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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-30231
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TANOX, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0196733
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10301 Stella Link, Houston, Texas 77025
(Address of principal executive offices)
713-578-4000
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value Preferred Share Purchase Rights
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. Yes [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [_]
The aggregate market value of the registrant's common stock held by
nonaffiliates as of February 28, 2003 was $267,989,639.
Number of shares of outstanding common stock as of February 28, 2003:
43,746,941
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Items 10, 11, 12 and 13 of Part III will be
included in the registrant's definitive proxy statement to be filed pursuant to
Regulation 14A and is incorporated herein by reference.
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TABLE OF CONTENTS
PART I Page
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ITEM 1. Business ................................................................................... 1
ITEM 2. Properties ................................................................................. 31
ITEM 3. Legal Proceedings .......................................................................... 31
ITEM 4. Submission of Matters to a Vote of Security Holders ........................................ 33
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters ..................... 34
ITEM 6. Selected Financial Data .................................................................... 35
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 36
Overview .............................................................................. 36
Critical Accounting Policies .......................................................... 37
Results of Operations ................................................................. 39
Liquidity and Capital Resources ....................................................... 40
ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk ................................. 43
ITEM 8. Financial Statements and Supplementary Data ................................................ 44
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 67
PART III
ITEM 10. Directors and Executive Officers of the Registrant ......................................... 68
ITEM 11. Executive Compensation ..................................................................... 68
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............................. 68
ITEM 13. Certain Relationships and Related Transactions ............................................. 68
ITEM 14. Controls and Procedures .................................................................... 68
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................ 69
SIGNATURES .................................................................................................. 71
CERTIFICATIONS .............................................................................................. 72
In this report, "Tanox", "we", "us" and "our" refer to Tanox, Inc. "Common
Stock" refers to Tanox's common stock, par value $0.01 per share.
Xolair(TM) (omalizumab) anti-IgE antibody is a trademark of Novartis AG.
i
PART I
ITEM 1. Business
Overview
Tanox discovers and develops therapeutic monoclonal antibodies to address
significant unmet medical needs in the areas of asthma, allergy, inflammation
and other diseases affecting the human immune system. Tanox's products are
genetically engineered antibodies that target a specific molecule, or antigen.
In 1987, we discovered a novel approach for treating allergies and asthma by
using anti-immunoglobulin E, or anti-IgE, antibodies capable of blocking IgE, a
causative agent of the allergy pathway, thus preventing the onset of disease
symptoms. Xolair(TM) (trade name for omalizumab), our most advanced product in
development, is a humanized monoclonal antibody that blocks IgE. Its therapeutic
effect has been validated through clinical trials in patients suffering from
allergic asthma, seasonal allergic rhinitis (hay fever) and perennial allergic
rhinitis. We are developing Xolair in collaboration with Novartis Pharma AG and
Genentech, Inc. In June 2000, our collaboration partners filed a Biologics
License Application (BLA) with the U. S. Food and Drug Administration (FDA) and
a submission for marketing approval with health authorities in the EU,
Switzerland, Australia, and New Zealand for allergic asthma and hay fever in
adults, adolescents and children. Following receipt of a Complete Response
Letter from the FDA in July 2001 and treatment of additional patients to expand
the safety database, our collaboration partners submitted to the FDA an
amendment to the BLA in December 2002 for moderate-to-severe allergic asthma in
adults and adolescents. The FDA's Pulmonary-Allergy Drugs Advisory Committee is
scheduled to review the BLA on May 15, 2003. In June 2002, Xolair was approved
for marketing in adolescents and adults with moderate allergic asthma in
Australia.
Using our knowledge of the human immune system, we are building a
diverse pipeline of monoclonal antibody product candidates. TNX-901, a humanized
anti-IgE monoclonal antibody distinct from Xolair, completed a Phase 2 trial in
patients suffering from severe peanut allergy. Further development of TNX-901
will depend on the outcome of our pending discussions with Genentech and
Novartis regarding further anti-IgE therapy investigation in peanut and
potentially other food allergies. TNX-355, an anti-CD4 antibody, is currently in
a Phase 1b trial for treating HIV-infected patients. TNX-224, a complement
factor D inhibiting antibody, is in preclinical studies for treating complement
mediated diseases. We are also conducting target discovery and target validation
research on several new targets implicated in allergies and other
immune-mediated disorders.
Background
Human Immune System
The human immune system has three general mechanisms that protect the
body against infections, toxins and cancer by responding to and clearing foreign
agents that have either penetrated the body's protective barriers, or, in the
case of cancer, have developed within these barriers. These harmful agents
express molecules (antigens) that can be recognized as foreign by the host
immune system. These protective immune mechanisms are:
.. Antibodies. The body produces proteins called antibodies that deactivate
and help remove foreign antigens from the body. Each antibody matches an
antigen much as a key matches a lock. Antibodies are made by specialized
white blood cells called B cells. With the help of other white blood cells,
such as antigen presenting cells and helper T cells, a B cell can
manufacture millions of identical antibody molecules and release them into
the bloodstream.
.. Cell-Mediated Immune Response. The second protective immune mechanism
relies on cells to
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recognize and destroy pathogen-infected cells or cancer. This mechanism is
known as cell-mediated immunity. T cells are important in cell-mediated
immune responses. Some T cells, called killer T cells, seek out and kill
cancer cells or virus-infected cells. Helper T cells also play a role in
cell-mediated immune response by stimulating inflammatory cells called
macrophages to actively destroy foreign antigens, microorganisms and cancer
cells.
.. Innate Immune Response. Innate immunity is the body's first line of defense
against injury and infection and serves a surveillance and maintenance
role. One part of the innate immune system involves white blood cells
called phagocytes (literally, "cell-eaters") that can engulf and digest
foreign microorganisms and other antigens. Important phagocytes, including
macrophages, rid the body of dead cells and other debris, and granulocytes,
including neutrophils, which contain granules filled with potent chemicals,
function to kill invading microorganisms. Natural killer cells, another
component of this system, have the ability to recognize and kill foreign
cells. Another part of the innate immune response is known as the
complement system. The complement system includes a series of proteins that
work to "complement" the activity of antibodies in destroying bacteria,
either by stimulating the macrophages and neutrophils, or by puncturing the
bacterial cell membrane to kill the cells. These proteins also cause
neutrophils to accumulate at the site of infection or tissue damage.
Most of the time, the immune system protects us from infections, cancer
and some toxic agents. However, the immune system may, under certain
circumstances, cause the disease or symptoms of disease. For example, in the
case of allergic diseases such as asthma and hay fever, the immune system
responds to the antigen, or allergen in this case, typically an innocuous
protein, by producing an IgE form of antibody. IgE is instrumental in triggering
the symptoms of the disease. In other cases, T and B cells may recognize a part
of the body as foreign, triggering an immune response against the body resulting
in an autoimmune disease with associated destruction of healthy tissue or
biochemical dysfunction.
Monoclonal Antibodies as Therapeutics
Monoclonal antibodies represent an exciting area of therapeutic product
development. Genetically engineered monoclonal antibodies are man-made
antibodies that target a specific antigen. Most monoclonal antibodies are
derived from animals such as mice. Advances in antibody design technologies have
enabled scientists to develop humanized (human-like) and fully human antibody
products that can be administered to patients on a chronic basis with reduced
concern for adverse responses by the human immune system. Advances in antibody
production technologies, such as high productivity fermentation and experimental
technologies such as transgenic plants and animals, have enabled manufacturers
to produce antibody products more cost-effectively. Because of these advances,
14 monoclonal antibodies have already been approved for marketing as
therapeutics by the FDA, and a large number of monoclonal antibodies are
currently undergoing clinical and preclinical investigation.
Our Strategy
Our vision is to improve the health of individuals worldwide by
developing innovative therapeutics for diseases of the immune system and related
disorders. By leveraging our expertise in monoclonal antibodies and
understanding of the human immune system, our objective is to become a
profitable, fully integrated biopharmaceutical company. We intend to accomplish
this objective through the following strategies:
.. Advance Our Product Pipeline. We will continue our efforts to expand the
market opportunity for anti-IgE antibodies in collaboration with our
partners. We have demonstrated the potential of anti- IgE therapy to treat
peanut allergy using TNX-901 in a placebo-controlled Phase 2 trial.
Although an arbitration panel has ruled that Tanox does not have the right
to independently develop TNX-901,
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Tanox, Novartis and Genentech have agreed to discuss further anti-IgE
therapy investigation for peanut and potentially other food allergies. We
recently presented positive single dose Phase 1a data with TNX-355 in
HIV-infected patients (greater than one log/10/ decreases in viral load) at
the 10th Conference on Retroviruses and Opportunistic Infections, and plan
to complete a Phase 1b multiple dose trial later this year. If the data
from this trial are supportive, we will advance the product into further
clinical trials and develop a commercial manufacturing strategy.
.. Form Strategic Collaborations to Support Development and Commercialization
of Our Products. To enable us to develop a greater number of products and
to mitigate risk, we may deem it advantageous to partner with large
pharmaceutical and biotech companies. These partnerships could allow us to
obtain funding for our development and marketing activities, thereby
reducing the substantial financial investment that is required to develop
our products, and providing us with domestic and international marketing
and sales expertise for our partnered products. To the extent economically
feasible, we expect to retain strategically important development,
manufacturing or marketing rights in order to maximize the value of our
drug development opportunities.
.. Develop Innovative and Effective Therapies for Treating Asthma, Allergies
and Other Diseases Affecting the Immune System. We have research programs
aimed at furthering our understanding of disease pathways in asthma,
allergy, and immune-mediated disorders, thereby discovering potential
molecular targets for the development of new and effective therapeutics.
.. Identify Attractive Acquisition and In-licensing Candidates. In addition to
our in-house programs, we will identify and evaluate opportunities to
acquire or in-license products and technologies that will supplement our
technology platform and product pipeline. We believe that we are well
positioned to continue to attract in-licensing and acquisition candidates
as a result of our expertise in monoclonal antibody technology and our
strong financial position.
.. Expand Our Biologics Manufacturing Capability. Biologics manufacturing
capacity is in short supply worldwide. To support our future clinical
manufacturing and commercial supply needs, we are investigating
construction or acquisition of a new biologics manufacturing facility, as
well as other alternatives for manufacturing capacity, that can supply
drugs for our clinical trials and initial commercial launches.
.. Continue to Prudently Invest Our Resources. We are committed to moving our
product pipeline forward in a cost efficient and focused manner. In
addition, we are actively pursuing out-licensing opportunities, both
exclusive and non-exclusive, for certain of our intellectual property which
is not core to our development projects. We entered into two license
agreements in 2002 and expect to enter into one or more in 2003.
Our Product Development Programs
Our lead product, Xolair, has completed clinical development in several
indications and has been submitted to the FDA for marketing approval for
moderate-to-severe asthma in adults and adolescents. We are also evaluating
other products and potential product candidates in clinical and preclinical
studies. Our drugs target various elements or malfunctions of the immune system
underlying the cause of disease. We have designed drugs to deactivate or reduce
the activity of the immune system for diseases caused by over-activation or
inappropriate activation of immune responses, such as autoimmune and allergic
diseases and acute inflammation. We also have designed drugs to activate the
immune system for treatment of diseases where boosting immune protection is
desirable, such as HIV/AIDS. Our products have either resulted from internal
research or were in-licensed or acquired.
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The table below summarizes the development status for our principal
product candidates.
Antibody
Product Description Indication Status Partners
- ------- ----------- ---------- ------ --------
Xolair Anti-IgE Allergic asthma Registration Novartis/Genentech
Seasonal allergic rhinitis Phase 3 completed Novartis/Genentech
Perennial allergic rhinitis Phase 3 completed Novartis/Genentech
TNX-901 Anti-IgE Severe peanut allergy Phase 2 completed, (1)
Development halted (1)
TNX-355 Anti-CD4 HIV/AIDS Phase 1b --
TNX-224 Anti-complement Acute inflammatory Preclinical --
Factor D diseases
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(1) Following an unfavorable arbitration ruling in October 2002, Tanox halted
independent development of TNX-901. (See detailed discussion under "Item 3.
Legal Proceedings.") Further development, if any, of TNX-901 will be done in
collaboration with Genentech and Novartis.
(2) In addition to the products above, we are also evaluating TNX-100, an
anti-CD40 antibody that completed a Phase 1 trial in Crohn's disease in 2002.
Anti-IgE Development--Xolair
Xolair is a humanized anti-IgE monoclonal antibody designed to prevent
symptoms of allergic asthma and allergic rhinitis. In allergic diseases, the
immune system responds to the antigen, or allergen in this case, by producing
IgE. IgE binds to the surface of mast cells and basophils through high affinity
IgE receptors on the cell surface. These cells, which are found in tissue and
also circulate in the blood, contain or can manufacture chemicals such as
histamine and leukotrienes, which induce inflammation. The first time an
allergy-prone person is exposed to an allergen, he or she makes IgE antibodies
specific to that allergen. These IgE molecules circulate in the blood stream and
find their way to attach to the mast cells or basophils, thereby arming these
cells. When a mast cell or basophil armed with allergen specific IgE on its
surface again comes in contact with its specific allergen, the allergen will
bind to the specific IgE molecules, with resultant cross-linking of the
underlying receptors on the cell surface. This event signals the mast cell or
basophil to release its powerful chemicals, causing tissue inflammation and
asthma and allergy symptoms, including wheezing, coughing, sneezing, runny nose,
watery eyes and itching. Xolair binds to circulating IgE, preventing IgE from
binding to and arming mast cells and basophils, and thereby blocks or inhibits
the allergic response.
Market Opportunity
Allergic reactions triggered by IgE include allergic asthma and
allergic rhinitis.
Asthma. Asthma makes breathing difficult and is potentially life
threatening. According to a report by Decision Resources: Immune Disease, Asthma
1998, approximately 35.6 million people in the top seven global markets (France,
Germany, Italy, Spain, the United Kingdom, Japan and the United States) suffer
from asthma. Approximately two-thirds of these patients have allergic asthma. In
the
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United States, there are 17 million asthmatics. Approximately 8.5 million of
these patients have moderate to severe asthma and depend on the use of
corticosteroids to control asthma symptoms. Five percent of asthmatic patients
with disease symptoms are not adequately controlled by current medication.
Corticosteroids (primarily inhaled but also systemic) and beta-agonists, the
mainstays of asthma therapy, are usually effective, yet each is associated with
specific safety drawbacks. Particular side effects of even inhaled
corticosteroid treatment include osteoporosis, cataracts and growth retardation
in children. Beta-agonists offer only symptom relief and do not control the
underlying inflammation. Leukotriene modifiers, a class of controller
medications with the potential to reduce steroid requirements, are modestly
effective for many patients. However, these modifiers have been associated with
drug interactions and adverse events including liver injury. Increasing use of
beta-agonists indicates inadequate control of the underlying inflammation that
causes asthma.
Allergic Rhinitis. Allergic rhinitis is a disease characterized by
runny nose, sneezing, congestion, itchy eyes and similar symptoms, and includes
hay fever. Allergic rhinitis afflicts approximately 39.5 million people in the
United States, most of whom have seasonal allergies and many of whom also suffer
from allergic asthma. Doctors commonly treat the symptoms of allergic rhinitis
with antihistamines, decongestants, nasal steroids and other drugs. They
sometimes prescribe allergy shots, called hyposensitization therapy, for
severely allergic persons, which can be effective if the treating health care
professional knows the allergen to which the patient is reacting. However, it is
often difficult to identify which allergen(s) causes the patient's allergy, and
the frequent and lengthy treatment protocols, coupled with limited effectiveness
in many patients, and the potential for serious adverse side effects, generally
lessen the desirability of hyposensitization.
Development Status and Clinical Results
Moderate to Severe Allergic Asthma. Three Phase 3 clinical trials in
patients with moderate to severe allergic asthma have been completed in adults
(including adolescents) (12-75 years) or children (6-12 years) served as the
basis for filing the initial marketing application for Xolair. The three
randomized, placebo-controlled, multicenter clinical trials included: 525
patients in the U.S. adult study; 546 patients in the European adult study; and
334 patients in the U.S. pediatric study. In the adult studies, patients who
were experiencing asthma symptoms despite taking inhaled corticosteroids, were
given either Xolair or placebo. In the pediatric study, all patients were well
controlled, but required inhaled corticosteroids for control.
When Xolair-treated patients were compared with those given placebo,
statistically significant clinical differences in favor of Xolair were found in
all three studies:
.. Xolair-treated patients had significant reduction in steroid dosage as
assessed by both the mean reduction and the percentage of patients able to
completely withdraw from inhaled steroids. In the adult studies, more than
twice as many Xolair-treated (approximately 40%) as placebo-treated
patients (approximately 20%) were able to completely withdraw from
corticosteroids, and in the pediatric studies the proportions were 55% vs.
39%, respectively.
.. The mean number of exacerbations per patient was significantly less for
Xolair-treated adult patients, and a strong trend was seen in this
direction in the pediatric trial. In the adult trials, Xolair-treated
patients experienced approximately half the number of exacerbations as did
the placebo-treated patients, and in the pediatric study, approximately 25%
fewer exacerbations.
.. Over the full year of treatment in the two adult trials, only two
Xolair-treated patients (0.4%) were hospitalized as compared to 13 placebo
patients (2.5%). The children with moderate-to-severe allergic asthma
participating in the pediatric trial were monitored for hospitalizations
during the 28-week core trial period. None of the Xolair-treated patients
were hospitalized because of serious
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asthma exacerbations while five of the placebo-treated patients (4.6%) were
hospitalized.
.. Significant differences in favor of Xolair were also found in all three
studies in other secondary efficacy measures such as quality of life and
use of rescue medications.
Xolair was well tolerated. The incidence of adverse events during the
Phase 3 trials was similar in both the Xolair and placebo groups. Adverse events
suspected as being drug related that occurred more frequently in Xolair patients
than in placebo patients were fatigue (0.5% vs. 0.1%), rash (0.4% vs. 0%), and
urticaria (skin itching and hives) (0.4% vs. 0.1%). No anti-drug antibodies were
detected, and there was no evidence of immune complex disease. Furthermore,
there was no increase in the incidence of parasitic infections.
Severe Allergic Asthma. To confirm efficacy in the severe allergic
asthma patient, a separate Phase 3b study was conducted in 246 adolescents and
adults. The design and treatment regimens were similar to the previous studies
in moderate to severe patients, except patients required much higher doses of
inhaled steroids and had lower airway flow rates (FEV1) at baseline. As compared
to placebo-treated patients, Xolair-treated patients were able to achieve
significantly better Asthma Symptom and Quality of Life scores, and were able to
more significantly reduce their dosages of inhaled corticosteroids.
Seasonal Allergic Rhinitis. One randomized, placebo-controlled Phase 3
clinical trial of Xolair for seasonal allergic rhinitis was conducted in 251
adult and adolescent patients with history of birch pollen allergy. Patients
were treated every 3 to 4 weeks for 8 to 9 weeks. The results of the study
showed that, compared with patients given placebo, Xolair-treated patients had
decreased severity of nasal symptoms (sneezing, itchy nose, runny nose and
stuffy nose) and ocular allergy symptoms (itchy eyes, watery eyes and red eyes),
decreased use of rescue medication, and improved quality of life. Xolair
treatment was safe and well tolerated. The incidence of adverse events was
similar for Xolair and placebo groups. These results confirmed the statistically
significant results of an earlier pivotal Phase 2 trial in 536 patients with a
history of ragweed pollen allergy.
Perennial Allergic Rhinitis. A Phase 3 clinical trial of Xolair for
perennial allergic rhinitis (PAR) was completed in 289 adults and adolescent
patients (12-75 years) with moderate to severe PAR. The severity of nasal
symptoms, post nasal drip, and ocular symptoms was significantly lower in the
Xolair group compared with placebo group, as were the requirements for rescue
medication. Xolair was also found to be more effective than placebo in the
subsets of patients who had previously failed to be adequately controlled by
nasal corticosteroids or specific immunotherapy (allergy shots). There were no
drug-related serious adverse events, and the incidence of adverse events was
lower in the Xolair group (77%) than in the placebo group (85%).
Additional Studies. To increase the safety database, Genentech and
Novartis conducted a safety study (ALTO) in difficult-to-treat allergic asthma.
Approximately 1,900 patients from 6 to 75 years of age were enrolled and
received treatment with Xolair in open-label fashion for six months. Results of
the trial were submitted to the FDA as part of the BLA amendment.
Regulatory Status
In December 2002, Genentech and Novartis submitted to the FDA an
amendment to the BLA for Xolair for the treatment of adult and adolescent
moderate-to-severe allergic asthma. Data in the BLA amendment address the FDA's
requests outlined in a July 2001 Complete Response Letter for, among other
things, an expanded Xolair-treated patient database. To date, over 4,000
patients have been treated with Xolair. The FDA's Pulmonary-Allergy Drugs
Advisory Committee is scheduled to review the BLA on May 15, 2003.
New data from "at risk" allergic asthma patients (those hospitalized
for asthma within the past year) will be included as part of the Xolair
marketing application that Novartis expects to submit to the
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European Medical Evaluations Agency (EMEA) in the first half of 2004. Xolair has
already received marketing approval from the health authority in Australia.
Anti-IgE Development--TNX-901
TNX-901 is a humanized anti-IgE monoclonal antibody that has recently
completed a Phase 2 trial demonstrating its potential to prevent severe allergic
reaction from accidental ingestion of peanuts or peanut products in patients
allergic to peanuts, a potentially life-threatening condition. TNX-901 binds IgE
in a way similar to Xolair, and is designed to prevent allergic reactions. At
the initiation of our collaboration with Novartis and Genentech in 1996,
Novartis and Tanox were already developing TNX-901, and Genentech was developing
Xolair.
Market Opportunity. We believe anti-IgE antibodies, such as TNX-901 and
Xolair, have potential applications beyond asthma and allergic rhinitis in
treating other allergic reactions and diseases, including peanut and other food
allergies. For example, patients with severe peanut allergy may suffer
gastrointestinal, skin and respiratory symptoms, and may also suffer potentially
life-threatening anaphylaxis in response to unintended ingestion of peanuts.
According to a recently published survey, peanut or tree nut (e.g., walnut,
almond and cashew) allergy affects about 3 million people in the United States,
1.1% of the U.S. population. The current treatment is avoidance of peanuts and
peanut oil, which are used in the preparation of many food products. Complete
avoidance requires constant vigilance and is difficult because prepared food
labeling does not always identify peanut-derived ingredients. Accidental
exposures can result in serious allergic reactions and sometimes death. Patients
with severe peanut allergy take antihistamines for accidental exposure and may
require administration of epinephrine for severe anaphylactic reactions.
Approximately six million children and adults in the United States suffer from
food allergies. There is no approved preventive therapeutic for food allergies.
Development Status and Clinical Data. In July 1999, we initiated our
first independent clinical trial with TNX-901. In 2002, we completed a
double-blind, placebo-controlled Phase 2 clinical trial with TNX-901 to evaluate
safety and efficacy in patients with severe peanut allergy. The study was
conducted in 84 patients with a history of immediate hypersensitivity to
peanuts. At screening, the hypersensitivity threshold was established through a
double-blind, placebo-controlled oral food challenge with encapsulated peanut
flour. The patients were then randomized to receive either TNX-901 (150, 300, or
450 mg) or placebo every month for four months. Two to four weeks after the last
dose of study drug was given, the patients underwent another oral food challenge
with encapsulated peanut flour.
The results show a clear increase in the amount of peanut flour
required to induce a hypersensitivity reaction. From mean screening thresholds
ranging from 178-436 mg in the various treatment groups, mean increases in the
hypersensitivity threshold were 710, 913, 1650, and 2627 mg for the placebo,
150, 300, and 450 mg of TNX-901 dose groups, respectively. TNX-901 was well
tolerated.
As discussed under "Item 3. Legal Proceedings," Novartis and Genentech
have contested our right to develop TNX-901 independently. In October 2002, an
arbitration panel ruled that we do not have the right to independently develop
TNX-901, and we thereafter halted further development. Since then, Genentech,
Novartis and Tanox have agreed to discuss potential tripartite development of
TNX-901 and to reach a decision on the scope and timing of continued
development, if any, of TNX-901 for peanut allergy on or before July 1, 2003. If
TNX-901 is not further developed, the three companies may consider developing
Xolair for this indication.
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Anti-CD4 Development - TNX-355
TNX-355 is a humanized anti-CD4 monoclonal antibody that we are
developing for treatment of human immunodeficiency virus, or HIV. The virus
enters the host cell by binding to the CD4 receptors on these cells. In lab
studies, TNX-355 binds to the CD4 receptor on the cell surface and prevents
viral entry into the cell, thereby blocking cellular infection. TNX-355 binds
to a region of the CD4 molecule that is not involved with normal immune
function. TNX-355, therefore, does not suppress immune function in monkeys nor
in human blood cells in the laboratory. Furthermore, the antibody does not
deplete CD4 cells in animals or human blood cells in vitro. We have exclusive
worldwide rights to TNX-355 through a license with Biogen.
Market Opportunity. According to the World Health Organization, HIV
infects approximately 1.5 million people in North America and Western Europe. A
number of drugs targeting viral replication are being used, often in combination
with others. About 30% of the patients treated with drug combinations no longer
respond to the treatment since their HIV has become drug resistant. In addition,
many drug combinations produce a variety of undesirable side effects.
Development Status and Clinical Results. We have completed an open
label, single dose, dose-escalating Phase 1a safety study in 30 HIV-infected
patients. An analysis of the trial results shows that TNX-355 demonstrates
greater than one log/10/ decreases in viral load in a dose-responsive manner.
The drug was safe and well tolerated in all dose groups up to 25 mg/kg. We are
currently conducting an open label, multiple-dose Phase 1b trial to further
evaluate the drug's effectiveness in reducing HIV virus load and protecting CD4+
cells.
Anti-Factor D - TNX-224
TNX-224 is a monoclonal antibody that binds to Factor D, a component of
the complement system, and is currently under preclinical investigation for the
treatment of acute inflammatory diseases. The complement system is the body's
first line of defense against infection.
While the complement system generally functions to protect the body,
complement system activation can become excessive and uncontrolled, resulting in
inflammation and tissue damage. This can occur in cases of acute tissue injury
or surgical procedures that reduce blood flow into a tissue. TNX-224 binds to
Factor D and inhibits complement activation in the alternative complement
pathway.
Market Opportunity. Complement activation is believed to play a major
role in acute tissue injury associated with procedures such as cardiopulmonary
bypass surgery and organ transplantation, and ischemia/reperfusion injury as a
result of stroke, burns and myocardial infarction.
Development Status. TNX-224 is in preclinical development to assess its
potential therapeutic usefulness by treating acute inflammatory diseases in
animal disease models.
Our Approach to Drug Discovery
We are committed to identifying new drugs for treating asthma,
allergies, inflammation and other diseases affecting the human immune system. A
cornerstone of our discovery effort is our Monoclonal Antibody Development
Platform (MADP) which is a semi-automated, high-throughput system that gives us
the capability to identify and optimize individual monoclonal antibody leads in
a 12-18 month timeframe. The resulting biologic drug candidates are humanized to
reduce the possibility of immunogenicity which could lead to decreased activity
and tolerability in patients. Our antibodies are
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also optimized for affinity, effector function and circulating half-life to
enhance their therapeutic potential.
Our monoclonal antibody therapeutics treat disease by altering the
function of a specific disease-causing protein, called a drug target. We select
drug targets that are well-established in the scientific community, as well as
novel drug targets that are proprietary to Tanox. The latter process involves
genome-wide expression profiling, proteomics, bioinformatics and transgenic
mouse technologies. Once a new target has been identified and its relevance to
disease has been confirmed, or validated, MADP is used to generate proprietary
monoclonal antibody drug candidates.
Collaboration and Licensing Agreements
Collaboration with Novartis and Genentech
We are developing our lead product, Xolair, in collaboration with
Novartis and Genentech. In 1990, we established a collaboration with Novartis to
jointly develop anti-IgE antibodies to treat allergic diseases. In 1996,
Genentech joined our collaboration with Novartis and we agreed to combine our
respective anti-IgE development programs in a three-party collaboration. We and
our collaboration partners selected Xolair as the lead product for development
and commercialization.
The collaboration agreements include, among others, the following terms:
.. Development. Novartis and Genentech are responsible for completing the
development of and obtaining the regulatory approval for Xolair and the
other anti-IgE products developed through the collaboration. Novartis and
Genentech share all development costs relating to Xolair and other anti-IgE
products that the collaboration may select for development in the United
States and Europe. We and Novartis equally share development costs relating
to China, Hong Kong, Korea, Singapore and Taiwan. Novartis is responsible
for development costs in the rest of the world.
.. Manufacturing. Novartis and Genentech are responsible for manufacturing
Xolair and other selected anti-IgE products worldwide, subject to our right
to manufacture up to 50% of the worldwide requirements of those products.
.. Marketing. Novartis and Genentech share U.S. marketing rights, and Novartis
has marketing rights in Europe (with Hoffman-La Roche Ltd. retaining the
option, subject to certain conditions, to participate in Europe) to
products developed through the collaboration. Novartis is responsible for
marketing these products in the rest of the world, including China, Hong
Kong, Korea, Singapore and Taiwan.
.. Milestone Payments. We may receive payments of up to $63.5 million based on
completing development and marketing objectives for Xolair, $18.5 million
of which we have already received. We may also receive payments of up to
$14.0 million based on completing development objectives for a potential
second generation drug, E26, $1.0 million of which we have already
received.
.. Royalties and Profit Sharing. We may receive royalties based on net sales
of Xolair and other selected anti-IgE products in the United States and a
share of Novartis' profits on these sales. We also may receive royalties on
net sales of Xolair and other selected anti-IgE products in Europe and the
rest of the world (except for China, Hong Kong, Korea, Singapore and
Taiwan) and an equal share of Novartis' profits from sales of Xolair and
other selected anti-IgE products in China, Hong Kong, Korea, Singapore and
Taiwan. We expect that the net amount Tanox will receive from Xolair will
be approximately in the range of 8% to 12% of net sales depending on
geographic distribution of Xolair sales.
9
Our rights to the full amount of the milestone payments and royalties
that we receive could be affected by the on-going legal proceedings with our
former attorneys described under "Item 3. Legal Proceedings."
Either Novartis or Genentech may withdraw from the collaboration on
short notice. If either Novartis or Genentech withdraws, rights to Xolair and
any other products developed by the collaboration (including by the withdrawing
partner) revert to us and the remaining collaborator and, if Genentech is the
withdrawing party, to Roche if Roche exercises its option to do so. If the
collaboration is dissolved in its entirety, we would continue to retain rights
to develop anti-IgE antibodies under the terms of separate agreements with
Novartis and Genentech.
In addition to the collaboration agreements, we and Genentech entered
into a cross-license agreement under which each party has an option to license
the other party's patents relating to the development of anti-IgE antibodies for
use in developing specific products. This option may be exercised at any time if
either party chooses to independently develop a product as permitted under the
collaboration agreements, if our collaboration with Novartis and Genentech
terminates or if we and Genentech may mutually agree.
Other Collaborations and License Agreements
Biogen. In 1998, we entered into an agreement to license from Biogen
its anti-CD4 monoclonal antibody and intellectual property on an exclusive
worldwide basis with limited sublicense rights. Biogen owns issued U.S.,
European and Australian patents and has pending applications in Canada and
Japan, which cover our TNX-355 product. We paid Biogen a license fee and agreed
to make additional development milestone payments and royalty payments to Biogen
based on annual net sales revenue levels. Additionally, we agreed to make
milestone payments to Biogen that increase as product development continues and
if specified corporate development events occur. In addition to royalty
payments, we may make up to an aggregate of $10.4 million in product development
milestone payments under this agreement, of which we have paid $100,000. The
license terminates on a country-by-country basis on the later of the expiration
of 12 years following the first commercial product sale or the expiration or
invalidity of applicable patents. The licensed patents expire in Europe in 2011
and in the United States in 2016, subject to extensions.
Chiron License. In 1995, our European subsidiary Tanox Pharma, B.V.
entered into an agreement to license from Chiron exclusive research and
development rights (except as to Chiron) to Chiron's murine monoclonal
antibodies against CD40. Subject to Tanox Pharma's obligations to develop an
anti-CD40 product and, under certain circumstances, pay maintenance fees, the
agreement granted Tanox Pharma an option to obtain a commercial license to
Chiron's anti-CD40 antibodies, patents and technology for Europe and Japan.
Tanox Pharma exercised this option in March 2000. Chiron retains its commercial
rights in the United States and the rest of the world. Additionally, Chiron has
an option to obtain a commercial license for the United States and the rest of
the world outside Europe and Japan to use anti-CD40 patents and technology that
Tanox Pharma develops. Chiron has four awarded U.S. patents relating to such
anti-CD40 antibodies and has patents pending in Europe, Japan and Canada.
Upon registering a product in Japan, the United Kingdom, France or
Germany, Tanox Pharma has agreed to pay Chiron a fee of $1.0 million and
royalties based on Tanox Pharma's European and Japanese sales. Chiron has agreed
to pay Tanox Pharma royalties based on Chiron's sales in the United States and
the rest of the world. The license terminates on the later of the expiration of
10 years following the first commercial product sale or the expiration of the
last to expire of licensed patents (currently, 2017, subject to extensions).
10
Patents and Proprietary Rights
We pursue patent protection for our proprietary technology and products
and have either been granted patents, have patent applications pending, or are
licensed under patents and patent applications that relate to our products. We
file patent applications in various countries, including in the United States,
Japan, Canada, Australia and certain countries in Europe and Asia.
We have at least five U.S. patents that cover and/or relate to the use
of anti-IgE and other allergy/asthma products. We also hold patents in Europe,
Canada, Japan, Singapore, Hong Kong and Australia covering such products. We
have additional anti-IgE patents pending in the United States and
internationally. Some of our patents are co-owned with Novartis. We also cross
license Genentech's patents covering anti-IgE products. Our patents covering
anti-IgE products expire between 2009 and 2013.
We also have filed U.S. and corresponding national patent applications
relating to anti-Factor D antibodies. We have a number of other U.S. and foreign
patents covering certain other proprietary technology and products, with over
fifty U.S. patents granted to date.
In September 2000, we purchased at auction from LXR Biotechnology, Inc.
its patent portfolio related to apoptosis. This portfolio includes the following
technologies: (i) Bak, a bcl-2 homologue and gene product, known to be a potent
inducer of apoptosis and cell death (5 U.S. patents, as well as several pending
applications in the U.S., Europe, Canada, and Japan); (ii) SARPs (secreted
apoptosis-regulating proteins), which constitute a family of proteins that
regulate the life and death of cells in the body (several pending applications
in the U.S., Europe, Canada, and Japan); (iii) Fas(DELTA)TM, a
naturally-occurring soluble form of the death receptor protein also known as
Fax, CD95, or APO-1, which is believed to be involved in the signaling pathway
for apoptosis induction in many tissues and organs (2 U.S. patents); and (iv)
patents directed to in vitro apoptosis drug screening critical for future
discovery, diversification and optimization of apoptosis regulating drugs. The
patents expire between 2014 and 2019. In addition to the patents, we succeeded
to various related license agreements that LXR had executed, and we have
continued to negotiate and enter into out-licenses of these technologies. We
have also in-licensed a series of patents and patent applications relating to a
new pro-apoptotic member of the Bcl-2 gene family known as BOK.
Patenting biotechnology-related products and processes can involve
uncertain and complex legal and factual questions and, to date, policies
regarding the breadth of claims allowed in biotechnology patents are not
necessarily consistent. Patents, if issued, may be challenged, invalidated,
limited in their scope of coverage, circumvented, or held unenforceable. We
cannot assure you that one or more of the patents noted above would not be held
invalid, successfully opposed, revoked, narrowed, or held unenforceable. Thus,
any patents that we own or license from third parties may not provide any
protection against competitors. Pending patent applications, future patent
applications filed, or patent applications that we license from third parties
may not result in patents. Also, patent rights may not provide proprietary
protection or competitive advantages against competitors with similar technology
or different technology. Furthermore, others may independently develop similar
technologies or duplicate any technology that we have developed. Moreover, the
laws of certain foreign countries do not protect our intellectual property
rights to the same extent as the laws of the United States.
Litigation may be necessary to enforce any patents issued or licensed
to us or to determine the scope and validity of these patents. We could incur
substantial costs and divert technical and management personnel's time and
attention if we participate in litigation or if we defend ourselves against
patent suits against us. If the outcome of litigation is adverse to us, third
parties may be able to use our patented inventions without paying us. Moreover,
we cannot assure you that our patents will not be infringed or successfully
avoided through design innovation. Any of these events may materially and
adversely affect our business.
11
In addition, other companies, some of which may be our competitors,
have filed applications for or have been issued patents, and may obtain
additional patents and proprietary rights, relating to products or processes
used in, necessary to, competitive with or otherwise related to our patents and
products. These products and processes include, among other items, patents
covering technology relating to the type of humanized monoclonal antibodies that
we anticipate developing. Protein Design Labs, Inc. owns certain patents and
patent applications relating to these humanized antibodies. We acquired the
right to take non-exclusive licenses to these patents and patent applications
for up to four of our products, excluding Xolair, for which we paid $2.5 million
in license fees (in addition to $1.5 million that we paid Protein Design Labs
under a previous agreement). In addition, we will pay approximately $4.0 million
if we exercise our option to license all four antibodies, plus maintenance fees
and continuing royalties. We do not know if licenses from Protein Design Labs
will be available for our other antibody products. The Medical Research Council
also owns patents relating to humanized antibodies, for which we hold a
non-exclusive license. Our license permits us to humanize our murine monoclonal
antibodies, and we are obligated to pay royalties on net sales of our products
incorporating licensed technology. We have also obtained licenses from other
parties holding patents or other intellectual property relating to technologies,
which we deem necessary or desirable for the manufacture, use or sale of our
products. These licenses generally require us to pay royalties on product sales,
and may also require the payment of milestones.
We may also develop products that are chimeric antibodies. Genentech
owns a patent (Cabilly 1) relating to chimeric antibodies and instituted suit
against us in 1994 claiming that we infringed this patent. We settled the
lawsuit and, pursuant to the settlement, we secured rights to acquire a
non-exclusive license to: Cabilly 1; another patent relating to antibody chain
co-expression (Cabilly 2); and other Genentech patents (or patents to which
Genentech has a license and is free to grant a sublicense), for our anti-IgE
antibody products. We also have certain rights to acquire a non-exclusive
license from Genentech for Cabilly 1, Cabilly 2 and certain other Genentech
patents for other products; provided these products are not exclusively licensed
by Genentech to a third party or would not compete with an existing product of
Genentech or its affiliates or a product that they are actively researching or
developing. We cannot assure you that we will be successful in securing licenses
from Genentech under these patents for products and product candidates that we
have in research and development. In addition, other parties also own patents
covering chimeric or deimmunized antibodies or processes applicable to making
these antibodies.
The scope, enforceability and validity of third party patents, the
extent to which we must obtain licenses under such patents or under other
proprietary rights and the cost and availability of licenses are unknown, but
these factors may limit our ability to market our products. Moreover, even if a
license were available, the payments that would be required could render
uneconomic our efforts to market certain of our products. If we elect to
manufacture or market these products without either a license or a favorable
result in litigation, damages could be assessed that could be materially adverse
to us. Further, failure to obtain a license could result in an injunction
prohibiting us from manufacturing or selling the affected lines of products.
In addition to patents, we rely on trade secrets and proprietary
know-how to protect our technology and products. We seek protection, in part,
through confidentiality and proprietary information agreements. These agreements
may not provide meaningful protection or adequate remedies for our technology if
unauthorized use or disclosure of this information occurs. Furthermore, our
trade secrets may otherwise become known to or be independently developed by our
competitors.
We require our employees, consultants, advisors, outside scientific
collaborators and sponsored researchers and other advisors to execute
confidentiality agreements on commencing an employment, consulting, or other
contractual relationships with us. These agreements provide that all
confidential information developed or made known to the individual during the
course of the relationship is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees
12
and certain other parties, the agreements provide that all employment related
inventions conceived by the individual shall be our exclusive property. We
cannot assure you, however, that these agreements will provide meaningful
protection for our confidential information or trade secrets against or in the
event of unauthorized use or disclosure of such information.
Government Regulation
The manufacture and marketing of our products and our research and
development activities are subject to regulations relating to product safety and
efficacy by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous FDA regulation.
The Federal Food, Drug and Cosmetic Act and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our products. The lengthy process of seeking drug approvals, and
the subsequent compliance with applicable statutes and regulations, require the
expenditure of substantial resources. Failure to comply with applicable
regulations can result in refusal by the FDA to approve product license
applications. The FDA also has the authority to revoke previously granted
product approvals.
Before we may market a pharmaceutical product in the United States, the
FDA requires us to complete a series of preclinical and human clinical tests.
Other countries have similar regulations. Preclinical tests include laboratory
evaluation of product chemistry and animal studies to assess the potential
safety and efficacy of the product and its formulations. The results of these
studies must be submitted to the FDA as part of the investigational new drug
application (IND). Human clinical trials cannot begin until the FDA approves the
IND application. Clinical testing involves a three-phase process. In Phase I, a
small number of patients or healthy volunteers are tested with the drug to
assess its safety profile (adverse effects), dosage tolerance, metabolism,
distribution, excretion and clinical pharmacology. In Phase II, clinical trials
are conducted with groups of patients afflicted with a specified disease in
order to provide enough data to evaluate the preliminary efficacy, optimal dose
regimen and expanded evidence of safety. In Phase III, the drug is tested in
large number of patients with a target disease to provide enough data to
statistically evaluate the efficacy and safety of the product. We cannot assure
you that we will successfully complete clinical testing of our products within
any specified time period, if at all. The results of the preclinical and
clinical testing of the product are then submitted to the FDA in the form of a
biological license application (BLA) or new drug application (NDA), for
marketing approval. In responding to a BLA or NDA, the FDA may grant marketing
approval, request additional testing or information (either before or after
approval) or deny the application if it determines that the application does not
provide sufficient evidence of safety and efficacy for approval. We cannot
assure you that FDA approval will be obtained on a timely basis, if at all, for
any of our products.
In addition, the FDA requires the registration of each drug and
approval of each manufacturing establishment. Since any approval granted by the
FDA is both site and process specific, any material change in the manufacturing
process, equipment or location necessitates additional FDA review and approval.
For our monoclonal antibody products we are subject to the procedure for
biological products. Domestic manufacturing establishments are subject to FDA
inspection and must comply with current good manufacturing practices (cGMP) for
pharmaceutical products. To supply products for use in the United States,
foreign manufacturing establishments must comply with cGMP and are subject to
periodic FDA or other regulatory authority inspection under reciprocal
agreements with the FDA.
For marketing outside the United States, we also are subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. Whether or not we obtain FDA approval, we must obtain approval of a
product by the comparable regulatory authorities of foreign countries before
manufacturing or marketing the product in
13
those countries. The approval process varies from country to country and the
time required for these approvals may differ substantially from that required
for FDA approval. We cannot assure you that clinical trials conducted in one
country will be accepted by other countries or that approval in one country will
result in approval in any other country.
In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject pharmaceutical product pricing to government control. In
addition, as a result of marketplace pressures, third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new drug products. Consequently, significant
uncertainty exists as to the reimbursement status of newly-approved healthcare
products. If we or any of our collaborators succeed in bringing one or more of
our products to market, we cannot assure you that third-party payors will
consider them cost effective or allow reimbursement to the consumer at price
levels sufficient for us to realize an appropriate return on our investment in
product development or to even realize a profit. Significant changes in the
healthcare system in the United States or elsewhere, including changes resulting
from adverse trends in third-party reimbursement programs, could materially
reduce our profitability. Such changes could also significantly harm our ability
to raise the capital we would need to continue our operations. Furthermore, if
these proposals affect our collaborators, the proposals may harm our ability to
commercialize the products we develop jointly with them.
In addition to FDA regulations, we are subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection Act, the Toxic
Substances Control Act, the Resource Conservation and Recovery Act and other
present and future federal, state or local regulations.
Competition
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies, including
major pharmaceutical and chemical companies, as well as specialized
biotechnology companies, perform activities similar to Tanox's. Many of these
companies have substantially greater financial and other resources, larger
intellectual property estates, larger research and development staffs, and
greater capabilities and experience in preclinical testing, human clinical
trials, regulatory affairs, manufacturing and marketing. We chose to enter into
the collaboration agreements with Novartis and Genentech, in part, to secure the
benefit of their experience in these areas, as well as the contribution of their
greater financial resources. In addition, colleges, universities, governmental
agencies and other public and private research organizations conduct research
and may market commercial products on their own or through joint ventures. These
institutions are becoming more active in seeking patent protection and licensing
arrangements to collect royalties for using technology that they have developed.
We compete with these institutions in recruiting and retaining highly qualified
scientific personnel.
The diseases that we have targeted, including asthma, allergy,
inflammation and other diseases affecting the human immune system, are intensely
competitive areas targeted by both pharmaceutical companies and other
biotechnology companies, including Novartis and Genentech. All of these
companies may have competitive products on the market, may be testing their
products in clinical trials or may be focusing on product approaches that could
prove to be superior to our approaches. For instance, we are aware that some of
these companies, which may be our competitors, have filed applications for or
have been issued patents and may obtain additional patent and proprietary rights
relating to products or processes used in, necessary to, competitive with or
otherwise related to, our products or processes. These patents include, among
other items, patents relating to humanized monoclonal antibodies.
Our competition will be determined in part by the potential indications
for which our antibodies
14
are developed and ultimately approved by regulatory authorities. For some of our
potential products, an important factor in competition may be the timing of
market introduction of our products or competitive products. Accordingly, we
expect the relative speed with which we develop our products, complete the
necessary approval processes and are able to generate and market commercial
quantities of the products to be important competitive factors. We expect that
competition among products approved for sale will be based, among other factors,
on product efficacy and safety, timing and scope of regulatory approval, product
availability, advantages over alternative treatment methods, price and
cost-effectiveness, development, distribution and marketing capabilities,
third-party reimbursement and patent position.
We are aware that several companies, including Novartis, have existing
products that will compete with Xolair, if it is approved for sale, including
corticosteriods, beta-agonists, antihistamines, leukotriene inhibitors, PDE4
inhibitors and allergen immunotherapy. In addition, several companies have
products in development that may compete with Xolair. These companies include,
but are not limited to, IDEC (Anti-CD23), CellTech/Schering-Plough (Anti-IL5),
GlaxoSmithKline (Anti-IL5), Protein Design Labs (Anti-IL2) and Amgen (Anti-IL1).
Our TNX-355 program will face competitions from existing HIV therapies
and particularly new viral entry inhibitors, such as Fuzeon and T-1249
(Roche/Trimeris), PRO-542 and PRO-140 (Progenics) and SCH-D (Schering-Plough).
Our competitive position also depends upon our ability to:
.. attract and retain qualified personnel;
.. develop proprietary products or processes for which we can obtain patent
protection and secure necessary licenses under third party patents;
.. discover and successfully develop new therapeutic products that
successfully treat human diseases;
.. secure sufficient capital resources to complete product development and
regulatory processes;
.. build or secure manufacturing capacity and to manufacture efficiently;
.. build or obtain a sales organization; and
.. achieve profitable commercial production of our products.
Manufacturing
We have a small-scale production and purification facility in which we
have produced our products for use in Phase 1 and Phase 2 clinical trials. With
funding from Novartis, we constructed a pilot manufacturing facility that we may
use for larger-scale process development and cGMP production of culture derived
products. The facility includes a 1,500L bioreactor system and purification
facility and occupies approximately 14,000 square feet of space. During 2002, we
produced clinical trial materials for TNX-901 until October, when our
development of TNX-901 was halted. We expect to reactivate the pilot plant in
2003 to produce clinical materials for our other products, including TNX-355.
Under our agreements with Novartis and Genentech, they must manufacture
Xolair and any other anti-IgE products selected by the collaboration partners
for development, but Tanox has retained the right to manufacture and supply up
to 50% of the worldwide requirements for Xolair and any other selected products.
Novartis has announced that it intends to supply Xolair from a facility that has
a capacity of
15
producing more than one metric ton of active substance per year.
Our current facility will not be adequate for commercial scale
manufacturing requirements if we successfully develop one or more of our
products. We are evaluating alternatives for commercial manufacturing capacity,
including the possible construction or acquisition of a plant or entering into a
contract manufacturing agreement. If we decide to establish a full-scale
manufacturing facility, we will require substantial additional funds and must
hire and train significant numbers of employees and comply with the extensive
FDA regulations applicable to such a facility.
Research and Development
Company-sponsored research and development expenses were $22.7 million,
$21.7 million and $18.3 million in 2002, 2001 and 2000, respectively. We expect
that research and development expenses will continue to increase as we seek to
identify new product opportunities and expand development of our current and
future product pipeline.
Marketing and Sales
Under our collaboration agreements, Novartis and Genentech have
responsibility for marketing Xolair. Novartis and Genentech share U.S. marketing
rights, and Novartis has marketing rights in Europe (with Roche retaining the
option to participate in Europe). Novartis can market these products in the rest
of the world, including China, Hong Kong, Korea, Singapore and Taiwan, where we
will share costs and profits with Novartis.
To effectively serve the worldwide markets, we intend to continue to
collaborate with major pharmaceutical companies or prominent pharmaceutical
sales and distribution organizations that can successfully market our products
on a worldwide basis or within specific geographic territories. As we pursue
strategic collaborations, we intend to reserve marketing rights for our
products, to the extent commercially reasonable, including rights in the United
States and selected Asian countries. We will focus initially on markets for
which our products have a clear advantage over other therapies or which we may
target using a relatively small sales force. We currently do not have an
internal sales and marketing capability. If we elect to retain marketing rights,
we will have to build a sales and marketing infrastructure.
Employees
At December 31, 2002, we had 127 full-time employees, 124 of whom are
based in the United States and 3 of whom are based in Taiwan. One hundred three
of our employees are engaged in, or directly support, research and product
development activities. Forty-three employees hold Ph.D. or M.D. degrees, and 20
employees hold other advanced degrees. We consider our relations with employees
to be good, and none of our employees are covered by a collective bargaining
agreement. We enter into confidentiality agreements with all of our employees
and consultants. We do not currently maintain key employee life insurance on any
of our personnel.
Corporate History
We were incorporated in Delaware in 2000 as the successor to a
corporation formed in 1986 under the laws of the State of Texas.
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Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge at our internet website at http://www.tanox.com. These
filings are also available to the public at the Securities and Exchange
Commission's (SEC) Public Reference Room at 450 Fifth Street, NW, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. Electronic filings with the
SEC are also available on the SEC internet website at http://www.sec.gov.
Forward-Looking Statements
Some of the information in this Annual Report on Form 10-K contains
forward-looking statements. We typically identify forward-looking statements by
using terms such as "may," "will," "should," "could," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or
similar words, although we express some forward-looking statements differently.
You should be aware that actual events could differ materially from those
suggested in the forward-looking statements due to a number of factors,
including:
.. the ability to develop safe and efficacious drugs;
.. failure to achieve positive results in preclinical and toxicology studies
in animals and clinical trials in humans;
.. failure to economically manufacture sufficient amounts of our products for
clinical trials and commercialization activities;
.. failure to receive, or delay in receiving, marketing approval for our
products;
.. failure to successfully commercialize our products, including gaining
market acceptance;
.. relationships with our collaboration partners;
.. our ability to obtain, maintain and successfully enforce patent and other
proprietary rights protection of our products;
.. the outcome of pending legal disputes;
.. variability of royalty, license and other revenues;
.. our ability to enter into future collaboration agreements to support our
research and development activities;
.. drug withdrawal from the market due to rare adverse reactions caused by the
marketed drug;
.. our ability to secure licenses from third parties holding patents that may
affect the manufacture or marketing of our products;
.. competition and technological change; and
17
.. existing and future regulations affecting our business, including the
content, timing of submissions and decisions made by the FDA and other
regulatory agencies.
Factors that could cause our actual results to differ from those set
forth in the forward-looking statements include those set forth below, as well
as those discussed elsewhere in this Form 10-K.
Factors That May Affect Our Future Results
Regulatory Risks
If We Do Not Receive Regulatory Approvals for Xolair, We Would Be
Significantly Harmed and Our Stock Price Would Drop Sharply.
Xolair is our lead product candidate, and our success will depend, to a
great degree, on the success of Xolair. To successfully commercialize Xolair,
our collaborators, Novartis and Genentech, must be able to obtain regulatory
approvals for Xolair.
Although Xolair has been approved for marketing in Australia, neither
the FDA nor any European regulatory agency has approved Xolair. In June 2000,
Novartis and Genentech filed a BLA with the FDA for both seasonal allergic
rhinitis and allergic asthma and also filed a submission for marketing approval
with health authorities in the EU, Switzerland, Australia, and New Zealand. In
July 2001, Genentech and Novartis announced that they had received a Complete
Response Letter with respect to Xolair, in which the FDA requested additional
preclinical and clinical data analyses, as well as information confirming that
the pharmacokinetics of the Xolair drug substance were consistent throughout the
development program. Based on subsequent discussions with the FDA and expansion
of the safety data base, our collaboration partners filed an amendment to the
BLA in December 2002. This amendment responded to the FDA's request for
additional information (which Genentech and Novartis supplied from existing
trials) and limited the proposed initial label claim to moderate-to-severe
asthma in adults and adolescents at least 12 years of age.
Additionally, Novartis has announced that it will propose a label
change in Europe from allergic asthma to "at risk" asthma patients, defined as
persons who, during the previous year, experienced an overnight hospitalization,
underwent an intensive care unit stay, were intubated, or needed to visit an
emergency room, in each case, due to asthma. Novartis has initiated a new study
in this population and expects that the results will be submitted to the EMEA in
the first half of 2004.
We cannot assure you that Xolair will be approved by the FDA, the EMEA
or any other regulatory authorities in a timely manner or at all. If our
collaborators fail to successfully obtain additional regulatory approvals for
Xolair, our business, financial condition and results of operations will be
materially harmed. Moreover, a setback of this nature would cause a sharp drop
in our stock price, which would severely restrict our ability to raise
additional funds through secondary offerings or to enter into corporate
transactions.
If We Do Not Receive and Maintain Regulatory Approvals, We Will Not Be
Able to Market Our Products.
With the exception of Xolair in Australia, neither the FDA nor any
regulatory authority has approved any of our products. We must receive FDA
approval to manufacture and market our products in the United States. The
process that pharmaceutical products must undergo to receive this approval is
extensive, and includes preclinical testing and clinical trials to demonstrate
safety and efficacy and a review of the manufacturing process to ensure
compliance with cGMP. This process can last many years, be very costly and still
be unsuccessful. The FDA can delay, limit or not grant approval for many
18
reasons, including:
.. their belief that a product candidate is not safe and effective;
.. their interpretation of data from preclinical testing and clinical trials
in different ways than we interpret it;
.. failure of our manufacturing processes or facilities or those of our
collaboration partners to meet cGMP standards; and
.. change in its approval policies and guidelines or adoption of new
regulations.
We may also experience development delays due to slow patient
enrollment in clinical trials, unexpected manufacturing issues or requests from
the FDA for additional clinical data.
The process of obtaining approvals to manufacture and market our
products in foreign countries is subject to delay and failure for the same
reasons.
Our products other than Xolair require significant additional
laboratory development or clinical trials before they can be commercialized. We
have limited capacity to conduct and manage clinical trials and rely on third
parties, potentially including collaborative partners and contract research
organizations, to assist us these efforts. Our reliance on third parties may
result in delays in completing, or failing to complete, clinical trials if our
collaborators fail to perform under our agreements with them.
Continued approval of a product candidate could also depend on
post-marketing studies. In addition, any marketed product and its manufacturer
continue to be subject to strict regulation after approval. Any unforeseen
problems with an approved product or any violation of regulations could result
in restrictions on the product, including its withdrawal from the market.
Delays in receiving or failing to receive regulatory approvals, or
losing previously received approvals, would delay or prevent product
commercialization, which would adversely affect our business, financial
condition and results of operations.
Our Preclinical and Clinical Testing Results Are Uncertain. If Trial
Results Are Negative, We May Be Forced to Stop Developing Products Important to
Our Future.
We must demonstrate through preclinical studies and clinical trials
that our products are safe and effective for use in each target indication
before we can obtain regulatory approvals to sell our products commercially.
These studies and trials may be very costly and time consuming. The results of
preclinical studies and initial clinical trials of our products do not
necessarily predict the results from later-stage clinical trials, which must
demonstrate the desired safety and efficacy traits. We cannot assure you that
the data collected from clinical trials of our products will be sufficient to
support FDA or other regulatory approvals.
The speed with which we are able to enroll patients in clinical trials
is an important factor in determining how quickly we may complete clinical
trials. Many factors affect patient enrollment, including the size of the
patient population, the proximity of patients to clinical sites, the eligibility
criteria for the study, whether the drug will continue to be made available to
the patient following completion of the trial, and other ongoing trials directed
at the same indication. We may target our clinical trial protocols at
indications that have small patient populations, which may make it difficult for
us to enroll enough patients to complete the trials. Delays in patient
enrollment in the trials will result in increased costs and program delays,
which could slow down our product development and approval process, and could
materially harm our business and results of operations.
19
Administering any product we develop to humans may produce undesirable
side effects. These side effects could interrupt or delay clinical trials of
products and could result in the FDA or other regulatory authorities denying
approval of our products for any or all targeted indications. The FDA, other
regulatory authorities or we may suspend or terminate clinical trials at any
time. Even if we receive FDA and other regulatory approvals, our products may
later exhibit adverse effects that limit or prevent their widespread use or that
force us to withdraw those products from the market.
We Are Subject to the Uncertainty Related to Reimbursement Policies and
Healthcare Reform Measures.
In recent years, there have been numerous proposals to change the
healthcare system in the United States. Some of these proposals have included
measures that would limit or eliminate payments for medical procedures and
treatments or subject pharmaceutical product pricing to government control. In
addition, as a result of marketplace pressures, third-party payors are
increasingly attempting to contain healthcare costs by limiting both coverage
and the level of reimbursement of new drug products. Consequently, significant
uncertainty exists as to the reimbursement status of newly-approved healthcare
products. If we or any of our collaborators succeed in bringing one or more of
our products to market, we cannot assure you that third-party payors will
consider them cost effective or allow reimbursement to the consumer at price
levels sufficient for us to realize an appropriate return on our investment in
product development or to even realize a profit.
Significant changes in the healthcare system in the United States or
elsewhere, including changes resulting from adverse trends in third-party
reimbursement programs, could materially reduce our potential profitability.
Such changes could also significantly harm our ability to raise the capital we
would need to continue our operations. Furthermore, if these proposals affect
our collaborators, the proposals may harm our ability to commercialize the
products we develop jointly with them.
Risks Relating to our Industry, Business and Strategy
We Face Intense Competition and Rapid Technological Change That Could
Result in Products That Are Superior to the Products We Are Developing.
The biotechnology and pharmaceutical industries are subject to rapid
and significant technological change. We have numerous competitors in the United
States and abroad, including, among others, major pharmaceutical and chemical
companies, specialized biotechnology firms, universities and other research
institutions. These competitors may develop technologies and products that are
more effective or less costly than any of our current or future products and
that could render our technologies and products obsolete or noncompetitive. Many
of these competitors have substantially more resources and product development,
production and marketing capabilities than we do. In addition, many of our
competitors have significantly greater experience than we do in undertaking
preclinical testing and clinical trials of new or improved pharmaceutical
products and obtaining FDA and other regulatory approvals of products for use in
health care. We also will be competing in manufacturing efficiency and, if we
succeed in achieving commercial sales of our products, marketing capability,
areas in which we have limited or no experience. Furthermore, our competitors
may obtain FDA approval for products sooner or be more successful in
manufacturing and marketing their products than are we or our collaborators.
Products currently exist in the market that will compete directly with
the products that we seek to develop. Any product candidate that we develop and
that obtains regulatory approval must then compete for market acceptance among
physicians, patients, healthcare payors and the medical community, as well as
for market share. Significant factors in determining whether we will be able to
compete successfully
20
include:
. relative efficacy and safety of our products;
. timing and scope of regulatory approval;
. product availability;
. potential advantages over alternative treatment methods;
. development, marketing, distribution and manufacturing
capabilities and support of our collaborators;
. reimbursement coverage from insurance companies and others;
. price and cost-effectiveness of our products; and
. patent protection.
If our products are not competitive based on these or other factors,
our business, financial condition and results of operations will be materially
harmed.
Failure to Secure Future Collaboration Partners for Our Other Products
and Failure by Those Partners to Develop, Manufacture, Market or Distribute
Those Products May Delay or Significantly Impair Our Ability to Generate
Revenues or Profit.
We may rely on future collaboration partners to develop, manufacture,
commercialize, market or distribute our other products. Many of our competitors
are similarly seeking to develop or expand their collaboration and license
arrangements with pharmaceutical companies. The success of these efforts by our
competitors could have an adverse impact on our ability to form future
collaboration arrangements. We cannot assure you that we will be able to
negotiate acceptable collaboration agreements in the future or that efforts
under any collaboration agreements will succeed. To the extent that we choose
not to or are unable to enter into future collaboration agreements, we would
encounter increased capital requirements to undertake research, development and
marketing at our own expense. In addition, we may experience significant delays
in introducing our product candidates or find that the absence of these
collaboration agreements adversely affects our ability to develop, manufacture
or sell our product candidates.
Our reliance on collaboration partners poses the following additional
risks:
. disputes with our partners may arise, delaying or terminating our
product candidates' research, development or commercialization or
resulting in significant litigation or arbitration;
. contracts with our partners may fail to provide significant
protection or may become unenforceable if one of these partners
fails to perform;
. our partners may not commit enough capital or other resources to
successfully develop, market or distribute our products; and
. our partners may not continue to develop and commercialize products
resulting from our collaborations.
21
If any of these risks occur, our product development and productivity
may suffer, and our business, financial condition and results of operations
would be materially harmed.
We Are Involved in Litigation and Arbitration Proceedings With Novartis
and Genentech That May Be Very Costly to Us.
We are a party to arbitrations and a related federal district court
lawsuit with our collaboration partners Novartis and Genentech, relating to our
rights to develop TNX-901 and other issues in connection with our collaboration
agreements. In October 2002, an arbitration panel ruled that we do not have the
right to independently develop TNX-901 and, accordingly, we halted further
development of the drug. We have offered the drug to Novartis and Genentech for
three-way collaborative development, and they have agreed to consider whether
TNX-901 should be further developed for peanut allergy. We cannot assure you
that Novartis and Genentech will determine to further develop anti-IgE therapies
(whether TNX-901 or Xolair) for peanut allergy or that our development efforts
to date in this indication area will yield any financial return for us.
Also at issue in these legal proceedings are claims by the parties of
breach of contract, theft of trade secrets, misappropriation, conversion and
tortious interference with contract, among others. These proceedings have been
ongoing for a number of years and have cost us substantial amounts of money, as
well as management time. In addition, if these proceedings are resolved
adversely to us, we could incur substantial damages that would harm our
financial position. Even if we succeed, we expect these proceedings to continue
to consume substantial amounts of our financial and managerial resources.
Further, because of the extensive discovery required in connection with this
type of dispute, there is a risk that disclosure might compromise some of our
confidential information.
We are Involved in Legal Proceedings With Our Former Attorneys That May
Be Very Costly to Us.
We have been involved in an arbitration regarding a fee dispute with
our former attorneys who represented us in our 1993 lawsuit against Genentech
and Roche and its affiliates, and a 1994 lawsuit filed against us by Genentech.
The arbitration panel issued an award which entitled those attorneys to receive
(i) approximately $3.5 million, including interest, (ii) payments ranging from
33-1/3% to 40% of any future milestone payments received by us from Genentech
following product approval and (iii) 10% of the royalties that we receive on
sales of anti-IgE products. We sought a court order vacating the arbitration
award. However, a judgment was entered confirming the award. We appealed that
decision, without success, in the Court of Appeals and intend to seek review by
the Texas Supreme Court.
We may not be successful in this proceeding. If this proceeding
continues to result in decisions unfavorable to us, we could lose substantial
value from our collaboration with Novartis and Genentech by virtue of the legal
fees awarded by the panel, which could negatively affect our stock price and
harm our business, financial condition and results of operations.
Failure to Attract and Retain Key Personnel and Principal Members of
Our Scientific and Management Staff Could Materially Harm Our Business,
Financial Condition and Results of Operations.
Our success depends greatly on our ability to attract and retain
qualified scientific and technical personnel, as well as to retain the services
of our existing technical management staff. To pursue our research and
development programs and product development plans, we will be required to hire
additional qualified scientific and technical personnel. There is intense
competition for qualified staff, and we cannot assure you that we will be able
to attract and retain the necessary qualified staff to develop our business. The
failure to attract and retain key scientific and technical personnel and
management staff or the loss of any of our current management team could
materially harm our business and financial condition.
22
We May Experience Difficulties in Achieving or Managing Growth, Which
Could Materially Harm Our Business, Financial Condition and Results of
Operations.
If our product development efforts and the product development efforts
of our collaborators succeed, our growth could strain our operations, product
development and other managerial and operating resources. Future growth will
impose significant added responsibilities on members of management, including
the need to identify, recruit, maintain and integrate additional employees,
including management. In the future, our financial performance and our ability
to compete effectively will depend, in part, on our ability to manage any future
growth effectively. To that end, we must be able to:
. manage our research and development efforts effectively;
. expand the capacity, scalability and performance of our product
development infrastructure;
. enhance our administrative, accounting and management information
systems and controls;
. improve coordination among our research, clinical development, process
development, finance, manufacturing and other operations personnel; and
. hire and train additional qualified personnel.
Our failure to accomplish any of these tasks could materially harm our
business, financial condition and results of operations.
We Are Exposed to Product Liability Claims, and It is Uncertain That We
Can Obtain Insurance Against These Claims at a Reasonable Rate in the Future.
Our business exposes us to potential product liability risks, which are
inherent in testing, manufacturing, marketing and selling pharmaceutical
products. We may be held liable if any product we develop, or any product that
uses or incorporates any of our technologies, causes injury or is found
otherwise unsuitable during product testing, manufacturing, marketing or sale.
We cannot assure you that we will be able to avoid product liability exposure.
Product liability insurance for the biopharmaceutical industry is
generally expensive. Although we currently maintain product liability insurance
covering our products in amounts we believe to be commercially reasonable, we
cannot assure you that our coverage is adequate or that continued coverage will
be available at acceptable costs. In addition, some of our license and
collaboration agreements require us to obtain product liability insurance.
Future license and collaboration agreements may also include such a requirement.
Our inability to obtain sufficient insurance coverage at an acceptable cost or
otherwise to protect against potential product liability claims could prevent or
inhibit us or our collaborators from commercializing our products. A successful
claim in excess of our insurance coverage could materially harm our business,
financial condition and results of operations.
We Deal With Hazardous Materials and Must Comply With Environmental
Laws and Regulations, Which Can Be Expensive and Restrict How We Do Business.
Our research and development work and manufacturing processes involve
the controlled use of hazardous materials, including chemical, radioactive and
biological materials. Our operations also produce hazardous waste products. We
are subject to federal, state and local laws and regulations governing how we
use, manufacture, store, handle and dispose of these materials. Although we
believe that we comply in all material respects with applicable environmental
laws and regulations, we cannot assure you that we will not incur significant
costs to comply with environmental laws and regulations in
23
the future. In addition, current or future environmental laws and regulations
may impair our research, development or production efforts.
We Could be Liable for Damages, Penalties or Other Forms of Censure If
We Are Involved in a Hazardous Waste Spill or Other Accident.
Despite precautionary procedures that we implement for handling and
disposing of hazardous materials, we cannot eliminate the risk of accidental
contamination or discharge or any resultant injury from these materials. If a
hazardous waste spill or other accident occurs, we could be liable for damages,
penalties or other forms of censure. In addition, we may be sued for injury or
contamination that results from our use or the use by third parties of these
materials, and our liability could exceed our total assets.
Risks Associated with Manufacturing and Marketing
Failure to Receive Market Acceptance for and Successfully Commercialize
Xolair Would Have a Significant Adverse Effect on Us.
Even if the FDA approves Xolair, we cannot be certain that physicians,
patients, insurers or other third-party payors will accept Xolair as a treatment
for its approved indication in the United States or in any foreign markets. A
number of factors may affect the rate and level of Xolair's market acceptance,
including:
. regulatory developments related to manufacturing or using Xolair;
. Xolair's price relative to other products or competing treatments;
. the effectiveness of Novartis' and Genentech's sales and marketing
efforts;
. the perception by physicians and other members of the healthcare
community of Xolair's safety, efficacy and benefits compared to those
of competing products or therapies;
. the willingness of physicians to adopt a new asthma treatment regimen;
. the availability of third-party reimbursement; and
. unfavorable publicity concerning Xolair or comparable products or
therapies.
If Xolair is not accepted as a safe and effective drug and we are
unable to successfully commercialize it, our business, financial condition and
results of operations will be materially harmed.
We Have Limited Experience and Capability in Manufacturing and May
Encounter Manufacturing Problems or Delays That Could Result in Lost Revenue or
Delaying Clinical Trials.
To commercialize our products successfully, we and our collaboration
partners must manufacture our products in commercial quantities in compliance
with regulatory requirements and at an acceptable cost. If the manufacturing
facilities used to produce our products cannot pass a pre-approval or periodic
plant inspection, the FDA may not approve our products or it may delay or bar
their sale. Although Novartis and Genentech have indicated that they wish to
manufacture and supply Xolair, we have reserved the right to manufacture up to
50% of the worldwide requirements. While we have successfully produced our
products for Phase 1 and Phase 2 clinical trials, we have no experience in
manufacturing commercial quantities of antibodies and currently have limited
manufacturing capacity.
24
In order to obtain regulatory approvals and to create capacity to
produce our products in sufficient quantities for commercial sale at an
acceptable cost, we will have to develop or acquire additional technology for
commercial scale manufacturing and build or otherwise obtain access to adequate
facilities, which will require substantial additional funds. We will also be
required to demonstrate to the FDA and corresponding foreign authorities our
ability to manufacture our products using controlled, reproducible processes. We
cannot assure you that we can develop the necessary manufacturing technology or
that we will be able to fund or build an adequate commercial manufacturing
facility necessary to obtain regulatory approvals and to produce adequate
commercial supplies of our potential products on a timely basis.
We cannot assure you that we, operating alone or with the assistance of
others, will be able to successfully make the transition to commercial
production. In addition, as more of our products move into the clinic, we cannot
assure you that we will be able to continue to produce sufficient quantities of
our product to timely supply our clinical requirements. Any failure to produce
these clinical requirements, either as a result of our limited manufacturing
capacity or otherwise, can delay the commencement of, or ability to continue our
ongoing, clinical trials.
We Lack Sales and Marketing Experience, Which Makes Us Depend on Third
Parties for Their Expertise in this Area.
Under our current collaboration agreement, Novartis and Genentech have
exclusive marketing rights to Xolair and other selected anti-IgE products.
However, commercialization rights may revert back to us if either we or our
collaborators terminate our relationship. We currently have no sales, marketing
or distribution capabilities. Any revenues we receive from our Xolair
collaboration will depend primarily on the efforts of our collaboration
partners. We intend to retain marketing rights in the United States and selected
Asian countries for products that we can develop and sell effectively with a
small, targeted sales force. If we elect to market products directly, we would
require significant additional expenditures and management resources to develop
an internal marketing and sales force. We cannot assure you that we would be
able to establish a successful sales force should we choose to do so.
Risks Related to Financial Results and Need for Financing
We Have a History of Net Losses; We Expect to Continue to Incur Net
Losses and We May Never Achieve or Maintain Profitability.
We have incurred net losses since our inception. As of December 31,
2002, we had an accumulated deficit of approximately $78.9 million, including a
net loss of approximately $26.0 million for the year ended December 31, 2002.
Our losses have primarily been the result of costs incurred in our research and
development programs and from our general and administrative costs.
We have not earned any revenues from commercial sales of our
therapeutic products, and such sales may not commence until 2003, if at all. We
have funded our operations principally from licensing fees and milestone
payments under our current or former collaborations, as well as with proceeds
from private placements and an initial public offering of our common stock. As
we increase our research and development, manufacturing, clinical trial and
administrative activities, we expect to continue to incur substantial operating
losses until such time, if ever, that we are able to generate sufficient revenue
from milestone payments, royalties on Xolair and, potentially, profits from an
additional product or products to cover our expenses.
Our ability to achieve and maintain long term profitability depends to
a significant extent on obtaining regulatory approval for and successfully
commercializing Xolair, and also on successfully completing preclinical and
clinical trials, obtaining required regulatory approvals and successfully
25
developing, manufacturing and marketing our other current and future product
candidates. We cannot assure you that we will be able to achieve any of the
foregoing or that we will be profitable even if we successfully commercialize
our products.
Failure by Novartis or Genentech to Develop, Manufacture, Market or
Distribute Xolair May Delay or Significantly Impair Our Ability to Generate
Revenues.
Under the terms of our collaboration agreements, Novartis and Genentech
are responsible for developing, obtaining regulatory approval for,
manufacturing, marketing and distributing Xolair. We expect for the extended
future that Novartis and Genentech will manufacture, market and distribute
Xolair, if it receives marketing approval. Our ability to profit from the
products covered by our collaboration agreements with Genentech and Novartis
depends in large part on their performance. We cannot control the amount and
timing of resources Novartis and Genentech will devote to any of our products.
If Novartis or Genentech experiences manufacturing or distribution difficulties,
does not actively market Xolair or other selected anti-IgE products or does not
otherwise perform under our collaboration agreements, our potential for revenue
from those products will be dramatically reduced. Novartis and Genentech may
terminate our collaboration agreements on short notice. If Novartis or Genentech
terminates our collaboration, we would experience increased capital requirements
to undertake development and marketing at our expense, and we cannot assure you
that we would be able to develop Xolair or our other anti-IgE products on our
own.
We May Need Additional Financing, But Our Access to Capital Funding is
Uncertain.
Our current and anticipated development projects require substantial
additional capital. While we expect that our cash on hand, together with our
revenue from operations, will sufficiently fund our operations for the next four
years, our future capital needs will depend on many factors, including
successfully commercializing Xolair, receiving milestone payments from our
collaboration partners, and making progress in our research and development
activities. Our capital requirement may also depend on the progress and level of
unreimbursed costs associated with preclinical studies and clinical trials, the
costs associated with acquisitions, the costs of preparing, filing, prosecuting,
maintaining and enforcing patent claims and other intellectual property rights,
competing technological and market developments, changes in or terminations of
existing collaboration and licensing arrangements, the establishment of
additional collaboration and licensing arrangements, and the cost of
manufacturing scale-up and development of marketing activities, if undertaken by
us. We do not have committed external sources of funding and we cannot assure
you that we will be able to obtain additional funds on acceptable terms, if at
all. If adequate funds are not available, we may be required to:
. delay, reduce the scope of or eliminate one or more of our development
programs;
. obtain funds through arrangements with collaboration partners or others
that may require us to relinquish rights to technologies, product
candidates or products that we would otherwise seek to develop or
commercialize ourselves; or
. license rights to technologies, product candidates or products on terms
that are less favorable to us than might otherwise be available.
If we raise additional funds by issuing additional stock, further
dilution to our stockholders may result, and new investors could have rights
superior to existing stockholders. If funding is insufficient at any time in the
future, we may be unable to develop or commercialize our products, take
advantage of business opportunities or respond to competitive pressures.
26
The Market Price of Our Common Stock has been Volatile.
Like other stocks of biopharmaceutical companies, the market price for
our common stock has been and may continue to be volatile. During the last two
years, our stock price ranged from $8.93 to $40.00. Factors that contributed to
the volatility of our stock during this period included:
. Regulatory developments or delays concerning Xolair;
. Important rulings and other developments in our various legal disputes;
. Results of clinical trials; and
. General market conditions, including particularly in the biotechnology
company segment.
Risks Relating to Intellectual Property
The Patentability, Validity, Enforceability and Commercial Value of Our
Patents Are Highly Uncertain. If Our Intellectual Property Positions are
Challenged, Invalidated or Circumvented and We Fail to Prevail in Resulting
Intellectual Property Litigation, Our Business Could be Adversely Affected.
Our success depends in part on obtaining, maintaining and enforcing
patents and maintaining trade secrets. While we file and prosecute patent
applications to protect our inventions, our pending patent applications may not
result in the issuance of valid patents and our issued patents may not provide
competitive advantages. Also, our patents may not prevent others from developing
competitive products using related technology. We cannot assure you that pending
patent applications developed by or licensed to us will result in patents being
issued or that, if issued, the patents will give us an advantage over
competitors with similar technology.
We own or have licenses to certain issued patents. The patents we own
that are most material to our business are five U.S. patents and six foreign
patents relating to anti-IgE antibodies. However, the patent position of
biotechnology and pharmaceutical firms is highly uncertain and involves many
complex legal and technical issues. There is no clear policy involving the
breadth of claims allowed or the degree of protection afforded under such
patents. Issued patents can be challenged in litigation in the courts and in
proceedings in the United States Patent and Trademark Office and in courts and
patent offices in foreign countries. Issuance of a patent is not conclusive as
to its validity, enforceability or the scope of its claim. We cannot assure you
that our patents will not be successfully challenged as to enforceability,
invalidated or limited in the scope of their coverage. Moreover, litigation to
uphold the validity of patents and to prevent infringement can be very costly
and can result in diverting technical and management personnel's time and
attention, which may materially harm our business, financial condition and
results of operations. If the outcome of litigation is adverse to us, third
parties may be able to use our patented technology without paying us. Moreover,
we cannot assure you that our patents will not be infringed or successfully
avoided through design innovation. Any of these events may materially and
adversely affect our business.
In addition to the intellectual property rights described above, we
also rely on unpatented technology, trade secrets and confidential information.
We cannot assure you that others will not independently develop substantially
equivalent information and techniques or otherwise gain access to our technology
or disclose such technology, or that we can effectively protect our rights in
unpatented technology, trade secrets and confidential information. We require
each of our employees, consultants and advisors to execute a confidentiality
agreement at the commencement of an employment or consulting relationship with
us. We cannot assure you, however, that these agreements will provide effective
protection if an unauthorized use or disclosure of this confidential information
occurs.
27
If We Fail To Obtain Any Required Patent License From Third Parties,
Our Product Development Efforts Could Be Limited.
Our success also depends on our ability to license the rights to
patents and patent applications owned by others and to operate without
infringing the proprietary rights of third parties. There may be patent rights
belonging to others that require us to alter our products, pay licensing fees or
cease certain activities. If our products conflict with patent rights of others,
the owners of those patent rights could bring legal actions against us claiming
damages and seeking to stop us from manufacturing and marketing the affected
products. If these legal actions are successful, in addition to any potential
liability for damages, we could be required to obtain a license in order to
continue to manufacture or market the affected products. We cannot assure you
that we would prevail in any such action or that any license required under any
such patent would be made available on acceptable terms or at all. Any of these
events may materially harm our business, financial condition and results of
operations.
Researching, developing and commercializing a biopharmaceutical product
often involves alternative development and optimization routes that are
presented at various stages in the development process. We cannot predict the
preferred routes at the outset of a research and development program, because
they will depend on subsequent discoveries and test results. There are numerous
third-party patents in our field, and it is possible that, to pursue the
preferred development route of one or more of our products, we will need to
obtain a license to a patent, which would decrease the ultimate profitability of
the applicable product. If we cannot negotiate a license, we might have to
pursue a less desirable development route or terminate the program altogether.
We are aware that other groups have claimed discoveries similar to
those covered by our patent applications. In addition, other companies, some of
which may be our competitors, have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes used in, necessary to, competitive with or otherwise
related to our patents and products. These products and processes include, among
other items, patents covering technology relating to humanized monoclonal
antibodies that we anticipate developing. Protein Design Labs, Inc. owns certain
patents and patent applications relating to such humanized antibodies. We have
acquired the right to take a non-exclusive licenses to these patents for up to
four of our products. Additionally, Genentech owns patents relating to antibody
chain co-expression. We have certain rights to acquire a non-exclusive license
from Genentech for these patents for products that are not exclusively licensed
by Genentech to a third party and that would not compete with an existing
product of Genentech or its affiliates or a product that they are actively
researching or developing. We cannot assure you that we will be able to obtain
licenses from Protein Design Labs for our other antibody products, of that we
will be successful in securing licenses from Genentech for products and product
candidates that we have in research or development.
We must make substantial cash payments, achieve certain milestones
and satisfy certain conditions, including filing investigational new drug
applications, obtaining product approvals and introducing products, to maintain
our rights under certain of our licenses, including our licenses from Chiron and
Biogen. We cannot assure you that we will be able to maintain our rights under
these licenses. If any of these licenses terminate, we may be unable to
commercialize any related product.
28
Executive Officers of Tanox
Our executive officers and their ages and positions with Tanox are:
Name Age Position
---- --- --------
Nancy T. Chang, Ph.D. ................ 53 Chairman of the Board, President and
Chief Executive Officer
Jeffrey W. Organ . ................... 49 Chief Operating Officer
William R. Shanahan, Jr., M.D. ....... 54 Chief Medical Officer
Matthew Moyle, Ph.D. ................. 42 Vice President of Research
Gregory P. Guidroz, C.P.A. ........... 50 Vice President of Finance
Katie-Pat Bowman ..................... 48 Vice President, General Counsel and Secretary
Nancy T. Chang, Ph.D., is one of our co-founders and has served as our
President and Chairman of the Board of Directors since our organization in March
1986. Dr. Chang has served as our Chief Executive Officer since June 1990. From
1986 to 1992, Dr. Chang served as an Associate Professor at Baylor College of
Medicine in the Division of Molecular Virology. Between 1981 and 1986, Dr. Chang
was employed by Centocor, Inc., serving as the Director of Research, Molecular
Biology Group, from 1984 to 1986. From 1980 to 1981, she was employed by Roche
Institute of Molecular Biology. Dr. Chang received her Ph.D. in biological
chemistry from Harvard University.
Jeffrey W. Organ has served as our Chief Operating Officer since May
2002. Prior to joining Tanox, from March 2000 to April 2002, Mr. Organ served as
an independent consultant to product and service companies in the healthcare and
pharmaceutical industries. From 1997 to 2000, Mr. Organ served as Vice President
of Marketing & Sales at Bridge Medical, a start-up company developing drug
delivery and patient safety systems. From February 1996 to January 1997, he held
the position of Senior Vice President of Marketing with IMED Corporation, a
leading provider of intravenous drug delivery systems. Prior to that, Mr. Organ
was President of Major Pharmaceuticals, a distributor of pharmaceuticals to
retail and institutional pharmacies, worked at Fujisawa Pharmaceuticals as
Vice President and General Manager for Multisource products, and worked at
American Hospital Supply in a variety of sales and marketing positions. He
received a BA from the University of Missouri and an MBA from Pepperdine
University.
William R. Shanahan, Jr., M.D., has served as our as Chief Medical
Officer since August 2000. From 1994 to August 2000, he served as Vice
President, Drug Development of Isis Pharmaceuticals, a leader in antisense
technology, and, prior to that, he was Director of Clinical Research at Pfizer
Central Research where he directed the clinical development of new
anti-inflammatory pharmacologic agents. At Searle Research and Development, he
held Associate Director and Director of Clinical Research positions where he
developed and monitored clinical studies related to anti-inflammatory,
gastroprotective, anti-HIV, and antineoplastic pharmacologic agents. In
addition, at the University of Connecticut School of Medicine he held various
positions in the Division of Rheumatology including Clinical Associate
Professor. Dr. Shanahan graduated from the University of California - San
Francisco with a Doctorate in Human Medicine in 1974, and from Loyola University
of Chicago with a Juris Doctorate in 1992.
Matthew Moyle, Ph.D., joined us as Vice President of Research in
January 2001. Prior to that, he held various positions with Amgen, Inc., a
biotechnology company, si