ALEXION PHARMACEUTICALS INC - 10-K Annual Report

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We are engaged in the discovery and development of therapeutic products aimed at treating patients with a wide array of severe disease states, including cardiovascular, autoimmune and hematologic disorders, inflammation and cancer. Since our incorporation in January 1992, we have devoted substantially all of our resources to drug discovery, research, and product and clinical development. Additionally, through our wholly owned subsidiary, Alexion Antibody Technologies, Inc., or AAT, we are engaged in the discovery and development of a portfolio of additional antibody therapeutics targeting severe unmet medical needs. During the fiscal years ended July 31, 2002, 2001, and 2000, we spent $60.0 million, $38.9 million, and $40.2 million, respectively, on research and development activities, excluding acquisition related non-cash charges for in-process research and development and amortization of goodwill.

Our two lead product candidates are therapeutic antibodies that address specific diseases that arise when the human immune system produces inappropriately activated inflammation in the human body. Antibodies are proteins that bind specifically to selected targets, or antigens, in the body. After the antibody binds to its target, it may activate the body’s immune system against the target, block activities of the target or stimulate activities of the target. We are currently examining our two lead antibody product candidates in eight different clinical development programs.

pivotal Phase III clinical trial of pexelizumab, called PRIMO-CABG, in approximately 3,000 patients undergoing coronary artery bypass graft surgery, or CABG, with cardiopulmonary bypass, or CPB. The Phase III trial will assess the safety and efficacy of pexelizumab in reducing the combined incidence of death or myocardial infarction in this patient population. In September 2000, the United States Food and Drug Administration, or FDA, granted “Fast Track” status for the development of pexelizumab in CPB. Fast Track designation provides for expedited development and application review for approval of a drug through the FDA.

Also in collaboration with P&G, we are conducting two Phase II studies with pexelizumab in acute myocardial infarction or heart attack patients: one study in patients receiving thrombolytic therapy, a procedure for dissolving clots that block heart vessels, and the other in patients receiving angioplasty, a procedure for opening up narrowed or blocked arteries that supply blood to the heart. The thrombolytic study, called COMPLY, completed patient enrollment in January 2002 and the angioplasty study, called COMMA, completed patient enrollment in April 2002. For each of these studies, enrollment completion is followed by completion of all follow-up patient visits, data collection and subsequent data analysis. We expect data from the COMPLY and COMMA trials to be presented at the American Heart Association meeting in November 2002.

Our other lead antibody product candidate, eculizumab, is in clinical development for the treatment of a variety of chronic autoimmune diseases. In rheumatoid arthritis patients, we have completed enrollment in a 12 month extension trial related to our completed Phase IIa rheumatoid arthritis trial. In January 2002, we initiated a Phase IIb study in rheumatoid arthritis patients and enrollment is on-going in a 12 month extension trial related to this study. A separate Phase II study in membranous nephritis, a kidney disease, was completed in September 2002 and enrollment has been completed in a 12 month extension study connected with this trial. We have undertaken separate early stage clinical programs to study eculizumab in several additional diseases. We completed a Phase I pilot safety trial of eculizumab in psoriasis patients which indicated that eculizumab appeared to be safe and well tolerated in these patients. At this time, we are not pursuing psoriasis as a clinical indication. In January 2002, we completed a Phase I pilot safety trial in dermatomyositis, an inflammatory skin and muscle disorder, which indicated that eculizumab appeared to be safe and well tolerated in this patient population. We reviewed the clinical data with the FDA and intend to initiate a Phase II clinical study for eculizumab in this disease. We also initiated a Phase I pilot safety trial in patients with bullous pemphigoid, a severe inflammatory skin disorder. Although there were no apparent safety issues, at this time, we have elected not to pursue this program further in order to more efficiently focus resources on other on-going eculizumab development programs.

In June 2002, we initiated an open-label Phase I pilot safety study of eculizumab in paroxysmal nocturnal hemoglobinuria, or PNH, patients. PNH is a rare, blood disease characterized by severe anemia and risk of blood clotting or thrombosis. Patient enrollment for the Phase I pilot study in PNH was completed in September 2002 and an open-label 12 month extension study to evaluate long-term safety is on-going. Evaluation of the initial pilot study awaits completion of all follow-up patient visits, data collection, and subsequent data analysis. We expect data from this pilot study to be presented at the American Society of Hematology meeting in December 2002.

Through AAT, our wholly owned subsidiary with extensive combinatorial human antibody library technologies and expertise, we have developed important additional capabilities to discover and develop additional antibody product candidates for the treatment of inflammatory diseases and cancer. We are also seeking to develop therapies employing the transplantation of cells from other species into humans, known as xenotransplantation.

To date, we have not received any revenues from the sale of our products. We have incurred operating losses since our inception. As of July 31, 2002, we had an accumulated deficit of $180.8 million. We expect to incur substantial and increasing operating losses for the next several years due to expenses associated with product research and development, pre-clinical studies and clinical testing, regulatory activities, manufacturing development, scale-up and commercial manufacturing and developing a sales and marketing force. We may need to obtain additional financing to cover these costs.

We plan to develop and commercialize on our own those product candidates for which the clinical trials and commercialization requirements can be funded and accomplished by our own resources. For those products which require greater resources, our strategy is to form corporate partnerships with major pharmaceutical companies for product development and commercialization, where we will still play a major role.

The human immune system defends the body from attack or invasion by infectious agents or pathogens. This is accomplished through a complex system of proteins and cells, primarily complement proteins, antibodies and white blood cells, each with a specialized function. Under normal circumstances, complement proteins, together with antibodies and white blood cells, act to protect the body by removing:

When activated by stimuli, the immune system triggers a series of enzymatic and biochemical reactions called the complement cascade that results in an inflammatory response. This inflammatory response is one of the immune system’s weapons against foreign pathogens or otherwise diseased tissue. However, under certain circumstances, the complement cascade may be activated inappropriately to direct an inflammatory response at healthy tissue, which may result in acute and chronic inflammatory conditions.

We have focused our product development programs on anti-inflammatory therapeutics for diseases for which we believe current treatments are either non-existent or inadequate. Currently available drugs for certain autoimmune, cardiovascular, and hematologic disorders, in which the immune system attacks the patient’s own tissue, broadly suppress the entire immune system, and may also cause potentially severe side effects. Our lead product candidates, which are genetically altered antibodies known as C5 complement inhibitors, or C5 Inhibitors, are designed to selectively block the production of inflammation-causing proteins in the complement cascade. We believe that selective suppression of this immune response may provide a significant therapeutic advantage relative to existing therapies. Additionally, we are seeking to develop UniGraft xenotransplants or use of non-human cells and tissues for neurologic or nervous systems disorders.

Product candidate	Technology	Indication	Status
Pexelizumab	C5 Inhibitor (single chain antibody)	Coronary Artery Bypass Graft surgery (CABG) with cardiopulmonary bypass (CPB)	Phase III trial ongoing (PRIMO-CABG)
		Myocardial Infarction
		(1) Thrombolysis(a)	Phase II trial enrollment completed (COMPLY)
		(2) PTCA(b)	Phase II trial enrollment completed (COMMA)
Eculizumab	C5 Inhibitor (whole antibody)	Rheumatoid Arthritis	Phase IIb trial on-going; extension study on-going
		Membranous Nephritis	Phase II trial enrollment completed; extension study on-going
		Paroxysmal Nocturnal Hemoglobinuria (PNH)	Phase I trial enrollment completed; extension study on-going
		Lupus Nephritis	Phase II trial under review for re-design
		Dermatomyositis	Phase Ib trial completed
UniGraft-SCI	Cell replacement	Spinal Cord Injury	Pre-clinical
UniGraft-PD	Cell replacement	Parkinson’s Disease	Pre-clinical

Because of the generally beneficial effects of the components of the complement cascade prior to C5 and the greater inflammatory disease-promoting effects of the cleavage products of C5, we have identified C5 as a potentially effective anti-inflammatory drug target. Our first two C5 Inhibitors specifically and tightly bind to C5 blocking its cleavage into harmful byproducts and are designed to inhibit subsequent damage from the inflammatory response.

We are developing one of our two lead C5 Inhibitor product candidates, pexelizumab, for the treatment of inflammation related to acute cardiovascular diseases and procedures. Our initial indications for pexelizumab are coronary artery bypass graft surgery with cardiopulmonary bypass surgery, myocardial infarction utilizing thrombolysis, and myocardial infarction utilizing percutaneous transluminal coronary angioplasty or PTCA, a procedure for opening up narrowed or blocked arteries that supply blood to the heart. We are developing our other C5 Inhibitor product candidate, eculizumab, for the treatment of inflammation related to chronic autoimmune disorders and hematologic disorders. The initial indications for which we are pursuing clinical development activities for eculizumab are rheumatoid arthritis, membranous nephritis, lupus nephritis, PNH, and dermatomyositis. The selection of these indications is based upon our belief that each represents a clinical condition which is:

Pexelizumab is a humanized, single chain antibody that has been shown to block complement activity for up to 4-10 hours after a single injection at the doses tested and is designed for the treatment of acute inflammatory conditions. In January 1999, we entered into a collaboration arrangement with Procter & Gamble Pharmaceuticals, or P&G, to develop and commercialize pexelizumab. Under this collaboration, we are pursuing the development of pexelizumab for the treatment of inflammation caused by various acute cardiovascular indications and procedures such as coronary artery bypass graft surgery with cardiopulmonary bypass surgery, and myocardial infarction utilizing thrombolysis or angioplasty. In December 2001, we and P&G entered into a binding memorandum of understanding, or MOU, pursuant to which we and P&G revised our January 1999 collaboration. Under the revised structure, we and P&G share decision-making and responsibility for all future United States, or U.S., development and commercialization costs for pexelizumab, including clinical, manufacturing, marketing, and sales efforts. Also see section “Strategic Alliance with Procter & Gamble”. A letter of understanding has been signed relating to the negotiation and completion of an agreement with a third party manufacturer for the large scale commercial manufacture of pexelizumab over 5 years.

In cardiopulmonary bypass surgery, or CPB, blood is diverted from a patient’s heart and lungs to a cardiopulmonary, heart-lung, bypass machine in the operating room. The machine adds oxygen to the blood and circulates the oxygenated blood to the organs in the patient’s body. Significant side effects of CPB include heart damage and excessive bleeding during and after the procedure. We believe these side effects may result from the activation of the complement cascade when the patient’s blood comes into contact with the plastic lining of the machine. Additionally, these side effects may also result from complement activation that occurs when insufficient blood flows through the heart as a result of the procedure and after blood flow through the heart is reintroduced following completion of the procedure; this combined reaction is sometimes called ischemia-reperfusion injury. Activated complement byproducts may be increased by over 1000% in patients undergoing CPB. The inflammation is also characterized by the activation of leukocytes, a type of white blood cell, and platelets, cells responsible for clotting. We believe that this leukocyte activation is associated with impaired lung, heart, brain and kidney function. We further believe that platelet activation and subsequent platelet dysfunction during the procedure impair a patient’s ability to stop the bleeding that occurs after extensive surgery.

The American Heart Association estimated that in 1999, approximately 600,000 CPB operations were performed in the United States. Currently, products utilized in patients undergoing cardiopulmonary bypass are designed to enhance the coagulation of blood so as to reduce the need for blood transfusions. However, we believe these products have little beneficial effect on the heart and brain inflammatory complications associated with the surgery.

Our pre-clinical studies indicated that C5 Inhibitors can prevent activation of platelets and leukocytes and the subsequent inflammatory response that occurs during the circulation of human blood in a closed-loop cardiopulmonary bypass machine. These pre-clinical studies additionally indicated that administration of a C5 Inhibitor may reduce cardiac damage associated with reduced heart blood flow.

In January 1999, we commenced dosing in a Phase IIb clinical trial with pexelizumab in patients undergoing coronary artery bypass graft surgery, or CABG during CPB, with or without accompanying valve surgery. The objective of this multi-center, double-blinded, randomized, placebo-controlled study was to assess the safety and effectiveness of pexelizumab in these patients. After completion of this trial, preliminary results from this trial were released in January 2001 which suggested that pexelizumab blocked complement, reduced inflammation and appeared to be safe and well-tolerated. Some patients in the trial experienced serious adverse events which included irregular heartbeat, infection, right heart failure and internal bleeding. The most common adverse events were irregular heartbeat, nausea and anemia. The primary therapeutic, exploratory pre-set goal of the trial, referred to as the primary endpoint, was not achieved. However, in the pre-specified population that included approximately 90% of the patient population, the 800 patients who had CABG, without valve surgery, those that received pexelizumab at the highest dose level experienced a significant reduction in larger post-surgical heart attacks.

In January 2002, we commenced initiation of a pivotal Phase III clinical trial of pexelizumab, called PRIMO-CABG, in approximately 3,000 patients undergoing CABG with CPB. The Phase III trial will assess the safety and efficacy of pexelizumab in reducing the combined incidence of death or myocardial infarction in this patient population. Patient enrollment is on-going.

Myocardial infarction is an acute cardiovascular disorder in which the coronary arteries, the blood vessels that supply nutrients to the heart muscle, are blocked to such an extent that the flow of blood is insufficient to supply enough oxygen and nutrients to keep the heart muscle alive. With insufficient supply of blood, oxygen, and nutrients, the heart muscle may subsequently infarct or die. Upon the reduction in blood flow in the coronary artery, a complex cascade of inflammatory events involving complement proteins, platelets and leukocytes and their secreted factors, and endothelial cells, commences within the blood vessel. In patients suffering a myocardial infarction, activated complement byproducts are significantly elevated. This severe inflammatory response targeting the area of insufficient blood flow to cardiac muscle is associated with subsequent death of heart muscle. Restoration of blood flow is also associated with an additional inflammatory reaction with an accompanying production of activated complement byproducts. This combined reaction is sometimes called ischemia-reperfusion injury. In addition to the high incidence of sudden cardiac death at the onset, severe complications associated with the initial survival of an acute myocardial infarction include congestive heart failure, shock, stroke, and death. The American Heart Association estimates that approximately 1.1 million people in the United States will have a heart attack in 2002.

We are developing pexelizumab to inhibit inflammation associated with complement activation in order to reduce the extent of heart damage and other adverse conditions in patients suffering an acute myocardial infarction. In contrast, most drugs currently being developed or on the market to treat myocardial infarction are designed to improve blood flow through the heart, rather than treating the damaging effects of inflammation caused by myocardial infarction. We and our scientific collaborators have performed pre-clinical studies in rodents which have demonstrated that administration of a C5 Inhibitor during periods of insufficient supply of blood to the heart muscle and prior to restoration of normal flow to the heart muscle significantly reduced the extent of subsequent death of heart muscle compared to control animal studies. Additionally, administration of a C5 Inhibitor significantly reduced the extent of cardiac damage associated with reduced heart blood flow without subsequent restoration of blood flow.

In October 1998, we commenced dosing subjects in a Phase I clinical trial in healthy individuals that was designed to evaluate dosing regimens for subsequent CPB and myocardial infarction clinical trials. We have used the results of this trial to select dosing regimens for subsequent clinical trials in acute myocardial infarction and CPB patients. The results of this trial indicated that pexelizumab was well tolerated at doses more than three times as high as had been previously administered. We completed patient enrollment in two Phase II clinical trials, each one designed to enroll approximately 900 patients, with our collaborator P&G, that test the safety and effectiveness of pexelizumab for the treatment of acute inflammation in patients suffering an acute myocardial infarction. One study is in patients receiving thrombolytic therapy, a procedure for dissolving clots that block heart vessels, and the other is in patients receiving angioplasty, a procedure for opening up narrowed or blocked arteries that supply blood to the heart. The thrombolytic study completed patient enrollment in January 2002 and the angioplasty study completed patient enrollment in April 2002. Evaluation of each study awaits completion of all follow-up patient visits, data collection and subsequent data analysis. We expect the data analyses to be presented at the American Heart Association meeting in November 2002.

Eculizumab is a humanized antibody that blocks complement activity for one to two weeks at the doses tested and is designed for the chronic treatment of autoimmune diseases such as rheumatoid arthritis and nephritis and hematologic disorders such as PNH. Eculizumab is not included in the collaboration with P&G, and we have retained full rights to eculizumab.

Rheumatoid arthritis is a chronic autoimmune disease directed at various organ and tissue linings, including the lining of the joints, causing inflammation and joint destruction. Clinical signs and symptoms of the disease include weight loss, joint pain, morning stiffness and fatigue. Further, the joint destruction can progress to redness, swelling and pain with frequent and severe joint deformity. Diagnostic procedures, which may include obtaining a sample of joint fluid, routinely demonstrate substantial elevations in the levels of activated complement byproducts in the joint fluid of affected rheumatoid arthritis patients. Rheumatoid arthritis is generally believed to be caused by different types of white blood cells, including T-cells, which both directly attack the patient's joints and also activate B-cells, another type of white blood cell, to produce antibodies that activate complement proteins in the joint leading to inflammation with subsequent tissue and joint destruction. It is estimated that more than 2.1 million people are currently affected by rheumatoid arthritis in the United States.

Currently, there are a large number of anti-inflammatory drugs under development or on the market for the treatment of patients with rheumatoid arthritis. These drugs include non-steroidal anti-inflammatory drugs, and their more recent analog the COX-2 inhibitors, which generally treat the symptoms of the disease, but do not alter disease progression. There are also several currently available drugs that are disease-modifying agents, but these are associated with undesirable side effects. Recently, tumor necrosis factor, or TNF, inhibitors have been approved or are under development to reduce the inflammatory response. TNF is one of the many injurious substances that may be generated downstream of the complement cascade. In contrast to single agent inhibitors like TNF inhibitors, by acting at C5 of the complement cascade, we expect eculizumab both to block complement activation and reduce the production of many of these downstream harmful substances. Because of this novel mechanism, we believe that eculizumab may provide a more clinically beneficial effect for RA patients.

In December 1997, we filed an Investigational New Drug application or IND with the U.S. Food and Drug Administration or FDA for eculizumab in the treatment of rheumatoid arthritis patients. In our early clinical trials, single doses of eculizumab appeared safe and well tolerated in the study populations as compared to placebo, showed dose-dependent reduction in complement activity in the study subjects, and showed a reduction in C-reactive protein blood levels in the study subjects. C-reactive protein is considered by many physicians to be the most objective component of the American College of Rheumatology’s definition of efficacy criteria for rheumatoid arthritis drug trials. Biological and clinical results from our Phase I/II trial demonstrated that 50% of rheumatoid arthritis patients receiving 8.0 mg/kg of eculizumab achieved an ACR 20 score, a measure of clinical benefit, as compared to 10% of placebo-treated patients.

We completed our first Phase IIa clinical trial testing the safety and effectiveness of repetitive dosing of eculizumab in patients with rheumatoid arthritis. Results showed that eculizumab appeared to be safe and well tolerated in patients in this trial. The most commonly observed adverse events were nausea and diarrhea. The results of this study suggested a significant three-month efficacy as measured by ACR 20 criteria for the active arm with a dosage regimen starting with five weekly loading doses followed by monthly intravenous or IV administration, compared to placebo. The primary endpoint, or therapeutic pre-set goal, for this trial was met by the group of patients who received this mid-level dosing regimen of eculizumab. Patients who received higher or lower doses of eculizumab in the clinical trial, did not achieve the primary endpoint. Our six-month safety data from this clinical trial showed that eculizumab appeared to be safe and well tolerated in this study population. Our on-going 12 month open label extension studies in RA will help us assess long-term safety.

In January 2002, we initiated a Phase IIb multi-center study in RA patients. The trial is designed to assess safety and efficacy of eculizumab and to confirm the most efficacious dose regimen of the drug. The trial will consist of approximately 300 patients who are being treated concomitantly with disease-modifying anti-rheumatic drugs. Patient enrollment is on-going. We have additionally commenced enrollment in an on-going 12 month open label extension study related to this Phase IIb RA trial.

The kidneys are responsible for filtering blood to remove toxic metabolites or breakdown by-products and maintaining the minerals and proteins in the blood that are required for normal metabolism. Each kidney consists of millions of individual filtering units, or glomeruli. When glomeruli are damaged, the kidney can no longer adequately maintain its normal filtering function. This may result in the build-up of toxins in the blood and the loss of valuable minerals and proteins in the urine. Clinically severe nephritis, or kidney inflammation, is found in many patients suffering from lupus and other autoimmune diseases. This condition occurs when more than 90% of the kidney is destroyed by disease. Kidney failure is frequently associated with:

Many forms of damage to the glomeruli are mediated by the immune system, particularly by antibodies and activated complement proteins. Membranous nephritis is a form of kidney inflammation that is believed to be caused by a chronic autoimmune disorder that targets the kidney. We estimate that there are approximately 150,000 people currently afflicted with membranous nephritis in the United States.

Membranous nephritis is characterized by kidney inflammation and dysfunction that may eventually progress to kidney failure. Diagnostic criteria for membranous nephritis include kidney biopsies that may demonstrate the presence of antibodies and activated complement byproducts in the kidneys of affected patients. The subsequent kidney inflammation leads to the abnormal loss of substantial amounts of protein in the patient’s urine; this condition is known as proteinuria and is recognized as an objective measurement of kidney disease. Loss of protein in the urine disturbs the normal control of water in the blood vessels and also is believed to directly further injure the kidney. Moreover, clinical studies by others have shown that the degree of proteinuria is associated with the incidence of subsequent kidney failure. Additional clinical signs associated with proteinuria may include:

Current therapies for membranous nephritis include potentially toxic drugs more frequently used to treat other indications such as cancer. These drugs generally act to broadly suppress the proliferation of many types of cells, including white blood cells. We believe that the usefulness of such therapies is generally limited due to their unfavorable side effects. Even with current therapies, in such a severe disease population more than 30% of the patients are expected to progress to renal or kidney failure, which may require dialysis or transplantation. In contrast, eculizumab directly targets the inhibition of deleterious complement activation. We believe eculizumab may exert more selective and effective anti-inflammatory activity without the adverse effects associated with current therapies.

We are developing eculizumab for a group of kidney and kidney-related chronic autoimmune disorders, which include membranous nephritis, lupus nephritis, and lupus. Our strategy is to develop eculizumab in kidney disease by initially obtaining safety data in the more readily available lupus patient population and then to commence efficacy trials in patients with a kidney disorder known as membranous nephritis. We initiated a Phase II trial with eculizumab for the treatment of membranous nephritis patients because of the more uniform clinical presentations of membranous nephritis as compared to other autoimmune renal diseases.

The Phase II trial patient enrollment for membranous nephritis was completed in February 2002. Evaluation of the study awaits completion of all follow-up patient visits, data collection and subsequent analysis. We expect the data analyses will be presented at a subsequent scientific meeting before the end of 2002. The on-going 12 month open label extension study in membranous nephritis will help us assess long-term safety.

Lupus is an autoimmune disorder that damages the brain, lungs, heart, joints and especially the kidneys. In lupus, antibodies deposit within particular organs causing complement activation, inflammation and tissue destruction. For decades, clinical studies by others have demonstrated the presence of complement activation in lupus patients undergoing flares. Studies have further shown an abundant deposition of activated complement

proteins with localized inflammation in tissue biopsies from kidney or other tissues in lupus patients. The Lupus Foundation estimates that approximately 1.4 million people in the United States have lupus. Further, up to one-half of individuals estimated to be afflicted with lupus have nephritis. Although lupus may affect people of either gender, women are 10 to 15 times more likely to suffer from the disease than men.

Patients with active lupus may have a broad range of symptoms related to the antibody and activated complement deposition and inflammation. Inflammation of the brain may cause seizures and other neurologic abnormalities. Inflammation of the heart may cause heart failure or sudden death. Lung inflammation causes shortness of breath. Lupus may also cause swollen joints and arthritis. One of the most common complications associated with lupus, however, is kidney disease, which often leads to kidney failure requiring dialysis or transplantation.

Current therapies generally act to suppress broadly the proliferation of many types of cells, including white blood cells. In contrast, eculizumab directly targets the inhibition of deleterious complement activation. We believe eculizumab may exert more selective and effective anti-inflammatory activity without the adverse effects associated with current therapies.

We are developing eculizumab for the prevention and treatment of inflammation in lupus patients. We have performed pre-clinical studies in a rodent model of lupus. In this chronic rodent model that spontaneously develops a disease similar to lupus, substantially more animals treated with a C5 Inhibitor survived as compared to untreated control animals.

We filed an IND with the FDA in late December 1997 for eculizumab in the treatment of patients suffering from lupus and began a Phase I clinical trial in lupus patients in July 1998. We announced results of this 24 patient, placebo-controlled clinical study in June 1999. This trial showed that a single dose of eculizumab appeared safe and well tolerated, reduced complement activity in a dose-dependent manner, and a single 8.0 mg/kg dose significantly lowered the incidence of proteinuria.

In June 2001, we announced the commencement of a Phase II eculizumab trial for lupus nephritis. Due to slow enrollment, a re-design of the study has been proposed. There have been no apparent safety issues in this study. Continuation of development depends on the evaluation of the re-design as well as availability of resources relative to other development programs.

In addition to the above disease indications, we commenced Phase I pilot clinical trials with, eculizumab in patients afflicted with the chronic hematologic disorder, paroxysmal nocturnal hemoglobinuria, or PNH, and also in the chronic autoimmune disorders dermatomyositis, psoriasis, and bullous pemphigoid. Paroxysmal nocturnal hemoglobinuria, or PNH, is a rare, autoimmune disorder characterized by severe anemia and risk of blood clotting or thrombosis. Patients with PNH have a deficiency in certain protective proteins on the surface of their red blood cells, allowing their own complement system to attack and destroy these red blood cells. According to published reports, the incidence of PNH is estimated to be between 1 per 1 million and 1 per 100,000. Approximately half the patients with PNH die from their disease. Dermatomyositis is an autoimmune disorder in which the immune system attacks the patients’ muscles and skin, which may cause extensive rash and

progressive and severe muscle weakness, pain and fatigue. According to the Muscular Dystrophy Association, approximately 2,000—3,000 new cases of dermatomyositis are diagnosed each year in the U.S., with an estimated prevalence of approximately 5,000—20,000 patients. Psoriasis is life-long autoimmune disorder in which the immune system attacks the patient’s skin, which may cause red, painful and disfiguring scaling in the affected areas. Bullous pemphigoid is an autoimmune disorder in which the immune system attacks the patient’s skin, which may cause extensive and striking blistering and is associated with one-year mortality rates of between 20—40%.

In September 2002, we completed patient enrollment in an open-label Phase I pilot study in the United Kingdom in patients with PNH to gather clinical data regarding the safety profile and the biological and clinical effects of eculizumab in this patient population. An open-label 12 month extension study to evaluate long-term safety is on-going. Evaluation of the initial pilot study awaits completion of all follow-up patient visits, data collection, and subsequent data analysis. We intend to review the clinical data with the FDA in order to finalize our clinical plan for eculizumab in this disease. We expect data from this pilot study to be presented at the American Society of Hematology meeting in December 2002.

We completed a Phase I pilot safety trial in dermatomyositis patients with eculizumab. Eculizumab treatment for two months appeared to be safe and well tolerated and associated with an improvement in skin rash in this 13 patient population. There were few adverse events noted, with most common adverse effects being skin rash and headache. Adverse events appeared comparable in placebo and drug populations. In this pilot Phase I trial, exploratory clinical measurements included clinical and laboratory assessments of skin rash and muscle strength. There were consistent trends in improvements with drug administration in subjective and objective measures of skin rash during the two-month trial. While there was little baseline skin inflammation in the placebo group, a majority of drug-treated patients who completed the trial experienced an improvement of 50% or more in their skin rash score. We reviewed the clinical data with the FDA and intend to initiate a Phase II clinical study for eculizumab in this disease. We also expect that data will be presented at a subsequent scientific meeting. In October 2000, we announced that the FDA granted Orphan Drug status for development of eculizumab for the treatment of patients with dermatomyositis. The Orphan Drug designation would provide Alexion with market exclusivity for eculizumab for this indication for seven years from the drug’s approval date.

We completed a Phase I clinical trial to investigate the safety of two months of therapy with eculizumab in psoriasis patients. Eculizumab appeared to be safe and well tolerated in this patient population. According to a standard measure of disease activity, eculizumab treatment for two months did not influence the outcome of psoriasis in this trial. At this time, we are not pursuing psoriasis as a clinical indication. We also initiated a Phase I pilot safety trial in patients with bullous pemphigoid, which was subsequently terminated. There were no apparent safety issues, but in view of difficulties in patient enrollment in this very rare disease, we have elected not to pursue this program further in order to more efficiently focus resources on other on-going eculizumab development programs.

AAT’s goal is to develop new fully human therapeutic antibodies addressing multiple disease areas, including autoimmune and inflammatory disorders, cancer and infectious disease. AAT’s technologies involve, in part, the generation of diverse libraries of human antibodies derived from patients’ blood samples, and the screening of these libraries against a wide array of potential drug targets. We believe that these technologies may be optimally suited to the rapid generation of novel, fully human and humanized, therapeutic antibodies directed at validated clinical targets. To date, we have focused on identifying antibodies which may be therapeutically effective in different autoimmune or inflammatory disorders, cancer, and infectious diseases. In addition, we believe that these technologies could permit the pre-clinical validation of new gene targets that are coming out of the international effort to sequence the human genome. We also believe that these technologies might provide new therapeutic antibodies when the libraries are screened against certain of these new gene targets.

In May 2001, we announced the results of a pre-clinical study of a new class of therapeutic antibodies that accelerated the return to normal platelet levels in an animal model of bone marrow toxicity commonly found in cancer patients. Antibodies in this new class function as agonists that stimulate their cell target, rather than blocking it, and were created using a rational design and selection process utilizing proprietary technology developed at AAT. This new class of antibody agonists is designed to selectively bind to the c-Mpl receptor on the surface of platelet precursors and then to stimulate platelet-specific proliferation and differentiation both in vitro and in vivo. We believe that our c-Mpl agonist has potential use for patients who need treatment related to anti-cancer drug-induced thrombocytopenia, a frequent adverse event that occurs in various types of cancer treatment including leukemia, bone marrow transplantation for various disorders and certain solid tumors.

Most transplant procedures today are whole organ transplants. We believe that there is a far greater number of patients with medical disorders, such as Parkinson’s disease and spinal cord injury, that are caused by the functional loss of highly specialized cells. However, since there are no human donors of such specialized cells, there is currently no available supply of such cells for replacement therapy. Further, the immune system prevents the transplantation of cells from other species, known as xenografts, as they are recognized by the immune system as foreign and they are rejected. We are studying a portfolio of UniGraft anti-rejection technologies designed to permit the therapeutic transplantation, or xenotransplantation, of such cells without rejection.

Although approximately 21,000 people received whole organ transplants in the United States in 1999, there are many times that number of patients who have disorders that may be amenable to cell or tissue transplantation. It is estimated that this broader population includes approximately 200,000 patients suffering from spinal cord injury and 1.0 million individuals with Parkinson’s disease. In particular, we believe that use of a safe and effective cell transplantation therapy for patients with spinal cord injury or Parkinson’s disease would represent major therapeutic advances.

Hyperacute rejection is generally believed to be mediated by naturally-occurring antibodies in the patient, most of which target a sugar antigen uniquely present on the surface of non-human tissue but not on the patient’s own tissue. After binding to the foreign tissue, these antibodies stimulate the activation of the recipient’s inactive complement proteins on the surface of the donor tissue with subsequent destruction of the donor tissue. Subsequently, acute rejection of xenografts is generally believed to be mediated by white blood cells.

We are designing UniGraft cell products to resist complement/antibody-mediated hyperacute rejection. We have commenced pre-clinical studies employing the UniGraft technologies during transplantation of genetically modified and proprietary porcine cells that are resistant to destruction by human complement proteins. We are currently focusing our anti-rejection and molecular engineering technologies primarily on the development of UniGraft cells to treat Parkinson’s disease and injuries to the spinal cord. We are currently performing pre-clinical studies in the spinal cord injury and Parkinson’s disease programs and optimizing manufacturing methods of the genetically modified pig cells.

As we complete optimization of manufacturing methods for the UniGraft cells/tissue to enable clinical development, we are seeking to collaborate with other parties on this program. If we are unable to secure a collaboration to share in the future funding of the development and clinical trials, we may be unable to maximize the value in this program; and subsequently, may have to reduce our financial commitment to the program. This may cause a delay or termination of our UniGraft program, and impairment to our UniGraft manufacturing assets resulting in a write down of a portion of those assets. As of July 31, 2002, the carrying value of those assets was approximately $4 million.

MP4 is a recombinant or genetically-modified protein consisting of parts of two brain-derived proteins. These two proteins are believed to be major targets of disease-causing T-cells in patients with multiple sclerosis. MP4 is designed to bind specifically to, and eliminate, the small population of T-cells in multiple sclerosis patients which are responsible for attacking the patient’s brain cells, while leaving the vast majority of uninvolved T-cells unaffected.

In October 1998, we were granted our third award from the National Institute of Standards and Technology or NIST under its Advanced Technology Program, a three-year grant supporting product development within our neurologic disorder transplantation program. Through the program, we may receive up to approximately $2.0 million over three years to support our UniGraft program to develop a spinal cord injury product within our neurologic disorder xenotransplantation program. As of December 31, 2001 this award has been completed. Through July 31, 2002, we had received approximately $1.9 million under this award.

In November 1999, we were granted our fourth award under the NIST program, a three-year grant supporting product development within our UniGraft program. Through the program, we may receive up to approximately $2.0 million over three years to support our production of UniGraft products. Through July 31, 2002, we had received approximately $1.2 million under this award.

We and Procter & Gamble Pharmaceuticals, or P&G, entered into an exclusive collaboration in January 1999 to develop and commercialize pexelizumab. We granted P&G an exclusive license to our intellectual property related to pexelizumab, with the right to sublicense. P&G agreed to fund generally all clinical development and manufacturing costs relating to pexelizumab for the treatment of inflammation caused by cardiopulmonary bypass surgery, heart attack, and angioplasty. Additionally, P&G agreed to pay us up to $95 million in payments, which included a non-refundable up-front $10 million license fee, milestone payments (including up to $33 million in milestone payments for achievement of certain sales thresholds), and research and development support payments. We were also to receive royalties on worldwide sales of pexelizumab, if any, for all indications. We retained a preferred position relative to third-party manufacturers to manufacture pexelizumab worldwide. We shared co-promotion rights with P&G to sell, market and distribute pexelizumab in the United States or U.S., and granted P&G the exclusive rights to sell, market and distribute pexelizumab outside of the U.S.

In December 2001, we and P&G entered into a binding memorandum of understanding, or MOU, pursuant to which we and P&G revised our January 1999 collaboration. Under the revised structure, we and P&G share decision-making and responsibility for all future United States, or U.S., development and commercialization costs for pexelizumab, including clinical, manufacturing, marketing, and sales efforts. Prior to December 2001, P&G was generally funding all clinical development and manufacturing costs for pexelizumab. Per the MOU, our revised collaboration with P&G provides for us and P&G to each incur approximately 50% of all Phase III clinical trial, product development and manufacturing, and commercialization costs necessary for the potential approval and marketing of pexelizumab in the U.S. and that each firm will receive an approximate equal share of the gross margin on U.S. sales, if any. P&G agreed to retain responsibility and costs for future development and commercialization outside the U.S., with us receiving a royalty on sales to the rest of the world, if any. We are responsible for royalties on certain third party intellectual property worldwide, if such intellectual property is necessary. Additionally, as part of the MOU, we will receive milestone payments for achieving specified development steps, regulatory filings and approvals, but will not receive previously agreed sales milestones and will generally forego further research and development support payments from P&G.

As part of the revised collaboration per the MOU, P&G agreed to continue to fund 100% of the costs to complete the two on-going Phase II clinical trials in myocardial infarction or heart attack patients that recently completed enrollment. We have agreed to bear the first 50% of projected costs associated with the coronary artery bypass graft surgery, or CABG, Phase III clinical trial and P&G will bear the second 50%, with a final adjustment to make even the 50% sharing of costs. We and P&G have agreed that each will share concurrently 50% of the on-going U.S. pre-production and development manufacturing costs of pexelizumab as well as any future AMI Phase III clinical trial costs. A letter of understanding has been signed relating to the negotiation and completion of an agreement with a third party manufacturer for the large scale commercial manufacture of pexelizumab over five years.

P&G has the right to terminate the collaboration at any time. If P&G terminates prior to incurring its 50% of the CABG-Phase III clinical trial costs, then P&G will not be required to contribute towards its approximately equal share of the U.S. CABG-Phase III clinical trial costs and P&G will be released from its future funding obligations. In addition, P&G would offer to assign any pexelizumab third party manufacturing agreements and we could be obligated to assume all future costs thereunder and reimburse P&G for its prior payments thereunder. If P&G terminates, all rights and the exclusive license to our intellectual property related to pexelizumab will revert back to us and we will be entitled to all future pexelizumab revenues, if any, without any sharing of revenues, if any, with P&G. If we were to continue development of pexelizumab, our costs would increase significantly as we would need to fund development and commercialization of pexelizumab on our own or identify a new collaboration partner.

We obtain drug product to meet our requirements for clinical studies using both internal and third-party contract manufacturing capabilities. We have a pilot manufacturing plant suitable for the fermentation and purification of certain of our recombinant compounds for clinical studies. Our pilot plant has the capacity to manufacture under cGMP or current good manufacturing practices regulations. We have also secured the production of clinical supplies of certain other recombinant products through third-party manufacturers. In each case, we have contracted product finishing, vial filling, and packaging through third parties.

To date, we have not invested in the development of commercial manufacturing capabilities. Although we have established a pilot manufacturing facility for the production of material for clinical trials for some of our potential products, we do not have sufficient capacity to manufacture more than one drug candidate at a time or to manufacture our drug candidates for later stage clinical development or commercialization. In the longer term, we may contract the manufacture of our products for commercial sale or may develop large-scale manufacturing capabilities for the commercialization of some of our products. The key factors which will be given consideration when making the determination of which products will be manufactured internally and which through contractual arrangements will include the availability and expense of contracting this activity, control issues and the expertise and level of resources required for us to manufacture products. In addition, as our product development efforts progress, we expect that we will need to hire additional personnel skilled in product testing and regulatory compliance.

collaboration with marketing partners or rely on relationships with one or more companies with established distribution systems and direct sales forces. Under our revised collaboration agreement, P&G is obligated to sell, market and distribute pexelizumab for all approved indications outside the U.S. We share with P&G co-marketing and co-promotion rights for pexelizumab in the U.S. For other future drug products, as well as for pexelizumab in the U.S., we may elect to establish our own specialized sales force and marketing organization to market our products.

Delaware		13-3648318
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

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