ongoing Phase II/III trial of the SMART M195 Antibody in myeloid
leukemia continues at a slower rate than the Company desires. There can
be no assurance that any further 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. In
addition, if patient accrual continues at the current rate, the Company
expects to review the viability of the ongoing clinical trial in the
second half of 1998 in order to determine whether to further modify or
terminate this trial in order to dedicate resources to more promising
clinical development programs, which programs may or may not include the
SMART M195 Antibody.
Uncertainty Of Patents And Proprietary Technology; Opposition
Proceedings. The Company's success is significantly dependent on its
ability to obtain patent protection for its products and technologies
and to preserve its trade secrets and operate without infringing on the
proprietary rights of third parties. The Company files and prosecutes
patent applications to protect its inventions. No assurance can be given
that the Company's pending patent applications will result in the
issuance of patents or that any patents will provide competitive
advantages or will not be invalidated or circumvented by its
competitors. Moreover, no assurance can be given that patents are not
issued to, or patent applications have not been filed by, other
companies which would have an adverse effect on the Company's ability to
use, manufacture or market its products or maintain its competitive
position with respect to its products. Other companies obtaining patents
claiming products or processes useful to the Company may bring
infringement actions against the Company. As a result, the Company may
be required to obtain licenses from others or not be able to use,
manufacture or market its products. Such licenses may not be available
on commercially reasonable terms, if at all.
Patents in the U.S. are issued to the party that is first to invent
the claimed invention. Since patent applications in the U.S. are
maintained in secrecy until patents issue, the Company cannot be certain
that it was the first inventor of the inventions covered by its pending
patent applications or that it was the first to file patent applications
for such inventions. The patent positions of biotechnology firms
generally are highly uncertain and involve complex legal and factual
questions. No consistent policy has emerged regarding the breadth of
claims in biotechnology patents, and patents of biotechnology products
are uncertain so that even issued patents may later be modified or
revoked by the U.S. Patent and Trademark Office ("PTO") or the courts in
proceedings instituted by third parties. Moreover, the issuance of a
patent in one country does not assure the issuance of a patent with
similar claims in another country and claim interpretation and
infringement laws vary among countries, so the extent of any patent
protection may vary in different territories.
The Company has several patents and exclusive licenses covering
its humanized and human antibody technology, respectively. With
respect to its human antibody technology and antibodies, the Company has
exclusively licensed certain patents from Novartis Pharmaceuticals
Corporation ("Novartis") (formerly known as Sandoz Pharmaceuticals
Corporation). With respect to its SMART antibody technology and
antibodies, the Company has been issued fundamental patents by the
European Patent Office ("EPO") and PTO. In addition, in June 1996 the
Company was issued a U.S. patent covering Zenapax and certain related
antibodies against the IL-2 receptor. The Company is also currently
prosecuting other patent applications with the PTO and in other
countries, including members of the European Patent Convention, Canada,
Japan and Australia. The patent applications are directed to various
aspects of the Company's SMART and human antibodies, antibody technology
and other programs, and include claims relating to compositions of
matter, methods of preparation and use of a number of the Company's
compounds. However, the Company does not know whether any 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.
With respect to its issued antibody humanization patents, the
Company 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. Eighteen
notices of opposition to the Company's European patent were filed during
the opposition period, including oppositions by major pharmaceutical and
biotechnology companies, which cited references and made arguments not
considered by the EPO and PTO before grant of the respective patents. The
entire opposition process, including appeals, may take several years to
complete, and during this lengthy process, the validity of the EPO
patent will be at issue, which may limit the Company's ability to
negotiate or collect royalties or to negotiate future collaborative
research and development agreements based on this patent.
The Company intends to vigorously defend the European and, if necessary,
the U.S. patent; however, there can be no assurance that the Company
will prevail in the opposition proceedings or any litigation contesting
the validity or scope of these patents. If the outcome of the European
opposition proceeding or any litigation involving the Company's antibody
humanization patents were to be unfavorable, the Company's ability to
collect royalties on licensed products and to license its patents
relating to humanized antibodies may be materially adversely affected,
which could have a material adverse affect on the business and financial
conditions of the Company. In addition, such proceedings or litigation,
or any other proceedings or litigation to protect the Company's
intellectual property rights or defend against infringement claims by
others, could result in substantial costs and a diversion of
management's time and attention, which could have a material adverse
effect on the business and financial condition of the Company.
A number of companies, universities and research institutions have
filed patent applications or received patents in the areas of antibodies
and other fields relating to the Company's programs. Some of these
applications or patents may be competitive with the Company's
applications or contain claims that conflict with those made under the
Company's patent applications or patents. Such conflict could prevent
issuance of patents to the Company, provoke an interference with the
Company's patents or result in a significant reduction in the scope or
invalidation of the Company's patents, if issued. An interference is an
administrative proceeding conducted by the PTO to determine the priority
of invention and other matters relating to the decision to grant
patents. Moreover, if patents are held by or issued to other parties
that contain claims relating to the Company's products or processes, and
such claims are ultimately determined to be valid, no assurance can be
given that the Company would be able to obtain licenses to these patents
at a reasonable cost, if at all, or to develop or obtain alternative
technology.
The Company is aware that Celltech Limited ("Celltech") has been
granted a patent by the EPO covering certain humanized antibodies, which
PDL has opposed, and that Celltech has a pending application for a
corresponding U.S. patent (the "U.S. Adair Patent Application"). Because
U.S. patent applications are maintained in secrecy, the U.S. Adair Patent
Application remains confidential. Accordingly, there can be no assurance
that claims in such a patent or application would not cover any of the
Company's SMART antibodies or be competitive with or conflict with claims
in the Company's patents or patent applications. If the U.S. Adair Patent
Application issues and if it is determined to be valid and to cover any
of the Company's SMART antibodies, there can be no assurance that PDL
would be able to obtain a license on commercially reasonable terms, if
at all. If the claims of the U.S. Adair Patent Application conflict
with claims in the Company's patents or patent applications, there can
be no assurance that an interference would not be declared by the PTO,
which could take several years to resolve and could involve significant
expense to the Company. Also, such conflict could prevent issuance of
additional patents to PDL relating to humanization of antibodies or
result in a significant reduction in the scope or invalidation of the
Company's patents, if issued. Moreover, uncertainty as to the validity
or scope of patents issued to the Company relating generally to
humanization of antibodies may limit the Company's ability to negotiate
or collect royalties or to negotiate future collaborative research and
development agreements based on these patents.
The Company has obtained a nonexclusive license under a patent held
by Celltech (the "Boss Patent") relating to the Company'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
the Company does not have a license. The Company 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 the Company's processes and
products were covered by a patent issuing from such patent application,
the Company may be required to obtain a license under such patent or to
significantly alter its processes or products. 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 Company.
The Company is aware that Lonza Biologics, Inc. has a patent issued
in Europe to which the Company does not have a license (although
Roche has advised the Company that it has a license covering Zenapax),
which may cover the process the Company uses to produce its potential
products. If it were determined that the Company's processes were
covered by such patent, the Company might be required to obtain a
license under such patent or to significantly alter its processes or
products, if necessary to manufacture or import its products in Europe.
There can be no assurance that the Company would be able to successfully
alter its processes or products to avoid infringing such patent or to
obtain such a license on commercially reasonable terms, if at all, and
the failure to do so could have a material adverse effect on the
business and financial condition of the Company.
Also, Genentech has patents in the U.S. and Europe that relate to
chimeric antibodies. Although the European patent was declared invalid
by the EPO in the opposition process, Genentech has appealed that
decision, thereby staying that decision. If Genentech were to assert
that the Company's SMART antibodies infringe these patents, the Company
might 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 the Company 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 could have a material adverse effect
on the business and financial condition of the Company.
In addition to seeking the protection of patents and licenses, the
Company also relies upon trade secrets, know-how and continuing
technological innovation which it seeks to protect, in part, by
confidentiality agreements with employees, consultants, suppliers and
licensees. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any breach
or that the Company's trade secrets will not otherwise become known,
independently developed or patented by competitors.
Dependence On Collaborative Partners. The Company has
collaborative agreements with several pharmaceutical or other companies to
develop, manufacture and market certain potential products, which include
Zenapax, the most advanced product of the Company. The Company
granted its collaborative partners certain exclusive rights to
commercialize the products covered by these collaborative agreements. In
some cases, the Company is relying on its collaborative partners to
conduct clinical trials, to compile and analyze the data received from
such trials, to obtain regulatory approvals and, if approved, to
manufacture and market these licensed products. As a result, the Company
often has little or no control over the development and marketing of
these potential products and little or no opportunity to review clinical
data prior to or following public announcement.
The Company's collaborative research agreements are generally
terminable by its partners on short notice. Suspension or
termination of certain of the Company's current collaborative research
agreements could have a material adverse effect on the Company's
operations and could significantly delay the development of the affected
products. 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 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. In
this regard, Boehringer Mannheim GmbH ("Boehringer Mannheim") recently
terminated further development of and its license to OST 577, the most
advanced product in development under the agreement with Boehringer
Mannheim. In order to proceed with further clinical development of OST
577, the Company is dependent upon Boehringer Mannheim to transfer
technical data, existing clinical supplies and other regulatory
information related to OST 577 to the Company in a timely manner. There
can be no assurance that Boehringer Mannheim will cooperate with the
Company in providing any of such data, supplies or information in a
manner that will permit the Company to easily or rapidly proceed with
further clinical development of OST 577. In addition, Boehringer
Mannheim has invoked the dispute resolution provisions under its
collaborative research agreement to address the reimbursement of up to
$2.0 million for the Phase II study of OST 577 for the treatment of
chronic hepatitis B ("CHB") conducted by Boehringer Mannheim. The
Company is unable to predict the outcome of this proceeding but in any
event has estimated and recorded a liability with respect to this
matter.
Further, in March 1998 Roche completed the acquisition of Corange,
the parent company of Boehringer Mannheim. The Company has not been
advised of any anticipated changes to the existing collaborative
arrangement with the Company resulting from the completed acquisition.
However, the Company expects that Roche will review the various drug
development programs of the Company and Boehringer Mannheim, including
those for the SMART[TM] Anti-L-Selectin Antibody and an antibody to an
undisclosed cardiovascular target. The Company cannot predict the
outcome or timing of such review or whether or not it will occur and in
particular, whether Roche will decide to continue, modify or terminate
the development program for these antibodies. In addition, Roche
acquired 1,682,877 shares of the Company's common stock held by Corange
which are no longer subject to contractual limitations on disposition.
The Company's ability to enter into new collaborations and the
willingness of the Company's existing collaborators to continue
development of the Company's potential products depends upon, among
other things, the Company's patent position with respect to such
products. In this regard, the Company has been issued patents by PTO and
EPO with claims that the Company believes, based on its survey of the
scientific literature, cover most humanized antibodies. Eighteen notices
of opposition 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 has entered into several
collaborations related to both the humanization and patent licensing of
certain antibodies whereby it granted licenses to its patent rights
relating to such antibodies, and the Company anticipates entering into
additional collaborations and patent licensing agreements partially as a
result of the Company's patent and patent applications with respect to
humanized antibodies. As a result, the inability of the Company to
successfully defend the opposition proceeding before the EPO or, if
necessary, to defend patents granted by the PTO or EPO or to
successfully prosecute the corresponding patent applications in Japan or
other countries could adversely affect the ability of the Company to
collect royalties on existing licensed products such as Zenapax, and
enter into additional collaborations, humanization or patent licensing
agreements and could therefore have a material adverse effect on the
Company's business or financial condition.
Absence Of Manufacturing Experience. Of the products developed by
the Company which are currently in clinical development, Roche is
responsible for manufacturing Zenapax. If further development occurs,
the Company intends to manufacture OST 577, the SMART M195 Antibody, the
SMART Anti-CD3 Antibody and PROTOVIR as well as some or all of its other
products in preclinical development. The Company currently leases
approximately 47,000 square feet housing its manufacturing facilities in
Plymouth, Minnesota. The Company intends to continue to manufacture
potential products for use in preclinical and clinical trials using this
manufacturing facility in accordance with standard procedures that
comply with current Good Manufacturing Practices ("cGMP") and
appropriate regulatory standards. The manufacture of sufficient
quantities of antibody products in accordance with such standards is an
expensive, time-consuming and complex process and is subject to a number
of risks that could result in delays. For example, the Company has
experienced some difficulties in the past in manufacturing certain
potential products on a consistent basis. Production interruptions, if
they occur, could significantly delay clinical development of potential
products, reduce third party or clinical researcher interest and support
of proposed clinical trials, and possibly delay commercialization of
such products and impair their competitive position, which would have a
material adverse effect on the business and financial condition of the
Company.
The Company has no experience in manufacturing commercial
quantities of its potential products and currently does not have
sufficient capacity to manufacture 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 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. The Company
intends to partially implement such plans during 1998. Such plans, if
fully implemented, would result in substantial costs to the Company and
may require a suspension of manufacturing operations during
construction. There can be no assurance that construction delays would
not occur, and any such delays could impair the Company's ability to
produce adequate supplies of its potential products for clinical use or
commercial sale on a timely basis. Further, there can be no assurance
that the Company will successfully improve and expand its manufacturing
capability sufficiently to obtain necessary regulatory approvals and to
produce adequate commercial supplies of its potential products on a
timely basis. Failure to do so could delay commercialization of such
products and impair their competitive position, which could have a
material adverse effect on the business or financial condition of the
Company.
Uncertainties Resulting From Manufacturing Changes. Manufacturing
of antibodies for use as therapeutics in compliance with regulatory
requirements is complex, time-consuming and expensive. When certain
changes are made in the manufacturing process, it is necessary to
demonstrate to the FDA that the changes have not caused the resulting
drug material to differ significantly from the drug material previously
produced, if results of prior preclinical studies and clinical trials
performed using the previously produced drug material are to be relied
upon in regulatory filings. Such changes could include, for example,
changing the cell line used to produce the antibody, changing the
fermentation or purification process or moving the production process to
a new manufacturing plant. Depending upon the type and degree of
differences between the newer and older drug material, various studies
could be required to demonstrate that the newly produced drug material
is sufficiently similar to the previously produced drug material,
possibly requiring additional animal studies or human clinical trials.
Manufacturing changes have been made or are likely to be made for the
production of the Company's products currently in clinical development,
in particular OST 577. There can be no assurance that such changes will
not result in delays in development or regulatory approvals or, if
occurring after regulatory approval, in reduction or interruption of
commercial sales. In addition, manufacturing changes to its manufacturing
facility may require the Company to shut down production for a period of time.
There can be no assurance that the Company will be able to reinitiate
production in a timely manner, if at all, following such shutdown. Delays
as a result of manufacturing changes or shutdown of the manufacturing facility
could have an adverse effect on the competitive position of those products
and could have a material adverse effect on the business and financial
condition of the Company.
Dependence On Suppliers. The Company is dependent on outside
vendors for the supply of raw materials used to produce its product
candidates. The Company currently qualifies only one or a few vendors
for its source of certain raw materials. Therefore, once a supplier's
materials have been selected for use in the Company's manufacturing
process, the supplier in effect becomes a sole or limited source of such
raw materials to the Company due to the extensive regulatory compliance
procedures governing changes in manufacturing processes. Although the
Company believes it could qualify alternative suppliers, there can be no
assurance that the Company would not experience a disruption in
manufacturing if it experienced a disruption in supply from any of these
sources. Any significant interruption in the supply of any of the raw
materials currently obtained from such sources, or the time and expense
necessary to transition a replacement supplier's product into the
Company's manufacturing process, could disrupt the Company's operations
and have a material adverse effect on the business and financial
condition of the Company. A problem or suspected problem with the
quality of raw materials supplied could result in a suspension of
clinical trials, notification of patients treated with products or
product candidates produced using such materials, potential product
liability claims, a recall of products or product candidates produced
using such materials, and an interruption of supplies, any of which
could have a material adverse effect on the business or financial
condition of the Company.
Competition; Rapid Technological Change. The Company's potential
products are intended to address a wide variety of disease conditions,
including autoimmune diseases, inflammatory conditions, cancers and
viral infections. Competition with respect to these disease conditions
is intense and is expected to increase. This competition involves, among
other things, successful research and development efforts, obtaining
appropriate regulatory approvals, establishing and defending
intellectual property rights, successful product manufacturing,
marketing, distribution, market and physician acceptance, patient
compliance, price and potentially securing eligibility for reimbursement
or payment for the use of the Company's product. The Company believes
its most significant competitors may be fully integrated pharmaceutical
companies with substantial expertise in research and development,
manufacturing, testing, obtaining regulatory approvals, marketing and
securing eligibility for reimbursement or payment, and substantially
greater financial and other resources than the Company. Smaller
companies also may prove to be significant competitors, particularly
through collaborative arrangements with large pharmaceutical companies.
Furthermore, academic institutions, governmental agencies and other
public and private research organizations conduct research, seek patent
protection, and establish collaborative arrangements for product
development, clinical development and marketing. These companies and
institutions also compete with the Company in recruiting and retaining
highly qualified personnel. The biotechnology and pharmaceutical
industries are subject to rapid and substantial technological change.
The Company's competitors may develop and introduce other technologies
or approaches to accomplishing the intended purposes of the Company's
products which may render the Company's technologies and products
noncompetitive and obsolete.
In addition to currently marketed competitive drugs, the Company
is aware of potential products in research or development by its
competitors that address all of the diseases being targeted by the
Company. These and other products may compete directly with the
potential products being developed by the Company. In this regard, the
Company is aware that potential competitors are developing antibodies or
other compounds for treating autoimmune diseases, inflammatory
conditions, cancers and viral infections. In particular, a number of
other companies have developed and will continue to develop human and
humanized antibodies. In addition, protein design is being actively
pursued at a number of academic and commercial organizations, and
several companies have developed or may develop technologies that can
compete with the Company's SMART and human antibody technologies. There
can be no assurance that competitors will not succeed in more rapidly
developing and marketing technologies and products that are more
effective than the products being developed by the Company or that would
render the Company's products or technology obsolete or noncompetitive.
Further, there can be no assurance that the Company's collaborative
partners will not independently develop products competitive with those
licensed to such partners by the Company, thereby reducing the
likelihood that the Company will receive revenues under its agreements
with such partners.
Any potential product that the Company or its collaborative
partners succeed in developing and obtaining regulatory approval for
must then compete for market acceptance and market share. For certain of
the Company's potential products, an important factor will be the timing
of market introduction of competitive products. Accordingly, the
relative speed with which the Company and its collaborative partners can
develop products, complete the clinical testing and approval processes,
and supply commercial quantities of the products to the market compared
to competitive companies is expected to be an important determinant of
market success. For example, with respect to the speed of development of
OST 577, the Company is aware that other drugs such as lamivudine from
Glaxo Wellcome plc are in advanced clinical development or have been
submitted for approval in certain jurisdictions for the treatment of CHB
by competitive companies that have significantly greater experience and
resources in developing antiviral products than the Company. Although
the Company is considering clinical trials involving a combination of
OST 577 and nucleoside analogs such as lamivudine, the availability of
lamivudine or other drugs for the treatment of CHB could have a material
adverse impact on the clinical development and commercial potential of
OST 577.
Other competitive factors include the capabilities of the
Company's collaborative partners, product efficacy and safety, timing
and scope of regulatory approval, product availability, marketing and
sales capabilities, reimbursement coverage, the amount of clinical
benefit of the Company's products relative to their cost, method of
administration, price and patent protection. There can be no assurance
that the Company's competitors will not develop more efficacious or more
affordable products, or achieve earlier product development completion,
patent protection, regulatory approval or product commercialization than
the Company. The occurrence of any of these events by the Company's
competitors could have a material adverse effect on the business and
financial condition of the Company.
Dependence on Key Personnel. The Company's success is dependent
to a significant degree on its key management personnel. To be
successful, the Company will have to retain its qualified clinical,
manufacturing, scientific and management personnel. The Company faces
competition for personnel from other companies, academic institutions,
government entities and other organizations. There can be no assurance
that the Company will be successful in hiring or retaining qualified
personnel, and its failure to do so could have a material adverse effect
on the business and financial condition of the Company.
Potential Volatility Of Stock Price. The market for the Company's
securities is volatile and investment in these securities involves
substantial risk. The market prices for securities of biotechnology
companies (including the Company) have been highly volatile, and the
stock market from time to time has experienced significant price and
volume fluctuations that may be unrelated to the operating performance
of particular companies. Factors such as disappointing sales of approved
products, approval or introduction of competing products, results of
clinical trials, delays in manufacturing or clinical trial plans,
fluctuations in the Company's operating results, disputes or
disagreements with collaborative partners, market reaction to
announcements by other biotechnology or pharmaceutical companies,
announcements of technological innovations or new commercial therapeutic
products by the Company or its competitors, initiation, termination or
modification of agreements with collaborative partners, failures or
unexpected delays in manufacturing or in obtaining regulatory approvals
or FDA advisory panel recommendations, developments or disputes as to
patent or other proprietary rights, loss of key personnel, litigation,
public concern as to the safety of drugs developed by the Company,
regulatory developments in either the U.S. or foreign countries (such as
opinions, recommendations or statements by the FDA or FDA advisory
panels, health care reform measures or proposals), market acceptance of
products developed and marketed by the Company's collaborators, sales of
the Company's common stock held by collaborative partners or insiders and
general market conditions could result in the Company's failure to meet the
expectations of securities analysts or investors. In such event, or in
the event that adverse conditions prevail or are perceived to prevail
with respect to the Company's business, the price of the Company's
common stock would likely drop significantly. In the past, following
significant drops in the price of a company's common stock, securities
class action litigation has often been instituted against such a
company. Such litigation against the Company could result in substantial
costs and a diversion of management's attention and resources, which
would have a material adverse effect on the Company's business and
financial condition.
No Assurance Of Regulatory Approval; Government Regulation. The
manufacturing, testing and marketing of the Company's products are
subject to regulation by numerous governmental authorities in the U.S.
and other countries based upon their pricing, safety and efficacy. In
the U.S., pharmaceutical products are subject to rigorous FDA
regulation. The federal Food, Drug and Cosmetic Act ("FD&C Act"), Public
Health Service Act ("PHS Act") and other federal, state and local
regulations govern the manufacture, testing, labeling, storage, record
keeping, clinical and nonclinical studies to assess safety and efficacy,
approval, advertising and promotion of pharmaceutical products. The
process of developing and obtaining approval for a new pharmaceutical
product within this regulatory framework requires a number of years and
the expenditure of substantial resources. There can be no assurance that
necessary approvals will be obtained on a timely basis, if at all.
In addition to the requirement for FDA approval of each
pharmaceutical product, each pharmaceutical product manufacturing
facility must be registered with, and approved by, the FDA. The
manufacturing and quality control procedures must conform to cGMP in
order to receive FDA approval. Pharmaceutical product manufacturing
establishments are subject to inspections by the FDA and local
authorities as well as inspections by authorities of other countries. To
supply pharmaceutical products for use in the U.S., foreign
manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies
in such countries under reciprocal agreements with the FDA. Moreover,
pharmaceutical product manufacturing facilities may also be regulated by
state, local and other authorities.
For marketing of pharmaceutical products outside the U.S., the
Company is subject to foreign regulatory requirements governing
marketing approval and pricing, and FDA and other U.S. export provisions
should the pharmaceutical product be manufactured in the U.S.
Requirements relating to the manufacturing, conduct of clinical trials,
product licensing, promotion, pricing and reimbursement vary widely in
different countries. Difficulties or unanticipated costs or price
controls may be encountered by the Company or its licensees or marketing
partners in their respective efforts to secure necessary governmental
approvals to market the potential pharmaceutical products, which could
delay or preclude the Company or its licensees or its marketing partners
from marketing their potential pharmaceutical products.
The basic steps required by the FDA before a new pharmaceutical
product for human use may be marketed in the U.S. include (i)
preclinical laboratory and animal tests, (ii) submission to the FDA of
an application for an Investigational New Drug ("IND") which must be
reviewed by the FDA before clinical trials may begin, (iii) completion
of adequate and well-controlled human clinical trials to establish the
safety and efficacy of the pharmaceutical product for its intended use,
(iv) for therapeutic monoclonal antibodies, submission of a Biologics
License Application ("BLA") to the FDA, and (v) FDA approval of the BLA
prior to any commercial sale or shipment of the pharmaceutical product.
The FDA reviews the results of the trials and may discontinue them
at any time for safety reasons or other reasons if they are deemed to be
non-compliant with FDA regulations. There can be no assurance that Phase
I, II or III clinical trials will be completed successfully within any
specific time period, if at all, with respect to any of the Company's or
its collaborators' pharmaceutical products, each of which is subject to
such testing requirements.
Both before and after approval is obtained, a pharmaceutical
product, its manufacturer and the holder of the BLA for the
pharmaceutical product are subject to comprehensive regulatory
oversight. The FDA may deny a BLA if applicable regulatory criteria are
not satisfied, require additional testing or information or require
postmarketing testing and surveillance to monitor the safety or efficacy
of the pharmaceutical product. Moreover, even if regulatory approval is
granted, such approval may be subject to limitations on the indicated
uses for which the pharmaceutical product may be marketed. Further,
approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems with the pharmaceutical product occur
following approval. Among the conditions for BLA approval is the
requirement that the manufacturer of the pharmaceutical product comply
with cGMP. In addition, under a BLA, the manufacturer continues to be
subject to facility inspection and the applicant must assume
responsibility for compliance with applicable pharmaceutical product and
establishment standards. Violations of regulatory requirements at any
stage may result in various adverse consequences, including FDA refusal
to accept a license application, total or partial suspension of
licensure, delay in approving or refusal to approve the pharmaceutical
product or pending marketing approval applications, warning letters,
fines, injunctions, withdrawal of the previously approved pharmaceutical
product or marketing approvals and/or the imposition of criminal
penalties against the manufacturer and/or BLA holders. In addition,
later discovery of previously unknown problems may result in new
restrictions on such pharmaceutical product, manufacturer and/or BLA
holders, including withdrawal of the pharmaceutical product or marketing
approvals and pharmaceutical product recalls or seizures.
No Sales And Marketing Experience. The Company intends to market
and sell certain of its products, if successfully developed and
approved, through a direct sales force in the U.S. and through sales and
marketing partnership arrangements outside the U.S. However, the Company
does not expect to establish a direct sales capability for at least the
next few years. The Company has no history or experience in sales,
marketing or distribution. To market its products directly, the Company
must either establish a 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 sales and distribution capabilities or
succeed in gaining market acceptance for its products. If the Company
enters into co-promotion or other marketing or patent licensing
arrangements with established pharmaceutical companies, the Company's
revenues will be subject to the payment provisions of such arrangements
and dependent on the efforts of third parties. There can be no assurance
that the Company will be able to successfully establish a direct sales
force or that its collaborators will effectively market any of the
Company's potential products, and the inability of the Company or its
collaborators to do so could have a material adverse effect on the
business and financial condition of the Company.
Product Liability And Insurance. The Company faces an inherent
business risk of exposure to product liability claims in the event that
the use of products during research and development efforts or after
commercialization results in adverse effects. There can be no assurance
that the Company will avoid significant product liability exposure. The
Company maintains product liability insurance for clinical trials.
However, there can be no assurance that such coverage will be adequate
or that adequate insurance coverage for future clinical trials or
commercial activities will be available at an acceptable cost, if at
all, or that a product liability claim would not materially adversely
affect the business or financial condition of the Company.
Future Requirements For Significant Additional Capital. The
Company's operations to date have consumed substantial amounts of cash.
Negative cash flow from operations is expected to increase beyond
current levels over at least the next year as the Company expects to
spend substantial funds in conducting clinical trials, to expand its
research and development programs, to develop and expand its research,
development and manufacturing capabilities and to defend or prosecute
its patents and patent applications. The Company's future capital
requirements will depend on numerous factors, including, among others,
royalties from the sales of Zenapax by Roche; the progress of the
Company's product candidates in clinical trials; the continued or
additional support by collaborative partners or other third parties of
research and clinical trials; enhancement of research and development
programs; the time required to gain regulatory approvals; the resources
the Company devotes to self-funded products, manufacturing methods and
advanced technologies; the ability of the Company to obtain and retain
funding from third parties under collaborative agreements; the
development of internal marketing and sales capabilities; the demand for
the Company's potential products, if and when approved; potential
acquisitions of technology, product candidates or businesses by the
Company; and the costs of defending or prosecuting any patent opposition
or litigation necessary to protect the Company's proprietary technology.
In order to develop and commercialize its potential products, the
Company may need to raise substantial additional funds through equity or
debt financings, collaborative arrangements, the use of sponsored
research efforts or other means. No assurance can be given that such
additional financing will be available on acceptable terms, if at all,
and such financing may only be available on terms dilutive to existing
stockholders. The inability of the Company to secure adequate funds on a
timely basis could result in the delay or cancellation of programs that
the Company might otherwise pursue and, in any event, could have a
material adverse effect on the business and financial condition of the
Company.
Environmental Regulation. The Company is subject to federal,
state and local laws and regulations governing the use, generation,
manufacture, storage, discharge, handling and disposal of certain
materials and wastes used in its operations, some of which are
classified as "hazardous." There can be no assurance that the Company
will not be required to incur significant costs to comply with
environmental laws, the Occupational Safety and Health Act, and state,
local and foreign counterparts to such laws, rules and regulations as
its manufacturing and research activities are increased or that the
operations, business and future profitability of the Company will not be
adversely affected by current or future laws, rules and regulations. The
risk of accidental contamination or injury from hazardous materials
cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability
could exceed the resources of the Company. In any event, the cost of
defending claims arising from such contamination or injury could be
substantial. In addition, the Company cannot predict the extent of the
adverse effect on its business or the financial and other costs that
might result from any new government requirements arising out of future
legislative, administrative or judicial actions.
Uncertainty Related To Health Care Industry. The health care
industry is subject to changing political, economic and regulatory
influences that may significantly affect the purchasing practices and
pricing of human therapeutics. Cost containment measures, whether
instituted by health care providers or enacted as a result of government
health administration regulators or new regulations, such as pricing
limitations or formulary eligibility for dispensation by medical
providers, could result in greater selectivity in the availability of
treatments. Such selectivity could have an adverse effect on the
Company's ability to sell its products and there can be no assurance
that adequate third-party coverage will be available for the Company to
maintain price levels sufficient to generate an appropriate return on
its investment in product development. Third-party payors are
increasingly focusing on the cost-benefit profile of alternative
therapies and prescription drugs and challenging the prices charged for
such products and services. Also, the trend towards managed health care
in the U.S. and the concurrent growth of organizations such as health
maintenance organizations, which could control or significantly
influence the purchase of health care services and products, as well as
legislative proposals to reform health care or reduce government
insurance programs, may all result in lower prices or reduced markets
for the Company's products. The cost containment measures that health
care providers and payors are instituting and the effect of any health
care reform could adversely affect the Company's ability to sell its
products and may have a material adverse effect on the Company. To date,
the Company has conducted limited marketing studies on certain of its
potential products and has not undertaken any pharmacoeconomic analysis
with respect to its products under development. The cost containment
measures and reforms that government institutions and third party payors
are considering instituting could result in significant and
unpredictable changes to the marketing, pricing and reimbursement
practices of biopharmaceutical companies such as the Company. The
adoption of any such measures or reforms could have a material adverse
effect on the business and financial condition of the Company.
Conduct of Certain Activities in California. The Company
maintains its headquarters and research and development facilities in
northern California. California has historically been the site of
various natural disasters, including earthquakes, seismic tremors,
unstable geologic fault lines, floods and mudslides. The occurrence of
a natural disaster of significant magnitude in northern California could
seriously impair the operations of the Company for an extended period of
time as well as result in the loss of data and information essential to
the continuation of the Company's business. Although the Company
maintains duplicate copies of certain of its data and information on its
information systems at its Minnesota facility, there can be no assurance
that such natural disaster would not significantly disrupt the
operations of the Company. Moreover, there can be no assurance that the
Company's employees or other suitable personnel would be available to
resume the operations of the Company in California in a timely manner,
and the cost of resuming its operations and responding to such disaster
could have a material adverse effect on the business and financial
condition of the Company.
ITEM 2. PROPERTIES
The Company leases approximately 43,000 square feet of laboratory and
office space in Mountain View, California. The Company's lease will
terminate on December 31, 2000. The Company has also leased an
additional 10,000 square feet of office space located adjacent to its
current facility in Mountain View, California through May 31, 1998, and
has negotiated an extension of this lease through September 30, 1998.
In July 1997, the Company entered into a lease agreement for a term of
approximately 12 years to lease approximately 90,000 square feet of
research and development and general office space in Fremont,
California. The Company plans to relocate its California headquarters
to this facility during the third or fourth quarter of 1998.
The Company also leases approximately 47,000 square feet of
manufacturing, laboratory and office space in Plymouth, Minnesota. The
Company's lease will terminate on February 29, 2004, subject to the
Company's options to extend the lease for two additional five year
terms. Although these facilities currently leased by the Company are
sufficient for its present manufacturing operations, the Company
believes that it may have to obtain additional manufacturing space in
the future and may lease or acquire additional space as required.
The Company owns substantially all of the equipment used in its
facilities. See Note 4 to the financial statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in administrative opposition proceedings
being conducted by the European Patent Office with respect to its
European patent relating to humanized antibodies. Eighteen oppositions
were filed with respect to the issuance of the patent to the Company in
January 1996. The opposition briefs argue that the patent was
incorrectly granted and should be withdrawn or limited. See "Business -
- - Patents and Proprietary Technology" and "Risk Factors -- Uncertainty
of Patents and Proprietary Technology; Opposition Proceedings." Other
than such administrative proceeding, the Company is not a party to any
material administrative proceedings. The Company believes that the
outcome of these opposition proceedings will not have a material adverse
effect on the financial position, results of operations or the cash
flows of the Company. However, if such outcome were to be unfavorable,
the Company's ability to collect royalties on licensed products and to
license its patents relating to humanized antibodies may be materially
adversely affected which could in the future have a material adverse
effect on the Company's results of operations, cash flows and financial
position.
In 1997, Boehringer Mannheim invoked the dispute resolution
provisions under its collaborative research agreement with the Company
to address the reimbursement of up to $2.0 million for the terminated
Phase II study of OST 577 for the treatment of chronic active hepatitis
B initiated by Boehringer Mannheim as well as certain legal expenses
related to Boehringer Mannheim's participation in the Company's public
offering in early 1997. The collaborative research agreement with
Boehringer Mannheim provides for reimbursement from PDL of costs and
expenses of up to $2.0 million for a Phase II study of OST 577 in the
event certain conditions are met with respect to that study. In March
1998, Roche acquired Boehringer Mannheim. The Company is unable to
predict the outcome of this proceeding but in any event has estimated
and recorded a liability with respect to this matter. See "Risk
Factors." Other than such legal proceeding, the Company is not a party
to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION AND DIVIDEND POLICY ($)
1996 High Low
- -------------------- --------- ---------
First Quarter 28.38 20.38
Second Quarter 30.00 22.00
Third Quarter 27.25 12.00
Fourth Quarter 38.38 21.75
1997 High Low
- -------------------- --------- ---------
First Quarter 40.13 31.75
Second Quarter 35.88 24.38
Third Quarter 43.50 26.50
Fourth Quarter 51.50 35.88
The Company's Common Stock trades on the Nasdaq National Market under
the symbol "PDLI." Prices indicated above are the high and low sales
prices as reported by the Nasdaq National Market System for the periods
indicated. The Company has never paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the
foreseeable future.
As of December 31, 1997, the approximate number of common
stockholders of record was 300. The market for the Company's securities
is volatile. See "Risk Factors."
In October 1997, the Company entered into a Stock Purchase Agreement
with Toagosei Co., Ltd. ("Toagosei") pursuant to which the Company sold
44,568 shares of newly issued Common Stock at a price per share of
$44.875. The Company offered and sold the shares to Toagosei, a
sophisticated investor who purchased such shares for investment
purposes, in a transaction not involving a public offering pursuant to
the exemption from registration provisions of Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share and number of employees data)
Years Ended December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Revenues:
Research and development
revenue under
collaborative agreements-
related parties (1) $ -- $11,000 $10,333 $9,333 $14,233
Research and development
revenue-other (1) 11,137 5,500 1,075 2,527 456
Interest and other income 9,118 6,100 6,205 3,349 2,111
--------- --------- --------- --------- ---------
Total revenues 20,255 22,600 17,613 15,209 16,800
Costs and expenses:
Research and development 25,614 28,795 20,803 16,367 12,329
Purchase of in-process
technology -- -- -- -- 7,725
General and administrative 6,629 5,601 5,163 4,051 2,653
Special charge (2) 11,887 -- -- -- --
Interest expense -- -- 1 7 25
--------- --------- --------- --------- ---------
Total costs and expenses 44,130 34,396 25,967 20,425 22,732
--------- --------- --------- --------- ---------
Net loss ($23,875) ($11,796) ($8,354) ($5,216) ($5,932)
========= ========= ========= ========= =========
Net loss per share (3) ($1.35) ($0.76) ($0.54) ($0.37) ($0.47)
========= ========= ========= ========= =========
Shares used in computation
of net loss per share 17,649 15,604 15,343 14,060 12,747
========= ========= ========= ========= =========
December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash, cash equivalents and
investments $163,655 $99,667 $107,065 $113,245 $72,732
Working capital 66,490 74,221 43,522 95,450 29,843
Total assets 175,026 110,331 116,412 121,054 80,294
Capital lease obligations,
less current portion -- -- -- -- 25
Accumulated deficit (59,382) (35,507) (23,711) (15,357) (10,141)
Total stockholders' equity 168,468 105,112 112,856 117,783 77,921
Number of employees 217 208 181 145 112
- ------------------
(1) Certain amounts in the category "Research and development revenue
under collaborative agreements-related parties" for the years ended
December 31, 1994-96 have been reclassified under the category
"Research and development revenue-other" based on a determination
that one of the Company's collaborative partners was not a related
party during these periods. The total research and development
revenue for these periods is unchanged.
(2) Represents a non-cash special charge of approximately $11.9 million
related to the extension of the term of all outstanding stock
options held by employees, officers, directors and consultants to
the Company that were granted prior to February 1995, with the
single exception of stock options granted to one non-employee
director. The extension conforms the term of previously granted
stock options, which was six years, to those granted since February
1995, ten years.
(3) For a description of the computation of net loss per share, see
Note 1 to the Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are
not limited to those discussed in "Risk Factors" as well as those
discussed elsewhere in this document.
OVERVIEW
Since the Company's founding in 1986, a primary focus of its
operations has been research and development. Achievement of successful
research and development and commercialization of products derived from
such efforts is subject to high levels of risk and significant resource
commitments. The Company has a history of operating losses and expects
to incur substantial additional losses over at least the next few years,
as it continues to develop its proprietary products, devote significant
resources to preclinical studies, clinical trials, and manufacturing and
to defend its patents and other proprietary rights. The Company's
revenues to date have consisted principally of research and development
funding, licensing and signing fees and milestone payments from
pharmaceutical, chemical and biotechnology companies under collaborative
research and development and patent licensing agreements. These revenues may
vary considerably from reporting period to reporting period and revenues
in any period may not be predictive of revenues in any subsequent
period, and variations may be significant depending on the terms of the
particular agreements. In 1998, the Company began receiving royalties from
sales of Zenapax[R] by Hoffmann-La Roche Inc., including its affiliates
("Roche"). The Company is dependent upon the further development,
regulatory and marketing efforts of Roche with respect to Zenapax
and there can be no assurance that Roche's further development,
regulatory and marketing efforts will be successful, including, without
limitation, if and when regulatory approvals in various countries may be
obtained and whether or how quickly Zenapax might be adopted by the
medical community. The Company began to receive royalties based on revenue
from sales of Zenapax by Roche in 1998, with royalties based on U.S. sales
paid to the Company on a quarterly basis and international sales on a
semi-annual basis. The Company intends to recognize royalty revenues when
royalty reports are received from Roche and the Company's other collaborative
partners. This method of recognizing royalty revenues from the Company's
licensees, taken together with the unpredictable timing of payments of
non-recurring licensing and signing fees and milestones under new and
existing collaborative research and development and patent licensing
agreements, is likely to result in significant fluctuations in revenues
in quarterly and yearly periods.
Although the Company anticipates entering into new collaborations
and patent licensing agreements from time to time, the Company presently
does not anticipate realizing non-royalty revenue from its new and
proposed collaborations and agreements at levels commensurate with the
non-royalty revenue historically recognized under its older
collaborations. Moreover, as the Company expands its business
activities, advancing potential products in clinical development, the
Company anticipates that its operating expenses will generally continue
to increase significantly as the Company dedicates more resources to its
research and development, manufacturing, preclinical and clinical
activity, and administrative and patent activities. Accordingly, in the
absence of substantial revenues from new corporate collaborations or
patent licensing agreements, significant royalties on sales of Zenapax
and other products licensed under the Company's intellectual property
rights, or other sources, the Company expects to incur substantial
operating losses in the foreseeable future as certain of its earlier
stage potential products move into later stage clinical development, as
additional potential products are selected as clinical candidates for
further development, as the Company invests in additional facilities or
manufacturing capacity, as the Company defends or prosecutes its patents
and patent applications and as the Company invests in research or
acquires additional technologies 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.
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 reports to the
Company following completion of each calendar quarter or semi-annual
period and royalty revenue is recognized when royalty reports are
received from the third party.
RESULTS OF OPERATIONS
Years ended December 31, 1997, 1996 and 1995
The Company's total revenues were $20.3 million in 1997 as
compared to $22.6 million in 1996 and $17.6 million in 1995. Total
research and development revenues represented $11.1 million, $16.5
million and $11.4 million of total revenues in 1997, 1996 and 1995,
respectively. Interest and other income were $9.1 million in 1997, $6.1
million in 1996, and $6.2 million in 1995.
The decrease in total research and development revenues in 1997
from the prior years was primarily attributable to expiration of
reimbursement funding under an agreement with Boehringer Mannheim which
funding arrangement expired as scheduled in October 1996. The Company
recognized $11.0 million in licensing and signing fees and milestone
payments in 1997 compared to $6.5 million and $1.0 million in 1996 and
1995, respectively. Of the amounts expended by the Company for research
and development, $0.1 million in 1997, $10.0 million in 1996 and $10.4
million in 1995 represented third-party funded research and development
activities (not including licensing and signing fees, milestone payments
and product sales).
Interest and other income increased to $9.1 million in 1997 from
$6.1 and $6.2 million in 1996 and 1995, respectively. This increase is
primarily attributable to the increased interest earned on the Company's
investment balances as a result of the Company's follow-on public
offering, which was completed during the first quarter of 1997.
Interest and other income of $6.1 million in 1996 was comparable to $6.2
million in 1995.
Total costs and expenses increased to $44.1 million in 1997 from
$34.4 million in 1996 and $26.0 million in 1995. The increase in costs
and expenses in 1997 compared to 1996 and 1995 was due primarily to a
non-cash special charge of $11.9 million associated with the extension
of the term of certain stock options that were granted prior to 1995.
The special charge is expected to be non-recurring and conformed the
term of previously granted stock options, which was six years, to those
granted since February 1995, ten years. Exercise prices of the stock
options were not altered. Without the non-cash special charge, total
costs and expenses in 1997 were $32.2 million, a decrease from 1996, due
principally to a decrease in research and development expenses.
Research and development expenses in 1997 decreased to $25.6
million from $28.8 million in 1996 and $20.8 million in 1995. The
decrease in 1997 costs and expenses as compared to 1996 was primarily
due to reduced clinical trial costs resulting from the termination of a
clinical trial in third quarter of 1996 involving PROTOVIR[TM], a product
candidate. Excluding clinical trial costs for PROTOVIR, the Company's
1997 research and development expenses increased as a result of the
addition of staff, the initiation and continuation of 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 1997 increased to $6.6
million from $5.6 million in 1996 and $5.2 million in 1995. These
increases were primarily the result of increased staffing and associated
expenses necessary to manage and support the Company's expanding
operations.
LIQUIDITY AND CAPITAL RESOURCES
To date the Company has financed its operations primarily through
public and private placements of equity securities, research and development
revenues and interest income on invested capital. At December 31, 1997,
the Company had cash, cash equivalents and investments in the aggregate
of $163.7 million, compared to $99.7 million at December 31, 1996 and
$107.1 million at December 31, 1995. This increase in cash resources in
1997 primarily reflects the completion of a 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
approximately $68.2 million.
In 1997, Boehringer Mannheim GmbH ("Boehringer Mannheim") invoked
the dispute resolution provisions under its collaborative research
agreement with the Company to address the reimbursement of up to $2.0
million for the Phase II study of OST 577 for the treatment of chronic
hepatitis B ("CHB") then being conducted by Boehringer Mannheim as well
as certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in the first quarter of 1997. In March
1998, Roche acquired Boehringer Mannheim. The Company is unable to
predict the outcome of this proceeding but in any event has estimated
and recorded a liability with respect to this matter. The collaborative
research agreement with Boehringer Mannheim provides for reimbursement
from PDL of costs and expenses of up to $2.0 million for a Phase II
study of OST 577 in the event certain conditions are met with respect to
that study.
In July 1997, the Company entered into a lease agreement for a
term of approximately 12 years to lease approximately 90,000 square feet
of research and development and general office space in Fremont,
California. The Company plans to relocate its California headquarters
to this facility during the third or fourth quarter of 1998 and expects
to invest approximately $13 million related to the construction of these
new headquarters, which improvements will include expanded laboratory
and development facilities.
As set forth in the Statements of Cash Flows, net cash used in
operating activities was approximately $7.6 million for the year ended
December 31, 1997 compared to approximately $7.0 million in 1996 and
$7.1 million in 1995. The increase in 1997 was primarily due to the
Company's continued investment in research and development, the addition
of staff, initiation and continuation of clinical trials, costs of
conducting preclinical tests, expansion of pharmaceutical development
capabilities including support for both clinical development and
manufacturing process development, and costs of the expanded operation
of the manufacturing facility.
As set forth in the Statements of Cash Flows, net cash used in
investing activities for the year ended December 31, 1997 was $72.1
million compared to net cash provided by investing activities of $11.8
million in 1996 and $4.8 million in 1995. The increase in 1997 was
primarily the result of increased purchases of short- and long-term
investments from the proceeds of the Company's public offering the first
quarter of 1997.
As set forth in the Statements of Cash Flows, net cash provided by
financing activities for the years ended December 31, 1997 was $74.9
million compared to $4.7 million in 1996 and $1.5 million in 1995. The
change in 1997 was primarily the result of the completion of a public
offering of 2.275 million shares of the Company's common stock in the
first quarter of 1997 and the exercise of outstanding stock options.
The Company's future capital requirements will depend on numerous
factors, including, among others, royalties from Roche's marketing of
Zenapax; the ability of the Company to enter into additional patent
licensing arrangements; the progress of the Company's product candidates
in clinical trials; the ability of the Company's collaborative partners
to obtain regulatory approval and successfully manufacture and market
the Company's products; the continued or additional support by
collaborative partners or other third parties of research and clinical
trials; enhancement of existing and investment in new research and
development programs; the time required to gain regulatory approvals;
the resources the Company devotes to self-funded products, manufacturing
methods and advanced technologies; the ability of the Company to obtain
and retain funding from third parties under collaborative agreements;
the development of internal marketing and sales capabilities; the demand
for the Company's potential products, if and when approved; potential
acquisitions of technology, product candidates or businesses by the
Company; and the costs of defending or prosecuting any patent opposition
or litigation necessary to protect the Company's proprietary technology.
In order to develop and commercialize its potential products the Company
may need to raise substantial additional funds through equity or debt
financings, collaborative arrangements, the use of sponsored research
efforts or other means. No assurance can be given that such additional
financing will be available on acceptable terms, if at all, and such
financing may only be available on terms dilutive to existing
stockholders. The Company believes that existing capital resources will
be adequate to satisfy its capital needs through at least 2000.
YEAR 2000 COMPLIANCE
The Company has conducted a preliminary review of its internal
operations and inquired of certain of its key vendors to assess the
appropriate resource commitments and contingency plans that may be
required to maintain the Company's computer systems after December 31,
1999. Based on this preliminary review, the Company does not believe
that modifications to existing computer systems to provide for proper
functioning with respect to dates in the year 2000 and thereafter will
pose significant operational problems or require significant financial
commitments on behalf of the Company. This belief is based on a
preliminary review and certain related estimates and assumptions of
future events such as the timely completion or availability of upgrades
or modifications to the Company's software and computer systems as
specified by its vendors, and the continued availability of certain
resources and internal capabilities, including without limitation the
employees of the Company responsible for the information systems and
manufacturing software used in the Company's operations. There can be
no assurance that a complete review of the Company's operations will not
identify additional efforts that may have a material impact on the
future operating results or financial condition of the Company, that
management's estimates can be achieved, that certain software used by
the Company will be upgraded or modified and made available to the
Company in a timely manner, that management's assumptions regarding the
further growth of the Company are complete or accurate or that the
required resources and capabilities of the Company to address this
potential issue will continue to be available in a timely manner.
Moreover, the Company's operations and development program are dependent
upon certain third party vendors who perform services for the Company,
as well as certain agencies and organizations such as the U.S. Food and
Drug Administration and foreign regulatory authorities. These third
party vendors, agencies and authorities may have difficulties or
problems in timely upgrading or modifying their internal operations and
computer systems to address the year 2000 issue and there can be no
assurance that the systems of these vendors, agencies and authorities
will be timely upgraded or modified in a manner that would not adversely
affect the Company's business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PROTEIN DESIGN LABS, INC.
BALANCE SHEETS
(In thousands, except par value per share)
December 31,
----------------------------
1997 1996
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $9,266 $14,141
Short-term investments 63,003 64,050
Other current assets 779 1,250
------------- -------------
Total current assets 73,048 79,441
Property and equipment, net 9,996 8,590
Long-term investments 91,386 21,475
Other assets 596 825
------------- -------------
$175,026 $110,331
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $475 $1,029
Accrued compensation 833 635
Other accrued liabilities 3,646 3,555
Deferred revenue 1604 --
------------- -------------
Total current liabilities 6,558 5,219
Commitments
Stockholders' equity:
Preferred stock, par value $0.01 per
share, 10,000 shares authorized;
no shares issued and outstanding -- --
Common stock, par value $0.01 per share,
40,000 shares authorized; 18,348
and 15,759 issued and outstanding at
December 31, 1997 and December 31, 1996,
respectively 183 158
Additional paid-in capital 227,093 140,328
Accumulated deficit (59,382) (35,507)
Unrealized gain on investments 574 133
------------- -------------
Total stockholders' equity 168,468 105,112
------------- -------------
$175,026 $110,331
============= =============
See accompanying notes
PROTEIN DESIGN LABS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except net loss per share data)
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
Revenues:
Research and development revenue
under collaborative agreements-
related parties $ -- $11,000 $10,333
Research and development revenue-
other 11,137 5,500 1,075
Interest and other income 9,118 6,100 6,205
------------- ------------- ------------
Total revenues 20,255 22,600 17,613
Costs and expenses:
Research and development 25,614 28,795 20,803
General and administrative 6,629 5,601 5,163
Special charge 11,887 -- --
Interest expense -- -- 1
------------- ------------- ------------
Total costs and expenses 44,130 34,396 25,967
------------- ------------- ------------
Net loss ($23,875) ($11,796) ($8,354)
============= ============= ============
Net loss per share ($1.35) ($0.76) ($0.54)
============= ============= ============
Shares used in computation
of net loss per share 17,649 15,604 15,343
============= ============= ============
See accompanying notes
PROTEIN DESIGN LABS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share and shares of common stock data)
Unrealized
Common Stock Additional Gain (loss) Total
---------------------- Paid-in Accumulated Deferred on Shareholders'
Shares Amount Capital Deficit Compensation Investments Equity
----------- --------- -------------- ------------- ------------ ------------ -------------
Balance at December 31, 1994 15,247,916 $152 $134,132 ($15,357) ($94) ($1,050) $117,783
Issuance of common stock to
employees, consultants and
outside directors for cash 157,845 2 1,484 -- -- -- 1,486
Amortization of deferred
compensation -- -- -- -- 94 -- 94
Change in unrealized gain
(loss) on investments -- -- -- -- -- 1,846 1,846
Net loss -- -- -- (8,354) -- -- (8,354)
----------- --------- -------------- ------------- ------------ ------------ -------------
Balance at December 31, 1995 15,405,761 154 135,616 (23,711) -- 796 112,855
Issuance of common stock to
employees, consultants and
outside directors for cash 353,328 4 4,712 -- -- -- 4,716
Change in unrealized gain
(loss) on investments -- -- -- -- -- (663) (663)
Net loss -- -- -- (11,796) -- -- (11,796)
----------- --------- -------------- ------------- ------------ ------------ -------------
Balance at December 31, 1996 15,759,089 158 140,328 (35,507) -- 133 105,112
Follow-on public offering of
common stock at $32.00 per
share (net underwriters discount
of $4,004 and offering expenses
of $665) 2,275,000 22 68,109 -- -- -- 68,131
Issuance of common stock to
investor at $44.875 per share 44,568 -- 2,000 -- -- -- 2,000
Issuance of common stock to
employees, consultants and
outside directors for cash 269,320 3 4,769 -- -- -- 4,772
Extension of term of certain
stock options -- -- 11,887 -- -- -- 11,887
Change in unrealized gain
(loss) on investments -- -- -- -- -- 441 441
Net loss -- -- -- (23,875) -- -- (23,875)
----------- --------- -------------- ------------- ------------ ------------ -------------
Balance at December 31, 1997 18,347,977 $183 $227,093 ($59,382) $ -- $574 $168,468
=========== ========= ============== ============= ============ ============ =============
See accompanying notes
PROTEIN DESIGN LABS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(In thousands)
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
Cash flows from operating activities:
Net loss ($23,875) ($11,796) ($8,354)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 3,244 3,242 2,533
Other (706) 466 (1,924)
Special charge 11,887 -- --
Changes in assets and liabilities:
Other current assets 470 (601) 377
Accounts payable (554) 392 (120)
Accrued liabilities 289 2,272 339
Deferred revenue 1,604 (1,000) 92
------------- ------------- ------------
Total adjustments 16,234 4,771 1,297
------------- ------------- ------------
Net cash used in operating activities (7,641) (7,025) (7,057)
Cash flows from investing activities:
Purchases of short- and long-term investments (317,482) (24,458) (74,162)
Maturities of short- and long-term investments 249,681 39,900 46,900
Proceeds from sales of short and long term
investments -- -- 36,349
Capital expenditures (4,565) (3,699) (3,586)
(Increase) decrease in other assets 229 22 (659)
------------- ------------- ------------
Net cash provided by (used in) investing activities (72,137) 11,765 4,842
Cash flows from financing activities:
Principal payments on capital lease obligations -- -- (25)
Proceeds from issuance of capital stock 74,903 4,715 1,486
------------- ------------- ------------
Net cash provided by financing activities 74,903 4,715 1,461
------------- ------------- ------------
Net increase (decrease) in cash and
cash equivalents (4,875) 9,455 (754)
Cash and cash equivalents at beginning of year 14,141 4,686 5,440
------------- ------------- ------------
Cash and cash equivalents at end of year $9,266 $14,141 $4,686
============= ============= ============
Supplemental disclosure of cash flow information
Interest paid $ -- $ -- $1
============= ============= ============
See accompanying notes
PROTEIN DESIGN LABS, INC.
NOTES TO FINANCIAL STATEMENTS
December 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, devote significant resources to preclinical
studies, clinical trials, and manufacturing and to defend its patents
and other proprietary rights. The Company's revenues to date have
consisted principally of research and development funding, licensing
and signing fees and milestone payments from pharmaceutical companies
under collaborative research and development and patent licensing
agreements. These revenues may vary considerably quarter to quarter
and from year to year and revenues in any period may not be
predictive of revenues in any subsequent period, and variations may
be significant depending on the terms of the particular agreements.
In 1998, Company began receiving royalties from sales of Zenapax by
Hoffmann-La Roche Inc., including its affiliates ("Roche").
The Company is dependent upon the further development, regulatory and
marketing efforts of Roche with respect to Zenapax and there can be
no assurance that Roche's further development, regulatory and
marketing efforts will be successful, including, without limitation,
if and when regulatory approvals in various countries may be obtained
and whether or how quickly Zenapax might be adopted by the medical
community. In addition, the Company intends to recognize royalty
revenues when royalty reports are received from Roche and the Company's other
collaborative partners. This method of recognizing royalty revenues
from the Company's licensees, taken together with the unpredictable
timing of payments of non-recurring licensing and signing fees and
milestones under new and existing collaborative research and
development and patent licensing agreements, may result in
significant fluctuations in revenues in quarterly and yearly periods.
Although the Company anticipates entering into new collaborative,
humanization and patent licensing agreements from time to time, the
Company presently does not anticipate realizing non-royalty revenue
from its new and proposed collaborations and agreements at levels
commensurate with the non-royalty 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 and clinical activity, and administrative and patent
activities. Accordingly, in the absence of substantial revenues from
new corporate collaborations or patent licensing agreements,
significant royalties on sales of Zenapax and other products licensed
under the Company's intellectual property rights, or other sources,
the Company expects to incur substantial operating losses in the
foreseeable future as certain of its earlier stage potential products
move into later stage clinical development, as additional potential
products are selected as clinical candidates for further development,
as the Company invests in additional facilities or manufacturing
capacity, as the Company defends or prosecutes its patents and patent
applications and as the Company invests in research or acquires
additional technologies or businesses.
Cash Equivalents, Investments and Concentration of Credit Risk
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of acquisition to be
cash equivalents. The "Other" adjustments line item in the Statements
of Cash Flows represents the accretion of the book value of certain
debt securities. The Company places its cash and short-term and long-
term investments with high-credit-quality financial institutions and
in securities of the U.S. government and U.S. government agencies
and, by policy, limits the amount of credit exposure in any one
financial instrument. To date, the Company has not experienced credit
losses on investments in these instruments.
Revenue Recognition
Contract revenues from research and development 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.
Certain amounts in the category "Research and development revenue
under collaborative agreements-related parties" for the years ended
December 31, 1994-96 have been reclassified under the category
"Research and development revenue-other" based on a determination
that one of the Company's collaborative partners was not a related
party during these periods. The total research and development
revenue for these periods is unchanged.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("FAS 128"). Effective December 31,
1997, the Company adopted FAS 128. FAS 128 requires the presentation
of basic earnings (loss) per share and diluted earnings (loss) per
share, if more dilutive, for all periods presented. In accordance
with FAS 128, net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the
period. Diluted net loss per share has not been presented as, due to
the Company's net loss position, it is antidilutive. Had the Company
been in a net income position, diluted earnings per share for 1997,
1996, and 1995 would have included an additional 1,052,000, 964,000,
and 579,000 shares, respectively, related to the Company's
outstanding stock options. The Company's previously reported net
loss per share amounts conformed to FAS 128 and, accordingly, its
adoption has no effect on these financial statements.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. For example, the Company
has a policy of recording expenses for clinical trials based upon pro
rating estimated total costs of a clinical trial over the estimated
length of the clinical trial and the number of patients anticipated
to be enrolled in the trial. Expenses related to each patient are
recognized ratably beginning upon entry into the trial and over the
course of the trial. In the event of early termination of a clinical
trial, management accrues an amount based on its estimate of the
remaining non-cancellable obligations associated with the winding
down of the clinical trial. These estimates and assumptions could
differ significantly from the amounts which may actually be realized.
In 1997, Boehringer Mannheim GmbH ("Boehringer Mannheim") invoked the
dispute resolution provisions under its collaborative research
agreement to address the reimbursement of up to $2.0 million for the
Phase II study of OST 577 for the treatment of chronic hepatitis B
("CHB") then being conducted by Boehringer Mannheim as well as
certain legal expenses related to Boehringer Mannheim's participation
in the Company's public offering in the first quarter of 1997. In
March 1998, Roche acquired Boehringer Mannheim. The Company is unable
to predict the outcome of this proceeding but in any event has
estimated and recorded a liability with respect to this matter. The
collaborative research agreement with Boehringer Mannheim provides
for reimbursement from PDL of costs and expenses of up to $2.0
million for a Phase II study of OST 577 in the event certain
conditions are met with respect to that study.
Property and Equipment
Property and equipment are stated at cost less accumulated
straight-line depreciation and amortization and consist of the
following:
(In thousands)
December 31,
---------------------------
1997 1996
------------- -------------
Laboratory and manufacturing equipment $12,789 $10,171
Office equipment 3,608 3,238
Furniture and fixtures 5,927 4,351
------------- -------------
22,324 17,760
Less accumulated depreciation and amortization (12,328) (9,170)
------------- -------------
$9,996 $8,590
============= =============
Laboratory, manufacturing, office equipment and furniture and fixtures
are depreciated over the estimated useful lives of the assets,
generally three to five years.
2. Collaborative, Humanization and Licensing Arrangements
Roche
Roche and the Company have entered into a product licensing agreement
for Zenapax, a humanized antibody created by the Company. Since
December 31, 1994, amounts received as research and development
funding and milestone payments under the agreement are not material.
Related costs for research and development under this arrangement
approximated the related revenues and are included in research and
development expenses in the accompanying financial statements. The
research and development funding arrangement expired in January 1995.
The Company will receive further payments if additional milestones
are achieved and royalty payments to the Company on net sales of
Zenapax. Royalties payable to the Company are subject to certain
offsets for milestones and third party royalties paid by Roche under
the agreement. The product licensing agreement may be terminated by
Roche upon 90 days notice, in which event rights licensed to Roche
will revert to the Company.
Corange/Boehringer Mannheim
In October 1993, Corange International Limited ("Corange") entered
into a strategic alliance with the Company, which alliance included a
joint development, marketing and licensing agreement, as amended in
1994, 1995 and 1996, including an assignment of all rights and
obligations of Corange to Boehringer Mannheim GmbH ("Boehringer
Mannheim") (the "Agreement"). The Company recognized research and
development funding under the Agreement of approximately $10.0
million and $10.3 million in 1996 and 1995, respectively. Related
costs under the Agreement approximated the related research and
development funding revenue and are included in research and
development expenses in the accompanying financial statements. The
research and development funding expired as scheduled in October
1996. The Company also recorded as contract revenue under the
Agreement a milestone payment of $1.0 million in 1996. The Agreement
provides for additional payments to the Company upon the achievement
of certain milestones related to certain remaining licensed products
under the Agreement, as well as the payment of royalties to the
Company on net sales of licensed products. The royalty rate is
subject to reduction upon the occurrence of certain events. In March
1998, Roche acquired Boehringer Mannheim. The Company cannot predict
the outcome or timing of whether Roche will decide to continue,
modify or terminate the preclinical development program for some or
all of the Boehringer Mannheim preclinical development programs being
conducted with the Company.
Novartis
In April 1993, the Company entered into agreements with Sandoz
Pharma, Sandoz, Ltd. and Sandoz Pharmaceuticals Corporation
(collectively, "Novartis") to acquire certain licenses and rights to
certain human, humanized and mouse monoclonal antibodies and certain
related know-how, patent rights, equipment and materials. The Company
is pursuing development of these products with the intent of
producing treatments for certain diseases, and has obtained from
Novartis worldwide manufacturing and marketing rights to these
products. The agreements call for milestone payments of up to $5.0
million to Novartis in the event of certain product approvals. The
agreements further specify that Novartis has certain co-promotion and
co-marketing rights for certain of the products licensed and will be
entitled to royalties on the Company's sales of certain products in
countries where Novartis does not sell such products.
Kanebo
In February 1992, Kanebo Ltd. ("Kanebo") entered into a product
licensing agreement with the Company. Under this agreement, the
Company received a licensing and signing fee, research and
development funding and milestone payments and may receive additional
milestone payments and royalties on product sales, if any. Since
December 31, 1994, the Company has received payments for delivery of
manufactured drug substance under related supply agreements. These
amounts are not material.
Lilly
In December 1997, the Company entered into a research, development
and licensing agreement with Eli Lilly & Company ("Lilly"). The
Company received a non-refundable licensing and signing fee under the
Agreement of $3.0 million in 1997, of which the Company recognized
$1.35 million in 1997. Related costs under the agreement are
anticipated to approximate the related research and development
funding revenue and the portion of these costs incurred in 1997 are
included in research and development expenses in the accompanying
financial statements. The agreement further provides for additional
annual research funding of $2.4 million for the second through fifth
years if the agreement is not earlier terminated. In addition, under
this agreement the Company can earn milestones, receive royalty
payments on net sales of licensed products and negotiate co-promotion
rights in the U.S. and Canada. The agreement may be terminated by
Lilly upon written notice ranging from 30-180 days upon the
occurrence of certain events, including the event that certain key
personnel are no longer associated with the Company or are unable to
fulfill certain obligations under the Agreement with Lilly.
Humanization Agreements
Since December 31, 1994, PDL has entered into six antibody
humanization agreements pursuant to which the Company performed
antibody humanization services and granted patent licenses to
specified antibody targets with Roche, Mochida Pharmaceutical Co.,
Ltd., Toagosei Co., Ltd., Genetics Institute, Inc. (a wholly-owned
subsidiary of American Home Products Corporation), Teijin Limited and
Ajinomoto Co., Inc. Under these agreements, PDL received a licensing
and signing fee and the right to receive milestone payments for
achievement of certain specified milestones, as well as royalties on
product sales, if any. Under some of these agreements, PDL received
certain rights to co-promote the product. The Company recognized
$4.0 million in 1997, $4.5 million in 1996 and $1.0 million in 1995
under these arrangements.
Patent Licensing Agreements
Since December 31, 1994, PDL has entered into seven patent licensing
agreements with Sankyo Co., Ltd., Biogen, Inc., IDEC Pharmaceuticals
Corporation (two licenses), MedImmune, Inc. (two licenses) and NeoRx
Corporation relating to antibodies humanized by those companies. In
each agreement, PDL granted a worldwide, nonexclusive license under
its humanized antibody patents to the other company for an antibody
to a specific target antigen. In each case, PDL received a licensing
and signing fee and the right to receive royalties on net sales of
licensed products. Under some of these agreements, PDL could also
receive milestone payments. The Company recognized $5.4 million in
1997, $1.0 million in 1996 and no revenue under these types of
arrangements in 1995.
3. Other Accrued Liabilities
At December 31, other accrued liabilities consisted of the following:
(In thousands)
1997 1996
------------- -------------
Employee stock purchase plan $379 $334
Clinical trials 1,434 1,843
Accrued rent 256 282
Other accrued liabilities 1,577 1,096
------------- -------------
$3,646 $3,555
============= =============
The Company has a policy of recording expenses for clinical trials
based upon pro rating estimated total costs of a clinical trial over
the estimated length of the clinical trial and the number of patients
anticipated to be enrolled in the trial. Expenses related to each
patient are recognized ratably beginning upon entry into the trial
and over the course of the trial. In the event of early termination
of a clinical trial, management accrues an amount based on its
estimate of the remaining non-cancellable obligations associated with
the winding down of the clinical trial.
4. Commitments
The Company occupies leased facilities under agreements that expire
in 1998, 2000, 2004 and 2010. The Company also has leased certain
office equipment under operating leases. Rental expense under these
arrangements totaled approximately $1.7 million, $1.3 million, and
$1.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
At December 31, 1997 the total future minimum non-cancelable payments
under these agreements are approximately as follows:
(In thousands)
1998 $2,289
1999 2,900
2000 2,763
2001 1,870
2002 1,913
Thereafter 13,359
-------------
$25,094
=============
In July 1997, the Company entered into a lease agreement for a term
of approximately twelve years to lease approximately 90,000 square
feet of research and development and general office space in Fremont,
California. The Company plans to relocate its California headquarters
to this facility during the third or fourth quarter of 1998. The
Company plans to invest approximately $13 million in order to make
the building suitable for its operations. Lease commitments under
this arrangement are included above.
Effective in June 1997, the Company entered into a Sponsored Research
Agreement with Stanford University to provide aggregate funding and
equipment support of up to $3 million over a period of 3 years for the
laboratory of Stanley Falkow, Ph.D. In 1997, the Company provided
approximately $1.0 million in funding and equipment support under this
commitment. Dr. Falkow is a member of the Board of Directors and a
Distinguished Investigator (consultant) of the Company. The funding
arrangement provides the Company with certain exclusive rights to
intellectual property resulting from the research efforts in Dr.
Falkow's laboratory during the funding period. The amount of annual
funding from the Company is subject to reduction in the event that Dr.
Falkow obtains other grants or financial support for his laboratory.
The agreement further provides that the Company may terminate the
funding arrangement upon 90 days written notice.
5. Short- and Long-Term Investments
The Company invests its excess cash balances primarily in short-term
and long-term marketable securities and U.S. government and
government agency notes. These securities are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported in stockholders'
equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. The cost of securities
sold is based on the specific identification method, when applicable.
The following is a summary of available-for-sale securities.
Estimated fair value is based upon quoted market prices for these or
similar instruments.
(In thousands)
Available-for-Sale Securities
-------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
December 31, 1997
Securities of the
U.S. Government and
its agencies $139,815 $589 ($15) $140,389
Mortgage-backed
securities 14,000 -- -- 14,000
------------- ------------- ------------- -------------
Total $153,815 $589 ($15) $154,389
============= ============= ============= =============
December 31, 1996
Securities of the
U.S. Government and
its agencies $85,393 $133 $ -- $85,526
============= ============= ============= =============
During 1997, there were no realized gains or losses on the sale of
available-for-sale securities, as all securities liquidated in 1997
were held to maturity. During 1996, there were no realized gains or
losses on the sale of available-for-sale securities, as all
securities liquidated in 1996 were held to maturity. The remaining
contractual period until maturity of short-term and long-term
investments generally range from 1 to 12 months, and 13 to 24 months,
respectively. The mortgage-backed securities, which had a maturity
of 30 years, were sold in February 1998 and reinvested in securities
of U.S. Government agencies with maturities ranging up to 24 months.
6. Stockholders' Equity
1997 Public Offering
In March 1997, the Company completed a public offering in which it
sold 2,275,000 shares of common stock at a price per share of $32.00.
The net proceeds of this offering to the Company were approximately
$68.2 million.
1997 Private Placement
In October 1997, the Company entered into a Stock Purchase Agreement
with Toagosei pursuant to which the Company sold 44,568 shares of
Common Stock to Toagosei at a price of $44.875. The net proceeds of
this offering to the Company were approximately $2.0 million.
1991 Stock Option Plan
In December 1991, the Board of Directors adopted the 1991 Stock
Option Plan (the "Option Plan"). During 1995, the stockholders
approved an increase in the number of shares reserved under the
Option Plan from 2,000,000 to 4,000,000 shares of common stock for
the grant of options under the Option Plan.
At December 31, 1997, options to purchase 957,320 shares were
exercisable at prices ranging from $6.25 to $42.44. Options granted
under the Option Plan generally vest at the rate of 25 percent at the
end of the first year, with the remaining balance vesting monthly
over the next three years in the case of employees, and ratably over
two or five years in the case of advisors and consultants.
1992 Outside Directors' Stock Option Plan
In February 1992 the Board of Directors adopted the 1992 Outside
Directors' Stock Option Plan (the "Directors' Plan"). The Company has
reserved 200,000 shares of common stock for the grant of options
under the Directors' Plan. Through December 31, 1997, the Company
granted options to purchase 135,000 shares at exercise prices ranging
from $7.25 to $38.75 per share, of which 40,585 were exercisable at
December 31, 1997. Options granted pursuant to the Directors' Plan
vest ratably over five years. A total of 17,916 options were
exercised through December 31, 1997.
1993 Employee Stock Purchase Plan
In February 1993, the Board of Directors adopted the 1993 Employee
Stock Purchase Plan (the "Employee Purchase Plan"). The Company has
reserved 300,000 shares of common stock for the purchase of shares by
employees under the Employee Purchase Plan. Eligibility to
participate in the Employee Purchase Plan is essentially limited to
full time employees of the Company who own less than 5% of the
outstanding shares of the Company. Under the Employee Purchase Plan,
eligible employees can purchase shares of the Company's common stock
based on a percentage of their compensation, up to certain limits.
The purchase price per share must equal at least the lower of 85% of
the market value on the date offered or on the date purchased. During
1997, an aggregate of 30,456 shares was purchased by employees under
the Employee Purchase Plan at prices ranging from $23.27 to $24.23
per share.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting of Stock Issued to Employees" ("APB 25") and
related interpretations, in accounting for stock options granted to
employees, consultants and directors under the Option Plan and
Directors' Plan because, as discussed below, the alternative fair
value accounting provided for under Financial Accounting Standard 123
"Accounting for Stock-Based Compensation" ("FAS 123") requires use of
option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of
the Company's stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share in
1997, 1996 and 1995 has been determined as if the Company had
accounted for its stock options under the fair value method
prescribed by FAS 123. The resulting effect on pro forma net income
and earnings per share on a pro forma basis disclosed for 1997, 1996
and 1995 is not likely to be representative of the effects on net
income and earnings per share on a pro forma basis in future years,
because 1997, 1996 and 1995 pro forma results include the impact of
only three years, two years and one year, respectively, of options
vesting, while subsequent years will include additional years of
vesting. The 1997 pro forma net loss excludes the $11.9 million non-
cash special charge related to the extension of all stock options
granted prior to February 1995 except stock options granted to one
non-employee director (See Note 9). The special charge represents
the intrinsic value of the modified options calculated in accordance
with APB 25. Under FAS 123, only the additional compensation cost
related to the time value of the modified options is included in pro
forma net losses.
(In thousands, except per share data)
1997 1996 1995
------------- ------------- -------------
Net loss:
As reported ($23,875) ($11,796) ($8,354)
Pro forma ($17,727) ($14,399) ($9,220)
Net loss per share:
As reported ($1.35) ($0.76) ($0.54)
Pro forma ($1.00) ($0.92) ($0.60)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: (a) no dividends; (b) expected volatility of 55%; (c)
weighted-average risk-free interest rates of 6.22%, 5.93% and 6.46%;
and (d) expected lives of 6 years.
A summary of the status of the Company's stock option plans at
December 31, 1997, 1996 and 1995, and changes during the years ending
those dates is presented below.
(In thousands, except exercise prices)
1997 1996 1995
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------- ---------- --------- ---------- --------- ---------- ----------
Outstanding at beginning of year 1,941 $18.44 1,756 $15.61 1,412 $13.72
Granted 448 36.25 608 24.90 544 18.99
Exercised (237) 17.16 (309) 13.23 (137) 9.41
Forfeited (52) 23.66 (114) 21.32 (63) 16.75
---------- ---------- ----------
Outstanding at end of year 2,100 22.25 1,941 18.44 1,756 15.61
========== ========== ==========
Weighted average fair value of
options granted during the year $21.33 $14.23 $11.01
========= ========= ==========
The following information applies to all stock options under the
Company's stock option plans at December 31, 1997:
(In thousands, except exercise prices and remaining contractual life data)
Options Outstanding Options Exercisable
------------------------------------ ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- ----------------- ------------ ----------- ----------- ------------ -----------
$ 6.25 - $ 10.50 181 4.54 $7.82 179 $7.79
12.13 - 18.13 803 6.47 16.00 563 10.99
19.06 - 29.25 698 8.27 24.41 232 23.41
31.50 - 42.44 418 9.60 36.94 24 35.88
------------ ------------
2,100 $22.25 998 $16.54
============ ============
7. Income Taxes
As of December 31, 1997 the Company had federal and state net
operating loss carryforwards of approximately $45.5 million and $3.9
million, respectively. Federal net operating loss carryforwards will
expire at various dates beginning in 2002 through 2012, if not
utilized.
The federal net operating loss carryforward differs from the
accumulated deficit principally due to temporary differences in the
recognition of certain revenue and expense items for financial and
federal tax reporting purposes, consisting primarily of in-process
technology capitalized for federal tax purposes.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting and the amount used for income tax purposes.
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes as of December 31 are
as follows:
(In thousands)
1997 1996
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $15,700 $11,400
Research credits 3,400 2,400
Deferred revenue 600 --
Capitalized research and development 3,300 2,800
Special stock option charge 4,700 --
Other 400 500
--------- ---------
Total deferred tax assets 28,100 17,100
Valuation allowance for deferred tax asset (28,100) (17,100)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
Because of the Company's lack of earnings history, the deferred tax
assets have been fully offset by a valuation allowance. The valuation
allowance increased by $6.9 million during the year ended December
31, 1996.
Utilization of the net operating loss and credit carryforwards may be
subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before utilization.
8. Legal Proceedings
The Company is involved in administrative opposition proceedings
being conducted by the European Patent Office with respect to its
European patent relating to humanized antibodies. Eighteen
oppositions were filed with respect to the issuance of the patent to
the Company in January 1996. The opposition briefs argue that the
patent was incorrectly granted and should be withdrawn or limited.
Other than such administrative proceeding, the Company is not a party
to any material administrative proceedings. The Company believes that
the outcome of these opposition proceedings will not have a material
adverse effect on the financial position, results of operations or
the cash flows of the Company. However, if such outcome were to be
unfavorable, the Company's right to receive royalties on sales of
licensed products such as Zenapax and its ability to license its
patents relating to humanized antibodies may be materially adversely
affected which could in the future have a material adverse effect on
the Company's results of operations, cash flows and financial
position.
In 1997, Boehringer Mannheim invoked the dispute resolution
provisions under its collaborative research agreement with the
Company to address the reimbursement of up to $2.0 million for the
terminated Phase II study of OST 577 for the treatment of CHB
initiated by Boehringer Mannheim as well as certain legal expenses
related to Boehringer Mannheim's participation in the Company's
public offering in early 1997. In March 1998, Roche acquired
Boehringer Mannheim. The Company is unable to predict the outcome of
this proceeding but in any event has estimated and recorded a
liability with respect to this matter. Other than such legal
proceeding, the Company is not a party to any material legal
proceedings. The collaborative research agreement with Boehringer
Mannheim provides for reimbursement from PDL of costs and expenses of
up to $2.0 million for a Phase II study of OST 577 in the event
certain conditions are met with respect to that study.
9. Special Charge
In 1997, the Company incurred a non-cash special charge of
approximately $11.9 million related to the extension of the term of
all stock options held by employees, officers, directors and
consultants of the Company that were granted prior to February 1995,
with the single exception of stock options granted to one non-
employee director. The non-cash special charge conforms the term of
previously granted stock options, which was six years, to those
granted since February 1995, ten years. The special charge resulted
in an increase in additional paid-in capital of approximately $11.9
million, although no proceeds were received by the Company.
Report of Ernst & Young LLP, Independent Auditors
Board of Directors and Stockholders Protein Design Labs, Inc.
We have audited the accompanying balance sheets of Protein Design Labs,
Inc., as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and cash flows for each of three years
in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Protein
Design Labs, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
February 3, 1998
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
Certain information required by Part III is omitted from this
Report in that the Registrant will file a definitive proxy statement
pursuant to Regulation 14A for the 1998 Annual Meeting of Stockholders
(the "Proxy Statement") not later than 120 days after the end of the
fiscal year covered by this Report, and certain information included
therein is incorporated by reference.
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS
The information concerning the Company's directors as required by
this Item is incorporated by reference to the Section entitled
"Nomination of Directors" of the Proxy Statement.
The information concerning the Company's executive officers as
required by this Item is incorporated by reference to the Section
entitled "Executive Officers of the Registrant" of the Proxy Statement.
The information concerning compliance with requirements regarding
reporting of timely filing of statements regarding changes in beneficial
ownership of securities of the Company as required by this Item is
incorporated by reference to the Section entitled "Section 16(a)
Reporting" of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the Section entitled "Executive Compensation and Other Matters" of
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
to the Section entitled "Security Ownership of Certain Beneficial Owners
and Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Section entitled "Executive Compensation and Other Matters -
Compensation Committee Interlocks and Insider Participation" of the
Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM
8-K
(a) The following documents are filed as part of this report:
(1) Index to financial statements
The following financial statements of the Company and the Report of the
Independent Auditors are included in Part II, Item 8.
Item
Page
Balance Sheets 57
Statements of Operations 58
Statements of Stockholders' Equity 59
Statements of Cash Flows 60
Report of Ernst & Young LLP, Independent Auditors 74
(2) All financial statement schedules are omitted
because the information is inapplicable or presented
in the Financial Statements or notes.
(3) The items listed on the Index to Exhibits on page 78
are incorporated herein by reference.
(b) Reports on Form 8-K.
None.
(c) See (a)(3) above.
(d) See (a)(3) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PROTEIN DESIGN LABS, INC.
(Registrant)
By: /s/ LAURENCE JAY KORN
-------------------------------
Laurence Jay Korn,
Chief Executive Officer
and Chairperson of the Board
of Directors
March 30, 1998
--------------------------------
Date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- -------------------------- ------------------------------------- -------------
/s/ LAURENCE JAY KORN Chief Executive Officer and March 30, 1998
- -------------------------- Chairperson of the Board of Directors
(Laurence Jay Korn) (Principal Executive Officer)
/s/ JON S. SAXE President and Director March 30, 1998
- --------------------------
(Jon S. Saxe) (Principal Accounting Officer)
/s/ CARY L. QUEEN Director March 30, 1998
- --------------------------
(Cary L. Queen)
/s/ GEORGE M. GOULD Director March 30, 1998
- --------------------------
(George M. Gould)
/s/ STANLEY FALKOW Director March 30, 1998
- --------------------------
(Stanley Falkow)
/s/ MAX LINK Director March 30, 1998
- --------------------------
(Max Link)
/s/ JURGEN DREWS Director March 30, 1998
- --------------------------
(Jurgen Drews)
INDEX TO EXHIBITS
Number
Exhibit
Number Exhibit Title
3.1
Restated Certificate of Incorporation. (Incorporated by reference to
Exhibit 3.1 to Annual Report on Form 10-K filed March 31, 1993.)
3.2
Amended and Restated Bylaws. (Incorporated by reference to Exhibit 3.1
to Annual Report on Form 10-K filed March 31, 1995.)
4.1
Registration Rights Agreement between the Company and certain holders
of Preferred Stock and Common Stock, dated August 21, 1986.
(Incorporated by reference to Exhibit 4.1 to Registration Statement
No. 33-44562 effective January 28, 1992.)
4.2
Amendment to Registration Rights Agreement between the Company and
certain holders of Preferred Stock and Common Stock, dated March 16,
1989. (Incorporated by reference to Exhibit 4.2 to Registration
Statement No. 33-44562 effective January 28, 1992.)
4.3
Registration Rights Agreement between the Company and Hoffmann-La
Roche Inc., dated March 16, 1989. (Incorporated by reference to
Exhibit 4.3 to Registration Statement No. 33-44562 effective January
28, 1992.)
4.4
Standstill Agreement between the Company and Hoffmann-La Roche Inc.,
dated March 16, 1989. (Incorporated by reference to Exhibit 4.4 to
Registration Statement No. 33-44562 effective January 28, 1992.)
4.5
Registration Rights Agreement between the Company and Corange
International Limited, dated October 28, 1993. (Incorporated by
Reference to Exhibit 4.5 to Annual Report on Form 10-K filed March 31,
1994.)
4.6
Standstill Agreement between the Company and Corange International
Limited, dated October 28, 1993. (Incorporated by Reference to Exhibit
4.5 to Annual Report on Form 10-K filed March 31, 1994.)
4.7
Amendment No. 1 to Stock Purchase Agreement, Registration Rights
Agreement and Joint Development, Marketing and Licensing Agreement.
(Incorporated by Reference to Exhibit 5.2 to Current Report on Form 8-
K filed December 15, 1994.)
*10.1
1991 Stock Option Plan, as amended on October 20, 1992 and June 15,
1995, together with forms of Incentive Stock Option Agreement and
Nonqualified Stock Option Agreements. (Incorporated by reference to
Exhibit 10.1 to Annual Report on Form 10-K filed March 31, 1996.)
*10.2
Founder Stock Purchase Agreement between the Company and Dr. Laurence
Jay Korn, dated August 21, 1986. (Incorporated by reference to
Exhibit 10.3 to Registration Statement No. 33-44562 effective January
28, 1992.)
*10.3
Founder Stock Purchase Agreement between the Company and Dr. Cary
Queen, dated January 1, 1987. (Incorporated by reference to Exhibit
10.4 to Registration Statement No. 33-44562 effective January 28,
1992.)
*10.4
1986 Stock Purchase Plan. (Incorporated by reference to Exhibit 10.18
to Registration Statement No. 33-44562 effective January 28, 1992.)
*10.5
Forms of Stock Purchase Agreement under the 1986 Stock Purchase Plan.
(Incorporated by reference to Exhibit 10.19 to Registration Statement
No. 33-44562 effective January 28, 1992.)
*10.6
Outside Directors Stock Option Plan, together with form of
Nonqualified Stock Option Agreements. (Incorporated by reference to
Exhibit 10.31 to Annual Report on Form 10-K filed March 31, 1993.)
*10.7
1993 Employee Stock Purchase Plan. (Incorporated by reference to
Exhibit 10.32 to Annual Report on Form 10-K filed March 31, 1993.)
*10.8
Letter Agreement between the Company and Saxe Associates, dated June
14, 1993 (with certain confidential information deleted and marked by
a box surrounding the deleted information). (Incorporated by reference
to Exhibit 10.9 to Annual Report on Form 10-K filed March 31, 1994.)
10.9
Lease Agreement between the Company and Charleston Properties, a
California general partnership, dated December 22, 1989.
(Incorporated by reference to Exhibit 10.5 to Registration Statement
No. 33-44562 effective January 28, 1992.)
10.10
First Amendment of Lease between the Company and Charleston
Properties, a California general partnership, dated August 31, 1992.
(Incorporated by reference to Exhibit 10.26 to Annual Report on Form
10-K filed March 31, 1993.)
10.11
Lease Agreement between the Company and Plymouth Business Center I
Partnership, a Minnesota general partnership, dated February 10,
1992. (Incorporated by reference to Exhibit 10.28 to Annual Report on
Form 10-K filed March 31, 1993.)
10.12
Amendment No. 1 to Lease Agreement between the Company and Plymouth
Business Center I Partnership, a Minnesota general partnership, dated
July 8, 1993. (Incorporated by reference to Exhibit 10.14 to Annual
Report on Form 10-K filed March 31, 1994.)
10.13
License Agreement between the Company and the National Technical
Information Service effective as of October 31, 1988 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.7 to
Registration Statement No. 33-44562 effective January 28, 1992.)
10.14
License Agreement between the Company and Hoffmann-La Roche Inc.
effective January 31, 1989 (with certain confidential information
deleted and marked by a box surrounding the deleted information).
(Incorporated by reference to Exhibit 10.8 to Registration Statement
No. 33-44562 effective January 28, 1992.)
10.15
License Agreement between the Company and F. Hoffmann-La Roche & Co.
effective January 31, 1989 (with certain confidential information
deleted and marked by a box surrounding the deleted information).
(Incorporated by reference to Exhibit 10.9 to Registration Statement
No. 33-44562 effective January 28, 1992.)
10.16
License Agreement between the Company and the Medical Research Council
of the United Kingdom dated July 1, 1989, as amended on January 30,
1990 (with certain confidential information deleted and marked by a
box surrounding the deleted information). (Incorporated by reference
to Exhibit 10.10 to Registration Statement No. 33-44562 effective
January 28, 1992.)
10.17
Software License Agreement among the Company, Molecular Applications
Group and Michael Levitt effective September 1, 1990 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.14 to
Registration Statement No. 33-44562 effective January 28, 1992.)
10.18
Development and License Agreement between the Company and Yamanouchi
Pharmaceutical Company, Ltd. effective February 12, 1991, as amended
on February 12, 1991 (with certain confidential information deleted
and marked by a box surrounding the deleted information).
(Incorporated by reference to Exhibit 10.16 to Registration Statement
No. 33-44562 effective January 28, 1992.)
10.19
Form of Director and Officer Indemnification Agreement. (Incorporated
by reference to Exhibit 10.1 to Registration Statement No. 33-44562
effective January 28, 1992.)
10.20
Stock Purchase Agreement between the Company and certain holders of
Preferred Stock and Common Stock dated August 21, 1986. (Incorporated
by reference to Exhibit 10.22 to Registration Statement No. 33-44562
effective January 28, 1992.)
10.21
Stock Purchase Agreement between the Company and Hoffmann-La Roche
Inc. dated March 16, 1989. (Incorporated by reference to Exhibit
10.25 to Registration Statement No. 33-44562 effective January 28,
1992.)
10.22
Agreement for Purchase and Sale of Assets between the Company and
Helix BioCore, Inc., a Minnesota corporation, dated February 10,
1992. (Incorporated by reference to Exhibit 10.27 to Annual Report on
Form 10-K filed March 31, 1993.)
10.23
Agreement between the Company and Kanebo, Ltd., a Japanese
corporation, dated February 29, 1992. (Incorporated by reference to
Exhibit 10.29 to Annual Report on Form 10-K filed March 31, 1993.)
10.24
Letter dated November 4, 1992 amending the License Agreement between
the Company and Hoffmann-La Roche Inc. effective January 21, 1989.
(Incorporated by reference to Exhibit 10.30 to Annual Report on Form
10-K filed March 31, 1993.)
10.25
Asset Purchase and License Agreement among the Company, Sandoz Pharma
Ltd. and Sandoz Pharmaceuticals Corporation, dated April 13, 1993
(with certain confidential information deleted and marked by a box
surrounding the deleted information). (Incorporated by reference to
Exhibit 5.1 to Current Report on Form 8-K filed April 28, 1993.)
10.26
License Agreement among the Company, Sandoz Pharma Ltd. and Sandoz
Ltd., dated April 13, 1993 (with certain confidential information
deleted and marked by a box surrounding the deleted information).
(Incorporated by reference to Exhibit 5.2 to Current Report on Form 8-
K filed April 28, 1993.)
10.27
Letter dated October 21, 1993 amending the Asset Purchase and License
Agreement among the Company, Sandoz Pharma Ltd. and Sandoz
Pharmaceuticals Corporation, dated April 13, 1993 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.31 to
Annual Report on Form 10-K filed March 31, 1994.)
10.28
Amended and Restated Agreement between the Company and Sloan-Kettering
Institute for Cancer Research, dated April 1, 1993 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by reference to Exhibit 10.32 to
Annual Report on Form 10-K filed March 31, 1994.)
10.29
Stock Purchase Agreement between the Company and Corange International
Limited, dated October 28, 1993. (Incorporated by reference to Exhibit
5.1 to Current Report on Form 8-K filed November 12, 1993.)
10.30
Joint Development, Marketing and License Agreement between the Company
and Corange International Limited, dated October 28, 1993 (with
certain confidential information deleted and marked by a box
surrounding the deleted information). (Incorporated by reference to
Exhibit 5.2 to Current Report on Form 8-K filed November 12, 1993.)
10.31
License Agreement between the Company and The Board of Trustees of
Leland Stanford Junior University effective as of June 30, 1993 (with
certain confidential information deleted and marked by a box
surrounding the deleted information). (Incorporated by reference to
Exhibit 10.35 to Annual Report on Form 10-K filed March 31, 1994.)
10.32
Lease Agreement between the Company and Bio-Shore Holdings, Ltd. dated
as of May 16, 1994 (Incorporated by reference to Exhibit 10.1 to
Quarterly Report on Form 10-Q filed August 2, 1994.)
10.33
Amendment No. 2 to Lease Agreement between the Company and St. Paul
Properties, effective as of October 25, 1994. (Incorporated by
reference to Exhibit 10.36 to Annual Report on Form 10-K filed March
31, 1995.)
10.34
Amendment No.1 to Lease Agreement between the Company and Bio-Shore
Holdings, Ltd. dated as of October 17, 1994. (Incorporated by
reference to Exhibit 10.38 to Annual Report on Form 10-K filed March
31, 1995.)
10.35
Patent License Agreement between the Company and Celltech Limited
dated as of September 30, 1994 (with certain confidential information
deleted and marked by a box surrounding the deleted information).
(Incorporated by reference to Exhibit 10.39 to Annual Report on Form
10-K filed March 31, 1995.)
10.36
Amendment No. 2 to Joint Development, Marketing and Licensing
Agreement between the Company and Boehringer Mannheim GmbH dated and
effective as of November 7, 1995 (with certain confidential
information deleted and marked by a box surrounding the deleted
information). (Incorporated by reference to Exhibit 10.37 to Annual
Report on Form 10-K filed March 31, 1996.)
10.37
Development and License Agreement between the Company and an Unnamed
Japanese Pharmaceutical Company dated December 28, 1995 (with certain
confidential information deleted and marked by a box surrounding the
deleted information). (Incorporated by Reference to Exhibit 10.38 to
Annual Report on Form 10-K filed March 31, 1996.)
10.38
Amendment No. 3 to Joint Development, Marketing and Licensing
Agreement between the Company and Boehringer Mannheim GmbH dated and
effective as of May 31, 1996 (with certain confidential information
deleted and marked by a box surrounding the deleted information).
(Incorporated by Reference to Exhibit 10.1 to Quarterly Report on Form
10-Q filed August 14, 1996.)
10.39
Amendment No. 3 to Lease Agreement between the Company and St. Paul
Properties, effective as of November 27, 1996.
10.40
Second Amendment of Lease Agreement between Bio-Shore Holdings, Ltd.,
and the Company, dated February 25, 1998.
23.1
Consent of Ernst & Young LLP, Independent Auditors.
27.1
Financial Data Schedule.
____________
* Management contract or compensatory plan or arrangement.