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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2001 Commission File Number 0-22962
HUMAN GENOME SCIENCES, INC.
(Exact name of registrant)
Delaware 22-3178468
(State of organization) (I.R.S. employer identification number)
9410 Key West Avenue, Rockville, Md. 20850-3338
(address of principal executive offices and zip code )
(301) 309-8504
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities pursuant to Section 12(g) of the Act:
Common stock, par value $0.01 per share
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 the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of the registrant's common stock outstanding on January 31,
2002 was 128,328,142.
As of January 31, 2002, the aggregate market value of the common stock held by
non-affiliates of the registrant based on the closing price reported on the
National Association of Securities Dealers Automated Quotations System was
approximately $2,395,123,843.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Human Genome Sciences, Inc.'s Notice of Annual Stockholder's Meeting
and Proxy Statement, to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated by reference into Part III of this
Annual Report.
*Excludes 43,183,320 shares of common stock deemed to be held by officers and
directors and stockholders whose ownership exceeds five percent of the shares
outstanding at January 31, 2002. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
registrant, or that such person is controlled by or under common control with
the registrant.
1
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainty. Our
actual results could differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Factors That May Affect Our Business"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Annual Report on Form
10-K.
OVERVIEW
We are a leading genomics and biopharmaceutical company focused on
therapeutic product development and functional analysis of genes using our
proprietary technology platform. We discover, develop and intend to
commercialize novel compounds for treating and diagnosing human disease based on
the identification and study of genes. We focus our internal product development
efforts on therapeutic proteins, antibodies, peptides and fusion proteins and we
use collaborations for the development of gene therapy products and small
molecule drugs. We have discovered a large number of genes through our genomics
capabilities and have developed a rapidly evolving product pipeline based on our
discoveries. We have seven products, including three therapeutic proteins, one
antibody and three albumin fusion products that we have advanced into human
clinical trials; two products are awaiting approval from FDA to enter human
clinical trials; a tenth product, a gene therapy product based on a gene we
discovered, has been licensed to Vascular Genetics, Inc. (VGI) and is in human
clinical trials being conducted by VGI; an eleventh product, an enzyme that
lowers levels of lipoprotein-associated phospholipase A2 (Lp-PLA2), was
discovered by GlaxoSmithKline (GSK) as part of our collaboration with GSK and is
also in human clinical trials being conducted by GSK. We have a number of
additional products in preclinical development.
We have extensive capabilities in gene discovery, intellectual property
protection and preclinical and clinical development and have established a
manufacturing capability for the preparation of our proteins and other products
for human studies. We intend to add sales and marketing when appropriate and are
currently adding additional manufacturing capabilities. We have established
strategic partnerships with a number of leading pharmaceutical and biotechnology
companies to leverage our capabilities and gain access to complementary
technologies and sales and marketing infrastructure. Some of these partnerships
provide us with research funding and milestone payments, along with royalty
payments as products are developed and commercialized. We are also entitled to
certain co-promotion, co-development, revenue sharing and other product rights.
We have a growing intellectual property portfolio protecting our genomic
discoveries and product pipeline.
STRATEGY
Our goal is to be an independent, global and fully-integrated
biopharmaceutical company through the discovery, development, manufacture and
commercialization of new gene-based products. As part of our strategy, we intend
to continue to:
- Discover medically useful genes based on our proprietary technology
platform;
- Develop, manufacture and commercialize our gene-based products on our
own and with our strategic partners;
- Establish and enhance strategic alliances to provide access to the
product development, clinical development and marketing expertise of
our partners;
- Expand our technology platform to accelerate our product development
activities;
- Pursue strategic acquisitions to augment our capabilities and provide
access to complementary technologies; and
- Capitalize on and expand our intellectual property portfolio.
2
PRODUCTS
We have discovered a large number of medically useful genes which we are
developing on our own. Currently, seven drugs from our technology are in human
clinical trials including three therapeutic proteins, one antibody and three
albumin fusion proteins. Our therapeutic proteins are: Mirostipen (MPIF-1), a
protein designed to protect cells which develop into white blood cells, red
blood cells and platelets from the toxic effects of chemotherapy, is in Phase II
human clinical trials. Repifermin (KGF-2), a protein designed to speed the
repair of damage to skin and other cells, is in Phase II human clinical trials
for the treatment of venous ulcers and mucositis. BLyS(TM), an immune stimulant,
is in Phase I human clinical trials for the treatment of common variable
immunodeficiency and IgA deficiency. Our antibody is LymphoStat-B(TM) and is in
Phase I human clinical trials in patients with autoimmune disease. We have three
albumin fusion proteins that have been advanced to Phase I human clinical
trials. These are: Albuferon(TM)-(alpha) for the treatment of chronic hepatitis
C and chronic myelogenous leukemia (CML), Albutropin(TM) for the treatment of
adult growth hormone deficiency and Albuleukin(TM) for the treatment of cancer.
We have two products awaiting approval from FDA to enter human clinical trials.
One of these is LymphoRad(131)(TM) is a radioiodinated form of BLyS and is
awaiting FDA clearance to begin Phase I human clinical trials in patients with
multiple myeloma.
Currently, there are two products being developed by partners that are
in human clinical trials. We licensed VEGF-2 to Vascular Genetics, Inc. (VGI)
for gene therapy. These clinical trials were on clinical hold until October
2001, but VGI expects to resume the trials during 2002. GlaxoSmithKline is
evaluating an enzyme that lowers levels of lipoprotein-associated phospholipase
A2 (Lp-PLA2) in Phase I human clinical trials.
We also have a rapidly evolving pipeline of additional products in
preclinical development to treat diseases such as cancer, HIV, hepatitis,
diabetes / metabolism, bone remodeling / osteoporosis, systemic lupus
erythematosus, rheumatoid arthritis and vascular disease.
INDUSTRY BACKGROUND
Every living organism has a unique "genome," a master blueprint of all
the cellular structures and activities required to build and support life. A
genome is a map of the organism's DNA, which is in part comprised of segments
called "genes." Genes contain the specific sequences of information responsible
for particular physiological traits and processes. Each gene is comprised of a
sequence of nucleotides which provide precise genetic instructions to create, or
"express" a protein. Proteins are the primary building blocks of an organism's
physiological characteristics. A typical human cell contains thousands of
different proteins essential to its structure, growth and function. If even one
gene is expressed abnormally, it can severely alter the cell's function and
result in a disease condition.
Throughout the past decade, researchers have focused on discovering
genes and sequencing the human genome to determine the order of nucleotides in a
specific gene, permitting identification of the gene and the protein it produces
using a variety of techniques. For example, scientists have used cDNA libraries,
which contain copies of DNA with only the expressed portion of the gene, in
conjunction with computer software to discern locations of genes within the
genome. Recent advances have made these technologies operate in a
high-throughput manner, causing the discovery of genes to become drastically
more efficient and allowing researchers to focus on the functional aspects of
genes. Understanding the functional aspects of genes allows for the correlation
of those genes to medically relevant conditions. Armed with these data,
researchers can more efficiently develop treatments for conditions of interest.
Gene research facilitates and greatly accelerates the development of a
variety of therapeutic, diagnostic and other products and services. Development
efforts can become more targeted as researchers develop compounds that affect
the specific activity of an expressed gene product. Most therapeutic drugs act
on proteins which cause or contribute to an illness or disorder. As a result,
the identification of proteins through gene research can play an important role
in the development of drugs and drug screens. Proteins themselves can also be
used as drugs. Insulin, which regulates sugar metabolism, is a good example of a
widely known protein drug. The identification of genes that code for proteins
that may be missing or defective can enable the development of therapeutics for
genetic diseases. In addition, identification of genes that may predispose a
person to a particular disease may enable the development of diagnostic tests
for the disease that will permit early diagnosis and more successful treatment.
Genomic research has the potential to make the drug discovery process
dramatically more time and cost efficient, as well as to enable the development
of more targeted drugs.
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OUR STRATEGY
Our goal is to become an independent, global and fully-integrated
biopharmaceutical company through the discovery, development, manufacture and
commercialization of new gene-based products. Our strategy consists of the
following key elements:
- Discover medically useful genes. We intend to continue to discover
medically useful genes using the strengths of our technology platform.
We undertake discovery efforts based on our capabilities in gene
sequencing, transcriptional profiling, creation of gene libraries and
bioinformatics. We study our extensive genomic database for
potentially medically useful genes and focus on discovering their
functions.
- Develop, manufacture and commercialize our products. We seek to
develop clinically the medically useful genes we discover. This may
include using the protein product itself as a drug, using the protein
as a target for a small molecule drug or creating antibodies targeted
at the protein. We also intend to pursue drugs using proprietary
protein fusion technology. This technology may provide longer acting
forms of many important proteins, which may allow us to develop safer,
more effective and more convenient versions of both existing and new
products. We intend to manufacture proteins and commercialize the
drugs we develop on our own or in conjunction with our partners.
- Establish and enhance strategic alliances. We intend to continue to
establish alliances with leading pharmaceutical and biotechnology
companies. These alliances will provide us with access to the
expertise of our partners in areas such as product development,
clinical development and sales and marketing, while allowing our
partners to develop therapeutics based on our technologies. In
addition, these alliances may generate research funding, milestone and
royalty payments that will enable us to continually enhance our
technology platform and to discover and develop new gene-based
products. We may also seek to retain certain co-promotion,
co-development, revenue sharing and other product rights.
- Expand our technology platform. We will continue to invest
considerable resources to expand and enhance our proprietary
technology platform. This will allow us to accelerate our discovery
and product development activities and facilitate the formation of
additional alliances with major biotechnology and pharmaceutical
companies. We also intend to continue to establish collaborations with
leading biotechnology companies to gain access to complementary
technologies for our product development efforts.
- Pursue strategic acquisitions. We intend to continually evaluate
potential acquisitions and joint ventures that would allow us to
augment our technology, product development and commercialization
capabilities, as well as provide access to complementary technological
expertise.
- Capitalize on and expand our intellectual property portfolio. We
vigorously pursue patents to protect our intellectual property and
have developed a strong intellectual property portfolio. We intend to
capitalize on and expand our portfolio as we make further discoveries.
As of March 1, 2002, we had 205 U.S. patents covering human genes and
proteins and had filed U.S. patent applications covering many more
human genes and the proteins they encode.
4
PRODUCTS IN DEVELOPMENT
We have discovered a large number of medically useful genes which we are
developing on our own or with our partners. A number of our and our partners'
products have advanced to various stages of human clinical testing. Moreover, we
have a rapidly evolving pipeline of products in preclinical development.
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PRODUCT INDICATION STATUS CURRENT HGS RIGHTS
- -----------------------------------------------------------------------------------------------------------------------
CLINICAL PROGRAMS
THERAPEUTIC PROTEINS:
Repifermin (KGF-2) Venous ulcers Phase IIb Worldwide, co-development and
co-marketing
with GlaxoSmithKline (GSK)
Mucositis Phase II Worldwide, co-development
and co-marketing with GSK
Ulcerative colitis Phase II Worldwide, co-development
and co-marketing with GSK
Mirostipen (MPIF-1) Adjunct to chemotherapy Phase II Worldwide except Japan (Takeda)
BLyS Common variable immunodeficiency Phase I Worldwide
Immunoglobulin-A (IgA) deficiency Phase I Worldwide
LymphoRad(131) Cancer IND Filed Worldwide
ANTIBODIES:
LymphoStat-B Autoimmune disease Phase I Worldwide
ALBUMIN FUSION PROTEINS:
Albuferon-(alpha) Hepatitis C Phase I Worldwide
(Albumin-Interferon-alpha)
Chronic myelogenous leukemia (CML) Phase I Worldwide
Albutropin Growth hormone deficiency Phase I Worldwide
Albuleukin Cancer Phase I Worldwide
GENE THERAPIES:
VEGF-2 (1)(2) Coronary artery disease Phase II(2) Licensed to Vascular Genetics
Critical limb ischemia Phase II Licensed to Vascular Genetics
SMALL MOLECULE DRUGS:
Lp-PLA2 (SB480848) (1) Atherosclerosis Phase I Under development by GSK
5
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PRODUCT INDICATION STATUS CURRENT HGS RIGHTS
- -------------------------------------------------------------------------------------------------------------------------
PRECLINICAL AND OTHER PROGRAMS
THERAPEUTIC PROTEINS:
FasTR(TM) Hepatitis, autoimmune disease Preclinical Worldwide
A novel interferon (1) Multiple sclerosis, hepatitis, Preclinical Licensed to Schering-Plough
cancer
Osteostat Bone remodeling / Osteoporosis Preclinical Worldwide
GMAD-1 Diabetes / Metabolism Preclinical Worldwide
DP-18 Diabetes / Metabolism Preclinical Worldwide
ANTIBODIES AND PEPTIDES:
CCR5-mAB HIV / AIDS Preclinical Worldwide
LymphoStat-B Rheumatoid arthritis Preclinical Worldwide
TRAIL R1 Receptor Antibody Cancer Preclinical Worldwide
TRAIL R2 Receptor Antibody Cancer Preclinical Worldwide
VEGF-2 Antibody Cancer, vascular disease Preclinical Worldwide
GMAD-2 Diabetes / Metabolism Preclinical Worldwide
FUSION PROTEINS:
Albuferon-(beta) Multiple sclerosis Preclinical Worldwide
Albupoietin(TM) Cancer Preclinical Worldwide
Albugranin(TM) Cancer Preclinical Worldwide
Albulin Diabetes / Metabolism Preclinical Worldwide
Albugon Diabetes / Metabolism Preclinical Worldwide
HGS-B 14 Bone remodeling / Osteoporosis Preclinical Worldwide
Albuthyrin Bone remodeling / Osteoporosis Preclinical Worldwide
Albutonin Bone remodeling / Osteoporosis Preclinical Worldwide
GENE THERAPY:
CTGF-2 (1) Vascular disease Preclinical Licensed to Transgene
TIMP-4 (1) Restenosis Preclinical Licensed to Transgene
VACCINES:
Streptococcus pneumniae (1) Bacterial pneumonia, meningitis and Preclinical Licensed to MedImmune and GSK
otis media
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(1) Drug development costs for these drugs are the sole responsibility of the
licensee.
(2) VEGF-2 trials were released from clinical hold in October 2001 by the
Food and Drug Administration (FDA). See "Risk Factors."
6
CLINICAL PROGRAMS
Repifermin (Keratinocyte Growth Factor-2, KGF-2)
We have shown in animal studies that repifermin speeds the repair of
damage to the cells lining the mouth, throat, gastrointestinal tract and related
tissues and heals serious chronic wounds to the skin. Repifermin may also be
useful in treating a number of other conditions involving injury to skin cells,
including skin ulcers, burns and surgical and other wounds. In addition,
repifermin may be useful in the treatment of mucositis, an injury to the lining
of the mouth and intestinal tract which can be caused by some cancer treatments.
GlaxoSmithKline exercised its co-right option to jointly develop and
commercialize repifermin. We expect to share equally in clinical development
costs for Phase III trials and beyond. We will co-promote repifermin upon
achieving regulatory approvals.
Three Phase I studies to evaluate the safety of repifermin in healthy
volunteers have been completed. In 2000, we completed a Phase II human study of
repifermin for the treatment of chronic venous ulcers, in which repifermin was
shown to be well tolerated and capable of accelerating wound healing by a number
of partial healing parameters. A large Phase II study to determine the safety
and efficacy of repifermin for complete healing of chronic venous ulcers began
in early 2001. Two different Phase II studies were also initiated to evaluate
repifermin in the treatment of mucositis in patients undergoing bone-marrow
transplantation. The results from a mucositis trial relating to repifermin
administration following transplantation were announced in 2001 and indicated
that while repifermin was safe and well tolerated in patients, no evidence was
shown that repifermin was active in reducing the incidence or severity of
mucositis. The mucositis trial relating to repifermin administration prior to
and following transplantation is ongoing. A third Phase II study was also
initiated to evaluate repifermin in the treatment of ulcerative colitis, an
inflammatory bowel disease. The results from the ulcerative colitis trials
showed that repifermin was safe and well-tolerated, but not shown to be
effective. We are continuing to analyze these final results to determine how to
proceed with this indication. The trials are being conducted at leading research
centers in the U.S.
Mirostipen (Myeloid Progenitor Inhibitory Factor-1, MPIF-1)
Myeloid progenitor cells, which develop into white blood cells, red
blood cells and platelets, are destroyed by many forms of cancer chemotherapy,
resulting in a decrease in these cells. We have shown in laboratory and animal
studies that MPIF-1 inhibits the differentiation and growth of certain bone
marrow cells, including myeloid progenitor cells. By preventing the growth of
myeloid progenitor cells during aggressive chemotherapy, it may be possible to
reduce the destruction of these cells and allow the more rapid repopulation of
red and white blood cells in circulation. This, in turn, may reduce the
incidence of serious infection, anemia and coagulation disorders associated with
chemotherapy.
A Phase I study to evaluate MPIF-1 safety in healthy volunteers was
completed in 1998. Two Phase II studies are being conducted to evaluate MPIF-1
in shielding myeloid progenitor cells from the harmful effects of chemotherapy.
These studies tested various doses of MPIF-1 in cancer patients undergoing
chemotherapy treatment for various cancers. Trials are being conducted at
leading cancer research centers in the U.S. and completed enrollment in 2001. We
expect results from the trials to be available in mid-2002.
BLyS (B Lymphocyte Stimulator)
BLyS is a novel immune stimulant. We have shown in laboratory studies
that BLyS stimulates B lymphocytes to produce high levels of antibodies. BLyS
has the potential to improve treatments for certain immune deficiency syndromes.
In addition, BLyS could boost immune systems depleted by organ transplantation,
chemotherapy and bone-marrow transplantation. BLyS could also enhance the
performance of traditional vaccines.
We are currently testing BLyS in patients with common variable
immunodeficiency, a disorder that leaves individuals susceptible to infection.
In February 2001, BLyS received "orphan" drug designation from the FDA for the
treatment of common variable immunodeficiency. A Phase I study with increasing
doses of BLyS is ongoing. For this trial, BLyS had been produced in an insect
cell culture. A Phase I study has also been initiated to evaluate BLyS in the
treatment of Immunoglobulin-A (IgA) deficiency, an immune disorder. In this
trial, we received approval from the FDA to begin manufacturing BLyS in E. coli,
which will allow us to increase production scale to support the needs of the
clinical program, and ultimately, to supply commercial needs.
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LymphoRad(131)
LymphoRad(131) is a radioiodinated form of B-Lymphocyte Stimulator
(BLyS). We have found in preclinical studies that LymphoRad(131) binds to
receptors found on B cells and B-cell tumors, delivering low doses of radiation
that cause cell death. Such studies also showed that treatment with
LymphoRad(131) resulted in inhibition of tumor growth and prolonged survival. In
January 2002, we filed an Investigational New Drug (IND) application for this
drug. Upon receiving clearance from the FDA, we plan to initiate Phase I
clinical trials in patients with multiple myeloma.
LymphoStat-B
LymphoStat-B is the first antibody drug to emerge from our human
antibody drug discovery program. The drug inactivates the B-Lymphocyte
Stimulator protein (BLyS). We have found in laboratory studies that LymphoStat-B
can reverse the immune stimulatory effects of BLyS. Many patients that suffer
from systemic lupus erythematosus and rheumatoid arthritis have elevated levels
of BLyS in their blood or joint fluid. In November 2001, we received approval
from the FDA to proceed with a Phase I clinical trial in patients with systemic
lupus erythematosus and have begun enrollment in this trial.
Fusion Proteins
Using our proprietary recombinant protein fusion technology, we are
genetically fusing proteins to albumin, a very abundant, natural and long-lived
protein in the blood. We have begun Phase I human clinical studies of several
albumin fusion proteins. These include Albuferon-alpha (hepatitis C and chronic
myelogenous leukemia - CML), Albutropin (growth hormone deficiency) and
Albuleukin (cancer).
Albuferon-alpha is created by fusing the gene for a human protein,
interferon alpha, an approved drug, to the human protein, albumin. Based on
preclinical studies, Albuferon-alpha should provide patients infected with
Hepatitis C with longer acting therapeutic activity and may offer an improved
side-effect profile. In March 2001, we received approval from the FDA to proceed
with a Phase I clinical trial in patients with hepatitis C. We have begun
enrolling patients in this trial. We are in the process of initiating a second
trial in patients with chronic myelogenous leukemia (CML).
Albutropin is created by fusing the gene for a human protein, human
growth hormone, an approved drug, to the human protein, albumin. Based on
preclinical studies, Albutropin may offer sustained therapeutic activity, which
is accomplished by using recombinant human albumin as a carrier molecule.
Preclinical data suggest that Albutropin is eliminated from the body fifty times
more slowly than regular growth hormone and is detectable in the blood for at
least a week after dosing. Therefore, Albutropin may offer patients a more
convenient administration schedule when compared to the existing short-acting
therapies. In June 2001, we received approval from the FDA to proceed with a
Phase I clinical trial in adult patients with growth hormone deficiency. We have
begun enrolling patients in this trial.
Albuleukin is created by fusing interleukin-2, a drug approved for
cancer treatment, to the human protein, albumin. Albuleukin is expected to
activate a type of immune cell called a T cell. T cells have the potential to
identify and kill cancer cells. Based on preclinical studies, Albuleukin is
longer-acting and is better tolerated, as compared with interleukin-2 itself. In
January 2002, we received approval from the FDA to proceed with a Phase I
clinical trial in patients with certain types of cancer. We have begun screening
patients in this trial.
VEGF-2 (Vascular Endothelial Growth Factor-2)
Laboratory studies have shown that VEGF-2 promotes the growth of certain
subsets of vascular endothelial cells, which form the lining and surface of
blood vessels. Thus, it may have potential as a treatment for coronary artery
disease and peripheral arterial disease. We have licensed the gene that encodes
VEGF-2 to Vascular Genetics, Inc., a company in which we have approximately a
27% equity position.
Vascular Genetics initiated clinical trials on the use of the VEGF-2
gene in the treatment of critical limb ischemia and refractory coronary artery
disease. In February 2000, these studies were halted in response to questions
raised by the FDA. Three Phase II studies of VEGF-2 were completed prior to the
halt. Results from one trial are available
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and were presented at the American College of Cardiology in March 2000. In
October 2001, the FDA removed these studies from clinical hold. VGI expects to
resume human clinical trials in 2002.
Small Molecule Inhibitor of lipoprotein-associated phospholipase A2 (Lp-PLA2).
In February 2001, GlaxoSmithKline announced the results of human testing
of a small-molecule inhibitor of a gene we discovered, lipoprotein-associated
phospholipase A2 (Lp-PLA2), as a treatment for cardiovascular disease. In
September 2001, we received a $1.0 million payment from GSK in connection with a
development milestone met by GSK during 2001.
PRECLINICAL AND OTHER PROGRAMS
In addition to the products in clinical development, our research and
development efforts have generated numerous other product possibilities, many of
which are in preclinical development. We and our partners are focused on
developing potential products in the following areas:
- Therapeutic Proteins. Therapeutic proteins are human proteins that, in
natural or modified form, have medically useful physiologic or
pharmacologic effects. Therapeutic proteins may be useful for the
treatment of a variety of diseases, including autoimmune,
neurodegenerative and cardio-pulmonary diseases. Therapeutic proteins
currently in broad clinical use include interferon, insulin and human
growth hormone. We have conducted development studies on a number of
potential therapeutic proteins, including MPIF-1, KGF-2 and BLyS. We
have also identified thousands of what we believe to be new secreted
proteins. We are expressing and evaluating these proteins and
assessing their activity using laboratory and animal studies. Current
therapeutic proteins in preclinical development include FasTR, a novel
interferon licensed to Schering-Plough, GMAD-1, DP-18, and Osteostat.
- Antibodies and Peptides. Antibodies and peptides are proteins that
bind in a highly specific manner to molecules, including other
proteins, and distinct sites on cell surfaces called receptors. By
attaching to them, antibodies and peptides can be used to neutralize
specific proteins and block specific receptors. We are undertaking the
development of antibodies and peptides that act on many of our newly
discovered proteins. We have entered into collaborations with Abgenix,
Cambridge Antibody Technology, Dyax and Medarex to enhance our
antibody and peptide development efforts. Antibody-based drugs
currently in broad clinical use include Herceptin, Rituxan and ReoPro.
The antibodies and peptides we are currently developing may be useful
in the treatment of diseases such as systemic lupus erythematosus,
rheumatoid arthritis, cancer and certain viral infections. Current
antibodies in preclinical development include CCR5-mAB, LymphoStat-B
for rheumatoid arthritis, TRAIL R1 Receptor Antibody, TRAIL R2
Receptor Antibody, VEGF-2 Antibody and GMAD-2.
- Fusion Proteins. We are using our recombinant protein fusion
technology to provide longer acting forms of many important proteins
used in the treatment of disease. This technology genetically fuses a
protein to albumin, a very abundant, natural and long-lived protein in
the blood. When albumin is fused to a therapeutic protein, the active
protein is expected to have the longer circulating life of albumin.
Prolonging the activity of the therapeutic protein in this manner may
offer a reduced dosing frequency and could lead to reduced side
effects in patients. Using this technology, we expect to develop
safer, more effective and more convenient protein therapeutics and
biopharmaceuticals for certain diseases, as well as develop
longer-acting forms of many existing proteins. Current fusion proteins
in preclinical development include Albuferon-(beta), Albupoietin,
Albugranin, Albulin, Albugon, HGS-B 14, Albuthyrin and Albutonin.
- Gene Therapy. We believe that our gene discovery technology may
identify genes that can be introduced into the body through the use of
gene therapy. Many diseases are caused by overproduction,
underproduction or defective production of specific proteins. Gene
therapy is an approach to the treatment of disease in which scientists
insert genes into a patient's cells for the purpose of inducing these
cells to produce therapeutic proteins or to replace defective or
missing genes. In other applications, we believe that gene therapy may
induce cells to secrete proteins that enhance the immune system's
ability to recognize and attack a specific disease. Gene therapy might
also allow localized delivery of proteins that cannot reach the
appropriate site through conventional methods of administration. There
are currently no gene therapy products on the market although several
are undergoing clinical trials. We have entered into agreements with
Schering-Plough, Vascular Genetics, Transgene and Vical granting them
the right to use our technologies for gene therapy. Vascular
9
Genetics has conducted gene therapy clinical studies of VEGF-2. These
studies were placed on hold by the FDA in February 2000 and were
released from clinical hold in October 2001. In July 2000, Transgene
selected two genes from our database, CTGF-2 and TIMP-4, as its first
two exclusive gene therapy products, both as a potential treatment for
severe cardiovascular conditions.
- Small Molecule Drugs. We believe that more complete knowledge of genes
and the proteins they express will enable traditional pharmaceutical
companies to design and screen pharmaceutical products in a more
efficient fashion by providing specific targets for drug discovery.
The discovery of new drugs often involves screening a large family of
synthetic and natural products to determine their impact on proteins
expressed by genes. Increasingly, automated biochemical tests that
assess the ability of chemical compounds to bind to and modify the
activity of purified proteins are used to test the efficacy and
selectivity of new drugs. A drug's selectivity is its ability to
affect only the desired protein targets and not other proteins
expressed in the human body. The undesired binding of a drug to other
proteins not detected by a screening test can result in toxicity or
other undesirable side effects. We believe that the genes we discover
may contribute to screening tests by permitting more complete sets of
target proteins to be assembled for a test. GlaxoSmithKline and our
other collaboration partners are currently using proteins expressed by
genes identified by us in a number of screening tests. We may pursue
small molecule drug development on our own or continue to leverage the
expertise of our partners in this area.
- Other. We believe that our genetic data could be applied also to the
development of diagnostic tests and antimicrobial agents and vaccines.
For the development of antimicrobial agents and vaccines, analysis of
the total genome of a microorganism should provide a complete picture
of all genes encoded by the microorganism. With this information, we
believe it may be possible to choose protein candidates that may be
useful as vaccine components or antigens required for the development
of products to enhance the immune system. We also believe that a
high-throughput approach of gene identification may identify new genes
capable of producing antibiotics and other useful secondary
metabolites. In the future we may pursue these developments on our own
or through strategic alliances.
RESEARCH AND DEVELOPMENT CAPABILITIES
Our product development efforts are supported by our extensive research
and development capabilities and are substantially augmented by those of our
partners. We exploit the power of modern computers, automated laboratory
instruments and advances in biology to discover the structure and function of
new genes and to understand their potential medical applications. As part of
this process we cover all stages of development, from the discovery of new human
genes to human clinical trials of the new drugs. We continually seek to upgrade
our technologies and integrate new and more efficient technologies into our
development efforts. We believe this discovery process is responsible for our
success in translating genomic information into new drug candidates.
Our technology platform is based on various methods that we integrate in
a high-throughput fashion to enable the rapid progression from gene discovery to
clinical trials.
- Gene Isolation is the process of deciphering the sequence of a gene.
We believe we have isolated the messenger RNA from more than 95% of
all human genes. Of these, we believe that between 75% and 80% are
fully functional, as they contain all the instructions necessary to
produce an active protein.
- Secreted Protein Identification refers to the elucidation of secreted
proteins which are often involved in disease processes. We believe we
have identified several thousand human genes that encode signaling
proteins. We believe that this collection represents the majority of
human signaling proteins.
- Expression Profiling and Mapping refers to the comparison of messenger
RNA levels in diseased and healthy tissues. Our scientists use gene
chips and proprietary methods to analyze gene expression profiles in a
wide variety of tissues and cells. They also use a variety of
techniques to map chromosome location, which generally allow our
scientists to map any gene within two or three weeks.
- Proteomics is the analysis of proteins correlated with a particular
disease. In this step we map out the physical properties of each
signaling protein. We attempt to determine the molecular weight, amino
acid composition and amino acid sequence of the majority of the newly
discovered signaling proteins.
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- Use of Antibodies. Antibodies are proteins that bind in a highly
specific manner to molecules. Antibodies are used to block the effects
of proteins and to determine the location of a protein in tissues. We
are working to produce antibodies to many of our discovered secreted
proteins.
- High-Throughput Biological Screening. We have developed a reliable
high-speed robotic cloning method to produce each newly discovered
signaling protein for biological studies. To date, we have cloned many
proteins.
- Biological Activity and Specificity. Our scientists can simultaneously
monitor changes in the expression of about 100 representative genes
through the use of an automated, high-throughput biological screening
system. We analyze the activity of the proteins on a wide variety of
different types of cells to assess their specificity of action, or the
range of circumstances in which they act, and the number of
characteristics they can influence. Only proteins that are highly
specific in their activity are selected for further development.
- Animal Models refer to producing animals with the human disease
equivalent. We test proteins that are highly specific in their
activity with animal models of human disease. Where possible, we
compare the results for each tested protein to the best existing
therapy. Proteins which prove to be active in these models are
selected for extensive laboratory studies.
- Preclinical Studies and Manufacturing. In this step we develop
protocols for human testing based on extensive laboratory toxicology
and pharmacokinetic studies. A toxicological study tests whether and
how the therapy could be harmful to humans. Pharmacokinetic studies
analyze how the drug will be absorbed, metabolized and stored by,
distributed throughout and excreted from the body. We are developing
techniques for measuring blood and tissue levels of each protein to
enable measurements within human subjects. We need to develop
manufacturing methods for large-scale production of each protein. We
lease a 127,000 square foot process development and manufacturing
facility to support Phase I, II and III human clinical studies and the
North American launch of novel protein and gene products. We are
currently designing a 405,000 square foot manufacturing facility
adjacent to our current manufacturing facility. We expect this new
leased facility to be ready for occupancy in 2004.
- Clinical Development is the process of conducting human clinical
trials and gaining the necessary approval from regulatory agencies.
The goal of clinical development is to establish the safety and
efficacy of our drugs for the treatment of human disease. Multiple
products discovered by us have advanced to clinical trials for
multiple indications.
- Bioinformatics refers to the use of computers to process, analyze,
store and retrieve biological information. Our high capacity computer
system has been designed for ease of use by research scientists, who
readily access the system through desktop computers. We believe that
our proprietary bioinformatics system is an important asset for the
identification and creation of gene-based product opportunities.
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COLLABORATIVE ARRANGEMENTS
Forming strategic alliances with leading pharmaceutical and
biotechnology companies is a key element of our strategy. We currently have
three major types of collaborations:
- Drug Discovery. These are collaborations in which we provide our drug
discovery capabilities in exchange for access to our partners' drug
development and commercialization expertise as well as research
funding and long-term value creation through potential milestone and
royalty payments. We are also entitled to certain co- promotion,
co-development, revenue sharing and other product rights. Between 1993
and 1997, we entered into major collaborations with GlaxoSmithKline,
Takeda, Schering-Plough, Merck KGaA and Sanofi-Synthelabo. These
collaborations ended in June 2001, a period described as the initial
research term, although certain aspects of these arrangements
continue.
- Technology. These are collaborations in which we gain access to our
partners' technology to complement our own drug discovery and
development capabilities in exchange for license fees, potential
milestone and royalty payments as well as equity investments.
- Microbial. These are collaborations in which we provide access to gene
sequence data for specific microbial organisms to biopharmaceutical
companies in exchange for license fees and royalty payments.
A summary of our most important collaborations is provided below:
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YEAR ESTABLISHED PARTNER FOCUS
---------------- ------- -----
DRUG DISCOVERY COLLABORATIONS
1993-97 GlaxoSmithKline Therapeutic proteins, small
molecule drugs, gene therapy
vaccines and diagnostics
1995 Takeda Therapeutic proteins and small
molecule drugs
1996 Schering-Plough Therapeutic proteins, small
molecule drugs and gene therapy
1996 Merck KGaA Therapeutic proteins and small
molecule drugs
1996 Sanofi-Synthelabo Therapeutic proteins and small
molecule drugs
TECHNOLOGY COLLABORATIONS
1997 Vascular Genetics Gene therapy
1998 Affymetrix Bacterial Gene Arrays
1998 Transgene Gene therapy
1999 Abgenix Antibodies
2000 Cambridge Antibody Technology Antibodies
2000 Dyax Antibodies and peptides
2000 Vical Gene therapy
2000 Praecis Small molecule drugs, including peptides
2000 Aventis Behring Albumin fusion technology
2000 Dow Chemical Chelator technology
2001 Medarex Antibodies and diagnostics
2001 MDS Nordion Radiolabeling technology
MICROBIAL COLLABORATIONS
1995-97 MedImmune Infectious agents
1996 Pharmacia Staphylococcus aureus and other
DRUG DISCOVERY COLLABORATIONS
General. We entered into collaboration agreements with GlaxoSmithKline
in May 1993, which we amended in June 1996 and July 1997. The initial term of
these agreements continued through June 2001, which was the conclusion of the
initial research term. Under these agreements, we granted GlaxoSmithKline rights
to develop and commercialize therapeutic and diagnostic products based on human
genes discovered by us in GlaxoSmithKline's field, which is the field of human
and animal health care, including gene therapy vaccines but excluding other gene
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therapy products, antisense products and the use of genes for synthesizing
drugs that were known in May 1993. Pursuant to the collaboration agreements
GlaxoSmithKline initially paid us an aggregate of $125.0 million, of which $55.0
million was allocated to the purchase of shares of our common stock. We and
GlaxoSmithKline jointly entered into collaboration agreements with four
additional pharmaceutical companies: Takeda, Schering-Plough, Merck KGaA and
Sanofi-Synthelabo.
Post-Initial Research Term. The initial research term under our
collaboration agreements with GlaxoSmithKline and the other four collaboration
partners expired on June 30, 2001. At that time, our partners were pursuing
approximately 430 research programs involving approximately 280 different genes
for the creation of small molecule and antibody drugs. They also were developing
approximately 30 therapeutic protein drugs. We cannot assure you that any of
these programs will be continued or result in any approved drugs.
GlaxoSmithKline. We share equally with GlaxoSmithKline any license fees
and product-development milestone payments made under the four additional
collaboration agreements, but we receive all royalty and research support
payments under those agreements. GlaxoSmithKline has granted us royalty
payments, based on net sales of products developed from any of our patents or
technologies that fall within GlaxoSmithKline's field, for any sales made by
GlaxoSmithKline or its licensees. We are also entitled to milestone payments in
connection with the development of these products. In 2001, we received a $1.0
million payment from GlaxoSmithKline for Lp-PLA2 in connection with a
development milestone met by GlaxoSmithKline. We hold an option to co-promote
any products sold by GlaxoSmithKline in the U.S., Canada, Mexico and Europe,
subject to the rights granted to Takeda and other collaborators. If we develop
and market or license to a third party any product in GlaxoSmithKline's field
pursuant to our rights under these agreements, GlaxoSmithKline will usually be
entitled to royalty payments from, or to share in milestone payments and license
fees we receive with respect to, those products.
Our collaboration agreements with GlaxoSmithKline include an option for
GlaxoSmithKline to co-develop and co-commercialize products in GlaxoSmithKline's
field to which we have exclusive development and commercialization rights under
our collaboration agreements with GlaxoSmithKline and for which Schering-Plough
has not exercised its option. In 2000, GlaxoSmithKline exercised its option to
jointly develop and commercialize repifermin. GlaxoSmithKline is also entitled
to royalty payments on and an option to co-promote products outside
GlaxoSmithKline's field sold by us which are based on or incorporate patents or
information developed by GlaxoSmithKline using our human gene technology.
Takeda. GlaxoSmithKline and Takeda entered into a license agreement
relating to the development and sale of products in GlaxoSmithKline's field
based upon rights licensed from us. We are entitled to all royalty payments and
one-half of the milestone payments due from Takeda to GlaxoSmithKline under this
license agreement on sales of products developed by Takeda. We entered into an
option and license agreement with Takeda pursuant to which we granted Takeda an
exclusive option to license rights under our patents and technology in the field
of human health care, other than gene therapy, antisense and diagnostics, in
order to make and sell up to three products in Japan. In consideration of the
grant of the option, Takeda paid us $5.0 million and agreed to pay to us
milestone payments and royalties based on the sale of Takeda products covered by
the option and license agreement. The option period terminates on June 30, 2004.
Takeda has exercised one of its options with the selection of MPIF-1. In 2001,
Takeda selected approximately 100 targets for use in small molecule and antibody
discovery.
Schering-Plough. In June 1996, we entered into a collaboration agreement
with Schering-Plough. Under this agreement, Schering-Plough has the right to use
our human gene technology and biological information developed by us and
GlaxoSmithKline to discover, develop and commercialize products. Schering-Plough
was also granted an option to co-develop and co-commercialize up to two of our
therapeutic protein products to which we have exclusive development and
commercialization rights under our agreements with GlaxoSmithKline. This option
can also be exercised with respect to proteins we elect to license to third
parties. In 2000, Schering-Plough exercised one of its two options with the
selection of a novel interferon discovered by us. We will receive milestones and
royalty payments for any product developed from this protein. Schering-Plough is
obligated to pay license fees, research payments and milestone payments in
connection with the development of products. Schering-Plough has paid us $32.5
million under this agreement. We also have a collaboration with Schering-Plough
related to gene therapy by which Schering-Plough was granted a non-exclusive
license to use our human gene technology to conduct research and an option to
obtain an exclusive license to specific genes in the field of gene therapy.
Schering-Plough has paid us $5.0 million under this second collaboration
agreement.
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Merck KGaA. In July 1996, we entered into a collaboration agreement with
Merck KGaA. Under this agreement, Merck KGaA has the right to use our human gene
technology and biological information developed by us and GlaxoSmithKline to
discover, develop and commercialize products. Merck KGaA is obligated to pay
license fees, research payments, and milestone payments in connection with the
development of products. Merck KGaA has paid us an aggregate of $32.5 million
under this agreement.
Sanofi-Synthelabo. In July 1996, we entered into a collaboration
agreement with Sanofi-Synthelabo. Under this agreement, Sanofi-Synthelabo has
the right to use our human gene technology and biological information developed
by us and GlaxoSmithKline to discover, develop and commercialize products.
Sanofi-Synthelabo is obligated to pay license fees, research payments and
milestone payments in connection with the development of products.
Sanofi-Synthelabo has paid us an aggregate of $22.5 million under this
agreement.
TECHNOLOGY COLLABORATIONS
Antibodies and Peptides
Abgenix. In November 1999, we entered into a collaboration and license
agreement with Abgenix relating to the field of fully human antibody drug
candidates, which was amended in 2001. Pursuant to this agreement, as amended,
we licensed technology from Abgenix that we will use to generate fully human
antibody drug candidates. We will independently develop and seek to
commercialize antibody-based drugs from this collaboration. Abgenix also has an
option to develop and commercialize products derived from our antigens. We and
Abgenix will pay reciprocal milestone and royalty payments for products
developed and commercialized.
Cambridge Antibody Technology (CAT). In August 1999, we entered into an
antibody license agreement with CAT for the development of fully human antibody
therapeutics for up to three of our target human proteins. Pursuant to this
agreement, we have entered into an exclusive license agreement to an anti-BLyS
antibody discovered in collaboration with CAT. Under this 1999 agreement, we
have paid CAT $0.8 million towards the achievement of the first contractual
milestone through the end of 2001. In February 2000, we entered into a broader
agreement with CAT that provides us with the right to use their technology to
develop and sell an unlimited number of fully human antibodies for therapeutic
and diagnostic purposes. Under this 2000 agreement, we paid CAT $12.0 million
for ten years of committed research support. We also plan to combine our
resources to develop and sell a significant number of therapeutic antibody
products. CAT has the right to select up to twenty-four of our proprietary
antigens for preclinical development. We have the option to share clinical
development costs and to share the profits equally with them on up to eighteen
such products. CAT has rights to develop six such products on their own. We are
entitled to clinical development milestone and royalty payments on those six
products. Under the 2000 agreement, we paid CAT $1.0 million in December 2001 to
exercise our option with respect to TRAIL Receptor 1, an antibody product. We
also invested approximately $54.7 million for ordinary shares of CAT. In
November 2000, we sold a portion of our CAT holdings at a gain of approximately
$5.9 million.
Dyax. In February 2000, we entered into a license agreement with Dyax
relating to Dyax' phage display and peptide technology, which was amended in
2001. Under the agreement, as amended, we have the right to use Dyax' phage
display technology to develop an unlimited number of therapeutic and diagnostic
products that we may sell or outlicense. In 2000, we paid Dyax $6.0 million for
the technology license. Through 2001, we have paid $4.7 million for research
support. Over the next year, we will pay Dyax approximately $1.3 million for
committed research support. We will provide milestone and royalty payments to
Dyax on products we develop and sell or will share revenue we receive from
outlicensees. The licensed technologies include Dyax' phage display technology
to create peptide drugs, human monoclonal antibody drugs and in vitro diagnostic
products. In addition, we have the right to require that Dyax perform research
in the fields of protein separation and high-throughput screening technology. We
also have rights to improvements in Dyax' phage display technology.
Praecis. In February 2000, we entered into a collaboration agreement
with Praecis relating to the field of small molecule drugs, including peptides.
Under the agreement, Praecis will screen two of our targets to identify novel
small molecule drugs to combat metabolic disorders and infectious diseases.
Medarex. In July 2001, we entered into a collaboration agreement with
Medarex relating to the creation of fully human antibodies. Under the agreement,
Medarex plans to use its technology to create antibody leads that are specific
for target proteins that we discovered. We have the option to exclusively
license therapeutic and diagnostic
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antibody products and Medarex is entitled to receive license fees, milestone
payments and royalties on any commercial sales of products resulting from the
collaboration.
Gene Therapy
Transgene. In February 1998, we entered into an agreement with Transgene
relating to the field of human gene therapy, including gene therapy vaccines to
the extent it will not conflict with our other collaboration agreements. Under
this agreement, we granted Transgene the right to license exclusively up to 10
genes. We obtained a 10% equity interest in Transgene and certain co-development
and co-marketing rights. Transgene selected two genes from our database, CTGF-2
and TIMP-4, as its first two exclusive gene therapy products. CTGF-2 stimulates
the formation of blood vessels and could be an effective tool in the control of
coronary artery disease. TIMP-4 prevents restenosis, which is the growth of
blood-vessel obstruction following an angioplasty. Our collaboration with
Transgene will end in 2008.
Vical. In February 2000, we entered into a license agreement with Vical
relating to the field of gene therapy. Under this agreement, we licensed
technology from Vical and granted Vical the right to license up to three genes.
The agreement provides for reciprocal royalty payments. Our collaboration with
Vical will end in 2004.
Vascular Genetics. In November 1997, we entered into an agreement with
Vascular Genetics whereby we granted Vascular Genetics an exclusive license in
the field of gene therapy for our VEGF-2 gene. As of December 31, 2001, we held
an approximately 27% equity interest in Vascular Genetics. We are also entitled
to receive up to 10% royalties on net sales.
Fusion Technology
Aventis Behring. In October 2000, we entered into a joint development
and commercialization agreement with Aventis Behring to co-develop and jointly
market an Aventis Behring plasma protein product.
Other
Dow Chemical. In October 2000, we entered into an agreement with Dow
Chemical Company to develop a drug for the treatment of B-cell malignancies.
This agreement combines one of Dow's patented technologies, bifunctional
chelation agents (BFCA) with BLyS, one of our protein discoveries. Dow's BFCA
technology is capable of attaching a variety of radioactive metals to BLyS,
resulting in a "radiolabeled" version of the protein.
MDS Nordion. In October 2001, we entered into an agreement with MDS
Nordion, a unit of MDS Inc., whereby MDS Nordion will manufacture LymphoRad(131)
at a GMP manufacturing suite under construction at its Ottawa, Canada facility.
We will supply MDS Nordion with the targeting protein, B Lymphocyte Stimulator
(BLyS) and MDS Nordion will use a process it developed for us that covalently
binds the radioactive isotope iodine(131) to the BLyS protein.
MICROBIAL COLLABORATIONS
MedImmune. We entered into a collaboration and license agreement with
MedImmune in July 1995, which we amended in March and December 1997. This
agreement is related to the development of drugs based upon certain infectious
agents sequenced by us or The Institute For Genomic Research (TIGR) or as to
which we hold licenses. Programs under this agreement include the creation of
vaccines and immunotherapeutics for non-encapsulated Haemophilus influenzae,
Streptococcus pneumoniae, Escherichia coli, Helicobacter pylori and Borrelia
burgdorferi. MedImmune sub-licensed the Streptococcus pneumoniae vaccine
technology to GlaxoSmithKline. We are entitled to a portion of the payments
received by MedImmune under its sub-license. In 2000, we received $1.0 million
from MedImmune.
Pharmacia. In October 1996, we entered into an agreement with Pharmacia
in which we granted to Pharmacia a nonexclusive license to conduct research and
to make, use and sell products based on genes of Staphylococcus aureus and the
pathogenicity islands of Escherichia coli sequenced by us.
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PATENTS AND PROPRIETARY RIGHTS
Our commercial success depends in large part on our ability to obtain
patent or other intellectual property protection for genes we discover. The
patent protection available to biotechnology firms is highly uncertain and
involves complex legal and factual questions that will determine who has the
right to develop a particular product. There have been, and continue to be,
intensive discussions on the scope of patent protection for both partial gene
sequences and full-length genes. The Patent and Trademark Office issued new
guidelines for patents in 2001 which clarify certain requirements for obtaining
a patent on a gene sequence. The biotechnology patent situation outside the U.S.
is even more uncertain and is currently undergoing review and revision in many
countries. Changes in, or different interpretations of, patent laws in the U.S.
and other countries may result in patent laws that allow others to use our
discoveries or develop and commercialize our products.
As of March 1, 2002, we had filed U.S. patent applications with respect
to many human genes and their corresponding proteins. We have also filed U.S.
patent applications with respect to all or portions of the genomes of eight
infectious microorganisms and one non-infectious microorganism. As of March 1,
2002, we had 205 U.S. patents covering human genes and proteins. The remaining
applications covering full-length genes and their corresponding proteins may not
result in the issuance of any patents. Our applications may not be sufficient to
meet the statutory requirements for patentability in all cases. In certain
instances, we will be dependent upon our collaborators to file and prosecute
patent applications.
Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, TIGR, in collaboration with the National Center for
Biological Information, disclosed full-length DNA sequences which are reportedly
in excess of 35,000 sequences that were assembled from partial gene sequences
available in publicly accessible databases or sequenced at TIGR. In addition,
the Human Genome Project and Celera Genomics Corporation have completed an
initial sequencing of the human genome, and have published papers on this
sequencing in February 2001. All of this public disclosure might limit the scope
of our claims or make unpatentable subsequent patent applications on full-length
genes we file.
Other companies or institutions have filed, and may file patent
applications in the future, which attempt to patent genes similar to those
covered in our patent applications, including applications based on our
potential products. The Patent and Trademark Office would decide which
applications merit a patent and the priority of competing patent claims. Any
patent application filed by a third party may prevail over patent applications
we filed, in which event the third party may require us to stop pursuing a
potential product or to negotiate a royalty arrangement to pursue the potential
product.
Other parties may claim that our potential products infringe their
patents. This risk will increase as the biotechnology industry expands and as
other companies obtain more patents and attempt to discover genes through the
use of high-speed sequencers. Other persons could bring legal actions against us
to claim damages or to stop our manufacturing and marketing of the affected
products. If any of these actions is successful, in addition to demanding
monetary damages, these persons may require us to obtain a license in order to
continue to manufacture or market the affected products. We believe that there
will continue to be significant litigation in our industry regarding patent and
other intellectual property rights. If we become involved in litigation, it
could consume a substantial portion of our resources.
Issued patents may not provide commercially meaningful protection
against competitors. Any issued patent may not provide us with competitive
advantages. Others may challenge our patents or independently develop similar
products that could result in an interference proceeding in the Patent and
Trademark Office. Others may be able to design around our issued patents or
develop products providing effects similar to our products. In addition, others
may discover uses for genes or proteins other than those uses covered in our
patents, and these other uses may be separately patentable. The holder of a
patent covering the use of an invention which we have a patent claim could
exclude us from selling a product for a use covered by its patent.
We rely on trade secret protection to protect our confidential and
proprietary information. We believe we have developed proprietary procedures for
making libraries of DNA sequences and genes. We have not sought patent
protection for these procedures. We have developed a substantial database
concerning genes we have identified. We have taken security measures to protect
our data and continue to explore ways to further enhance the security for our
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data. However, we may not be able to meaningfully protect our trade secrets.
While we have entered into confidentiality agreements with employees and
academic collaborators, we may not be able to prevent their disclosure of these
data or materials. Others may independently develop substantially equivalent
information and techniques.
COMPETITION
We are in a race to identify, establish uses for and patent as many
genes as possible and to commercialize the products we develop. Many of our
potential competitors have substantially greater research and product
development capabilities and financial, scientific, marketing and human
resources. The Human Genome Project and Celera Genomics Corporation have claimed
to have mapped the complete human genome, and have made their findings available
to the public. We face competition from other entities using high-speed gene
sequencers to discover genes, such as Incyte Genomics, Inc. and Celera Genomics
Corporation. We also face competition from entities using more traditional
methods to discover genes related to particular diseases, such as Amgen, Inc.,
Genentech, Inc., Millennium Pharmaceuticals, Inc. and other large biotechnology
and pharmaceutical companies. We expect that competition in our field will
continue to be intense.
Research to identify genes is also being conducted by various institutes
and U.S. and foreign government-financed entities, including British, French,
German and Japanese efforts, as well as numerous smaller laboratories associated
with universities or other not-for-profit entities. In addition, a number of
pharmaceutical and biotechnology companies and government-financed programs are
engaged or have announced the intention to engage in areas of human genome
research similar to or competitive with our focus on gene discovery, and other
companies are likely to enter the field.
We face significant competition in our product development and
commercialization efforts. Although we believe that there are significant
product development opportunities for both us and our collaborators based on our
gene databases, competition exists among us and our collaborators to develop and
commercialize products. In addition, our competitors may succeed in developing
products before we do, obtaining approvals from the FDA or other regulatory
agencies for such products more rapidly than we do, or developing products that
are more effective than those proposed to be developed by us. Similarly, while
we will share any success of our collaborators in identifying and
commercializing products through royalties and co-payment arrangements, our
collaborators face similar competition from other competitors who may succeed in
developing products more quickly, or developing products that are more
effective, than those developed by our collaborators. Certain of these
competitors may be further advanced than us in developing potential products.
Research and development by others may render the products that we or our
collaborators may seek to develop obsolete or uneconomical or result in
treatments, cures or diagnostic tests superior to any therapy or diagnostic test
developed by us or our collaborators. In addition, therapies or diagnostic tests
developed by us or our collaborators may not be preferred to any existing or
newly developed technologies.
GOVERNMENT REGULATION
Regulation of Pharmaceutical Products. New drugs and biologics are
subject to regulation under the Federal Food, Drug, and Cosmetic Act. In
addition to being subject to certain provisions of that Act, biologics are also
regulated under the Public Health Service Act. We believe that the
pharmaceutical products developed by us or our collaborators will be regulated
either as biological products or as new drugs. Both statutes and their
corresponding regulations govern, among other things, the testing,
manufacturing, distribution, safety, efficacy, labeling, storage, record
keeping, advertising and other promotional practices involving biologics or new
drugs. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing, of biologics and drugs.
In addition, any gene therapy products developed by us will require
regulatory approvals prior to human trials and additional regulatory approvals
prior to commercialization. New human gene therapy products are subject to
extensive regulation by the FDA and the Center for Biological Evaluation and
Research and comparable agencies in other countries. Currently, each human-study
protocol is reviewed by the FDA and, in some instances, the National Institutes
of Health, on a case-by-case basis. The FDA and the National Institutes of
Health have published guidance documents with respect to the development and
submission of gene therapy protocols.
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Obtaining FDA approval has historically been a costly and time-consuming
process. We may not obtain FDA approvals in a timely manner, or at all. We and
our collaborators may encounter significant delays or excessive costs in our
efforts to secure necessary approvals or licenses. Generally, in order to gain
FDA pre-market approval, a developer first must conduct laboratory studies and
animal-model studies to gain preliminary information on an agent's efficacy and
to identify any safety problems. The results of these studies are submitted as a
part of an investigational new drug application, which the FDA must review
before human trials of an investigational drug can start. The investigational
new drug application includes a detailed description of the initial animal
studies and human investigation to be undertaken.
Laboratory studies can take several years to complete, and there is no
assurance that an investigational new drug application based on such studies
will ever become effective so as to permit human testing to begin. A 30-day
waiting period after the receipt of each investigational new drug application is
required by the FDA prior to the commencement of human testing. If the FDA has
not commented on or questioned the investigational new drug application within
this 30-day period, human studies may begin. If the FDA has comments or
questions, it places the studies on clinical hold and the questions must be
answered to the satisfaction of the FDA before human testing may begin.
In order to commercialize pharmaceutical products, we or one of our
collaborators must sponsor and file an investigational new drug application and
be responsible for initiating and overseeing the human studies to demonstrate
the safety and efficacy and, for a biologic product, the potency, which are
necessary to obtain FDA approval of any such products. For our or our
collaborator-sponsored investigational new drug applications, we or our
collaborator will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations and the general investigational plan and
protocols contained in the investigational new drug application. Human trials
are normally done in three phases, although the phases may overlap. Phase I
trials are concerned primarily with the safety and pharmacology of the drug,
involve fewer than 100 subjects and may take from six months to over a year to
complete. Phase II exploratory trials normally involve a few hundred patients,
but in some cases may involve fewer. Phase II trials are designed primarily to
demonstrate safety and preliminary effectiveness in treating or diagnosing the
disease or condition for which the drug is intended. Phase III trials are
expanded trials with larger numbers of patients which are intended to gather the
additional information for proper dosage and labeling of the drug and
demonstrate its overall safety and effectiveness. All three phases generally
take three to five years, but may take longer, to complete. Regulations
promulgated by the FDA may shorten the time periods and reduce the number of
patients required to be tested in the case of certain life-threatening diseases
which lack available alternative treatments.
The FDA receives reports on the progress of each phase of testing, and
it may require the modification, suspension, or termination of trials if an
unwarranted risk is presented to patients. If the FDA imposes a clinical hold,
trials may not recommence without FDA authorization and then only under terms
authorized by the FDA. The investigational new drug application process can thus
result in substantial delay and expense. Human gene therapy products (which is
one of the areas in which we are seeking to develop products) are a new category
of therapeutics. Because this is a relatively new and expanding area of novel
therapeutic interventions, there can be no assurance as to the length of the
trial period, the number of patients the FDA will require to be enrolled in the
trials in order to establish the safety, efficacy and potency of human gene
therapy products, or that the data generated in these studies will be acceptable
to the FDA to support marketing approval.
After completion of trials of a new drug or biologic product, FDA
marketing approval must be obtained. If the product is regulated as a biologic,
the Center for Biological Evaluation and Research will require the submission
and approval, depending on the type of biologic, of either a biologic license
application or, in some cases, a product license application and an
establishment license application before commercial marketing of the biologic.
If the product is classified as a new drug, we must file a new drug application
with the Center for Drug Evaluation and Research and receive approval before
commercial marketing of the drug. The new drug application or biologic license
applications must include results of product development, laboratory, animal and
human studies, and manufacturing information. The testing and approval processes
require substantial time and effort and there can be no assurance that the FDA
will accept the new drug application or biologic license applications for filing
and, even if filed, that any approval will be granted on a timely basis, if at
all. In the past, new drug applications and biologic license applications
submitted to the FDA have taken, on average, one to two years to receive
approval after submission of all test data. If questions arise during the FDA
review process, approval can take more than two years.
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Notwithstanding the submission of relevant data, the FDA may ultimately decide
that the new drug application or biologic license application does not satisfy
its regulatory criteria for approval and require additional studies. In
addition, the FDA may condition marketing approval on the conduct or specific
post-marketing studies to further evaluate safety and effectiveness. Rigorous
and extensive FDA regulation of pharmaceutical products continues after
approval, particularly with respect to compliance with current good
manufacturing practices, or cGMPs, reporting of adverse effects, advertising,
promotion and marketing. Discovery of previously unknown problems or failure to
comply with the applicable regulatory requirements may result in restrictions on
the marketing of a product or withdrawal of the product from the market as well
as possible civil or criminal sanctions.
If a developer obtains designation by the FDA of a biologic or drug as
an "orphan" drug for a particular use, the developer may request small grants
from the federal government to help defray the costs of qualified testing
expenses in connection with the development of such drug. Orphan drug
designation may be granted to drugs for rare diseases, typically defined as a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States, and includes many genetic diseases. The first applicant
who has obtained designation of a drug for a particular use as an orphan drug
and then obtains approval of a marketing application for such drug for the
particular use is entitled to marketing exclusivity for a period of seven years,
subject to certain limitations.
Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation will remain in
effect in the future. In February 2001, BLyS received "orphan" drug designation
from the FDA for the treatment of common variable immunodeficiency.
Moreover, several areas in which we or our collaborators may develop
products involve relatively new technology and have not been the subject of
extensive product testing in humans. The regulatory requirements governing these
products and related testing procedures remain uncertain. In addition, these
products may be subject to substantial review by foreign governmental regulatory
authorities that could prevent or delay approval in those countries. Regulatory
requirements ultimately imposed on our products could limit our ability to test,
manufacture and, ultimately, commercialize our products.
Other. Ethical, social and legal concerns about gene therapy, genetic
testing and genetic research could result in additional regulations restricting
or prohibiting the processes we or our suppliers may use. Federal and state
agencies, congressional committees and foreign governments have expressed
interest in further regulating biotechnology. More restrictive regulations or
claims that our products are unsafe or pose a hazard could prevent us from
commercializing any products.
In addition to the foregoing, state and federal laws regarding
environmental protection and hazardous substances, including the Occupational
Safety and Health Act, the Resource Conservation and Recovery Act and the Toxic
Substances Control Act, affect our business. These and other laws govern our
use, handling and disposal of various biological, chemical and radioactive
substances used in, and wastes generated by, our operations. If our operations
result in contamination of the environment or expose individuals to hazardous
substances, we could be liable for damages and governmental fines. We believe
that we are in material compliance with applicable environmental laws and that
our continued compliance therewith will not have a material adverse effect on
our business. We cannot predict, however, how changes in these laws may affect
our future operations.
SOURCES OF SUPPLY
We currently are able to obtain our chemicals and equipment from various
sources, and therefore, have no dependence upon a single supplier. We are
currently dependent upon one manufacturer, MDS Nordion of Ottawa, Canada, for
the radiolabeling of LymphoRad(131), a product for which we have filed an
Investigation New Drug application with the FDA. If we are unable to secure an
adequate supply of this product at commercially reasonable rates, our ability to
continue with the intended human clinical trials would be adversely affected.
MANUFACTURING
We have developed in-house capabilities for the production and
purification of laboratory-produced proteins for use in our research activities,
but do not have any manufacturing facilities licensed to supply materials
suitable for
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commercial sale, or any experience in manufacturing materials suitable for
commercial sale. From time to time, we may depend on third parties for
manufacturing. If we need others to manufacture our products, we will depend on
those third parties to comply with cGMPs, and other regulatory requirements and
to deliver materials on a timely basis. These third parties may not perform
adequately. Any failures by these third parties may delay our development of
products or the submission of these products for regulatory approval.
During 1997 and 1998, we designed and the Maryland Economic Development
Corporation (MEDCO) constructed an 84,000 square foot process development and
manufacturing facility for the preparation of our proteins for human studies.
The facility now comprises approximately 127,000 square feet, including a 43,000
square foot expansion completed in 2000, and is located in the Johns Hopkins
Belward Research Campus near our offices and research laboratories. The original
facility was completed in 1999. We designed the facility to allow for the
production and purification of multiple laboratory-produced proteins. We are
using the facility for production of laboratory and human study supplies of our
therapeutic proteins under cGMP requirements and for process development and
scale-up. The FDA must inspect and license this facility to determine compliance
with cGMP requirements for commercial production. A delay in licensing of the
facility could delay or increase the cost of regulatory approval. We have
entered into long-term lease arrangements with MEDCO for the facility and the
expansion. Under these lease agreements, which we have accounted for as
operating leases, we have the option to purchase the properties, during and at
the end of the lease term. Our option to purchase these facilities is at
declining, pre-determined amounts during the lease term and is approximately
$19.4 million at the end of the lease term. Alternatively, we can vacate the
facilities. We are not contingently liable for any residual value guarantee
associated with these properties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
for additional discussion.
Our long-range plan is to establish additional manufacturing
capabilities to allow us to meet our full commercial manufacturing requirements.
We are currently designing a large-scale manufacturing facility to allow for the
production of proteins and antibodies to be used for both clinical and
commercial use. This 405,000 square foot facility will be located adjacent to
the existing process development and manufacturing facility and is expected to
be available for occupancy in 2004. The FDA must inspect and license this
facility to determine compliance with cGMP requirements for commercial
production. A delay in licensing of the facility could delay or increase the
cost of regulatory approval. During 2001, we entered into a seven-year lease
agreement relating to this facility. As part of this agreement, we are required
to maintain collateral with the lending institutions in amounts equal to 100% of
the financed project cost of approximately $226.0 million for the duration of
the lease. Under this lease agreement, which we have accounted for as an
operating lease, we have the option to purchase the property, during and at the
end of the lease term, for approximately $226.0 million. Alternatively, we can
cause the property to be sold to third parties. We are contingently liable for
the residual value guarantee associated with the property in the event the net
sale proceeds are less than the original financed costs of the facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for additional discussion.
While we are expanding our manufacturing capabilities, we may contract
with third party manufacturers or may develop products with partners and take
advantage of such partner's manufacturing capabilities. We may not be able to
successfully establish manufacturing capabilities or manufacture our products
economically or in compliance with cGMPs and other regulatory requirements.
MARKETING
We do not currently have any marketed products. We expect that in the
future we will rely at least partially on collaborators or on third parties with
whom we may contract to market any products that we may develop. Our
collaborators or other third parties may not be successful in marketing our
products. To date, we have collaborated with GlaxoSmithKline, Schering-Plough
and others. However, we also may co-promote or retain North American rights to
certain of our products. If we decide to market products directly, we will incur
significant additional expenditures and commit significant additional management
resources to develop an external sales force in order to implement our marketing
strategy. We may not be able to establish a successful marketing force.
EMPLOYEES
As of March 1, 2002, we had 1,010 full-time employees, of whom 836 were
in research and development, including 153 scientists holding doctoral degrees.
We anticipate hiring approximately 150 additional employees
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during the next six months, including research and development staff, process
development and manufacturing personnel, and medical and regulatory affairs and
strategic marketing staff. None of our employees is covered by a collective
bargaining agreement and we consider relations with our employees to be good.
FACTORS THAT MAY AFFECT OUR BUSINESS
There are a number of important factors that could cause our actual
results to differ materially from those that are indicated by forward-looking
statements. Those factors include, without limitation, those listed below and
elsewhere herein.
BECAUSE OUR BUSINESS STRATEGY IS STILL LARGELY UNTESTED, WE DO NOT KNOW WHETHER
WE WILL BE ABLE TO COMMERCIALIZE ANY OF OUR PRODUCTS OR TO WHAT EXTENT WE WILL
GENERATE REVENUE.
We do not know whether we can implement our business strategy
successfully because we are in the early stages of development. We initially set
out to find as many genes as possible and are now using that information to
develop medical and pharmacological products. We use automated high-speed
technology to:
- rapidly identify the function of and obtain proprietary rights to a
substantial number of genes; and
- select genes with the greatest potential for the treatment and
diagnosis of human disease.
Nobody has tested our strategy. Other companies first target particular
diseases and try to find cures for them through gene-based therapies. If our
strategy does not result in the development of products that we can sell
profitably, we will be unable to generate revenue.
IF WE ARE UNABLE TO IDENTIFY GENES WITH POTENTIAL VALUE, WE MAY NOT BE ABLE TO
RECOVER OUR INVESTMENT IN OUR GENE DISCOVERY EFFORT.
We invested significant time and resources to isolate and study genes
and determine their functions. We now devote an ever-increasing portion of our
resources to identifying and developing proteins, antibodies and other compounds
for the treatment of human disease. We have recently made substantial capital
expenditures and hired additional personnel to foster these activities. Before
we can commercialize a product, we must rigorously test the product in the
laboratory and complete extensive human studies. We cannot assure you that
expenses for testing and study will yield profitable products or even products
approved for marketing by the FDA. We will incur additional costs to continue
these activities. If we are not successful in identifying products which we can
develop commercially, we may be unable to recover the large investment we make
in research and development.
BECAUSE OUR PRODUCT DEVELOPMENT EFFORTS DEPEND ON NEW AND RAPIDLY-EVOLVING
TECHNOLOGIES, WE DO NOT KNOW WHETHER OUR EFFORTS WILL BE SUCCESSFUL.
To date, companies have developed and commercialized relatively few
gene-based products. Our work depends on new, rapidly-evolving technologies and
on the marketability and profitability of innovative products. Commercialization
involves risks of failure inherent in the development of products based on
innovative technologies and the risks associated with drug development
generally. These risks include the possibility that:
- these technologies or any or all of the products based on these
technologies will be ineffective or toxic, or otherwise fail to
receive necessary regulatory clearances;
- the products, if safe and effective, will be difficult to manufacture
on a large scale or uneconomical to market;
- proprietary rights of third parties will prevent us or our
collaborators from exploiting technologies or marketing products;
- third parties will market superior or equivalent products; and
- we may not be able to obtain or exploit new and superior technology
which could render obsolete the technologies we use.
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BECAUSE WE ARE AN EARLY STAGE COMPANY, WE DO NOT KNOW WHETHER WE CAN DEVELOP OUR
BUSINESS OR ACHIEVE PROFITABILITY.
We expect to continue to incur increasing losses and we cannot assure
you that we will ever become profitable. We are in the early stages of
development, and it will be a number of years, if ever, before we are likely to
receive revenue from product sales or royalty payments. We will continue to
incur substantial expenses relating to research and development efforts. We
anticipate that we will increase these efforts as we focus on the laboratory and
human studies that are required before we can sell a product. The development of
our products requires significant further research, development, testing and
regulatory approvals. We may not be able to develop products that will be
commercially successful or that will generate revenue in excess of the cost of
development.
PRODUCT DEVELOPMENT RISKS
BECAUSE WE HAVE LIMITED EXPERIENCE IN DEVELOPING AND COMMERCIALIZING PRODUCTS,
WE MAY BE UNSUCCESSFUL IN OUR EFFORTS TO DO SO.
Our ability to develop and commercialize products based on proteins,
antibodies and other compounds will depend on our ability to:
- develop products internally;
- complete laboratory testing and human studies;
- obtain and maintain necessary intellectual property rights to our
products;
- obtain and maintain necessary regulatory approvals related to the
efficacy and safety of our products;
- develop efficient production facilities meeting all regulatory
requirements or enter into arrangements with third parties to
manufacture our products on our behalf; and
- deploy sales and marketing resources effectively or enter into
arrangements with third parties to provide these functions.
Although we have initiated human studies with respect to eight products,
we have limited experience with these activities and may not be successful in
developing or commercializing these or other products.
BECAUSE CLINICAL TRIALS FOR OUR PRODUCTS WILL BE EXPENSIVE AND PROTRACTED AND
THEIR OUTCOME IS UNCERTAIN, WE MUST INVEST SUBSTANTIAL AMOUNTS OF TIME AND MONEY
THAT MAY NOT YIELD VIABLE PRODUCTS.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
product, we must demonstrate through laboratory, animal and human studies that
such product is both effective and safe for use in humans. We will incur
substantial expense for and devote a significant amount of time to these
studies.
The results of preliminary studies do not predict clinical success. A
number of potential drugs have shown promising results in early testing but
subsequently failed to obtain necessary regulatory approvals. Data obtained from
tests are susceptible to varying interpretations, which may delay, limit or
prevent regulatory approval. Regulatory authorities may refuse or delay approval
as a result of many other factors, including changes in regulatory policy during
the period of product development.
Completion of clinical trials may take many years. The length of time
required varies substantially according to the type, complexity, novelty and
intended use of the product candidate. Our rate of commencement and completion
of clinical trials may be delayed by many factors, including:
- our inability to manufacture sufficient quantities of materials for
use in clinical trials;
22
- variability in the number and types of patients available for each
study;
- difficulty in maintaining contact with patients after treatment,
resulting in incomplete data;
- unforeseen safety issues or side effects;
- poor or unanticipated effectiveness of products during the clinical
trials; or
- government or regulatory delays.
Seven of our products, mirostipen, repifermin, BLyS, LymphoStat-B,
Albuferon, Albutropin and Albuleukin have advanced to clinical trials. Two
products are awaiting clearance from the FDA to enter human clinical trials. For
all of our trials except the repifermin wound healing trial, only a limited
number of patients is involved. To date, data obtained from these clinical
trials have been insufficient to demonstrate safety and efficacy under
applicable FDA guidelines and are not sufficient to support an application for
regulatory approval without further studies. In two trials of repifermin, the
drug was shown to be safe, but was not shown to be effective. Studies conducted
by us or by third parties on our behalf may not demonstrate sufficient
effectiveness and safety to obtain the requisite regulatory approvals for these
or any other potential products. Regulatory authorities may not permit us to
undertake any additional clinical trials.
BECAUSE THE CLINICAL TESTING OF VEGF-2 MUST RECEIVE FDA APPROVAL BEFORE VGI CAN
RESUME ITS PHASE II TRIALS, THE CLINICAL SUCCESS OF VEGF-2 IS UNCERTAIN.
Clinical trials of VEG-2 by Vascular Genetics were placed on clinical
hold by the FDA in February 2000. These trials were removed from clinical hold
in October 2001. Prior to the hold, four clinical trials of VEGF-2 had been
ongoing. Vascular Genetics announced the completion of three of these trials
because enrollment and treatment were complete. In the fourth study, a majority
of the target patients had been enrolled and treated. During the hold period,
Vascular Genetics provided the FDA with results which were being compiled from
the clinical trials, in addition to providing measurements of the amount of the
VEGF-2 protein in patient blood samples. Vascular Genetics must receive approval
from the FDA before it can initiate additional trials.
The trials of VEGF-2 are being conducted with patients for whom
conventional treatments have been unsuccessful or for whom no conventional
treatment exists. During the course of treatment, these patients could die or
suffer adverse medical effects for reasons that may not be related to VEGF-2.
Deaths in the patient population for the VEGF-2 trial did occur, in both active
and placebo groups, and Vascular Genetics has reviewed the relevant data
regarding these patients and provided an analysis of the reasons for these
deaths to the FDA. These adverse effects may affect the interpretation of the
clinical trial results and the success of the trials. Later clinical trials may
be extensive, expensive and time-consuming. VEGF-2 may never be approved for use
in humans.
BECAUSE NEITHER WE NOR ANY OF OUR COLLABORATION PARTNERS HAVE RECEIVED MARKETING
APPROVAL FOR ANY PRODUCT RESULTING FROM OUR RESEARCH AND DEVELOPMENT EFFORTS,
AND MAY NEVER BE ABLE TO OBTAIN ANY SUCH APPROVAL, WE MAY NOT BE ABLE TO
GENERATE ANY PRODUCT REVENUE.
We have not completed development of any product based on our genetic
research. It is possible that we will not receive FDA marketing approval for any
of our products. Although a number of our potential products have entered
clinical trials, we cannot assure you that any of these products will receive
marketing approval. All the products being developed by our collaboration
partners will also require additional research and development, extensive
preclinical studies and clinical trials and regulatory approval prior to any
commercial sales. In some cases, the length of time that it takes for our
collaboration partners to achieve various regulatory approval milestones may
affect the payments that we are eligible to receive under our collaboration
agreements. We and our collaboration partners may need to successfully address a
number of technical challenges in order to complete development of our products.
Moreover, these products may not be effective in treating any disease or may
prove to have undesirable or unintended side effects, toxicities or other
characteristics that may preclude our obtaining regulatory approval or prevent
or limit commercial use.
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RISKS FROM OUR COLLABORATION RELATIONSHIPS AND STRATEGIC ACQUISITIONS
OUR PLAN TO USE COLLABORATIONS TO LEVERAGE OUR CAPABILITIES AND TO GROW IN PART
THROUGH THE STRATEGIC ACQUISITION OF OTHER COMPANIES AND TECHNOLOGIES WILL NOT
BE SUCCESSFUL IF WE ARE UNABLE TO INTEGRATE OUR PARTNERS' CAPABILITIES OR THE
ACQUIRED COMPANIES WITH OUR OTHER OPERATIONS OR IF THEY DO NOT MEET OUR
EXPECTATIONS.
As part of our strategy, we intend to continue to evaluate strategic
partnership opportunities and consider acquiring complementary technologies and
businesses. In order for our future collaboration efforts to be successful, we
must first identify partners whose capabilities complement and integrate well
with ours. Technologies to which we gain access may prove ineffective or unsafe.
Our partners may prove difficult to work with or less skilled than we originally
expected. In addition, any past collaborative successes are no indication of
potential future success in this area. In order to achieve the anticipated
benefits of an acquisition, we must integrate the acquired company's business,
technology and employees in an efficient and effective manner. The successful
combination of companies in a rapidly changing biotechnology and genomics
industry may be more difficult to accomplish than in other industries. The
combination of two companies requires, among other things, integration of the
companies' respective technologies and research and development efforts. We
cannot assure you that this integration will be accomplished smoothly or
successfully. The difficulties of integration are increased by the necessity of
coordinating geographically separated organizations and addressing possible
differences in corporate cultures and management philosophies. The integration
of certain operations will require the dedication of management resources which
may temporarily distract attention from the day-to-day operations of the
combined companies. The business of the combined companies may also be disrupted
by employee retention uncertainty and lack of focus during integration. The
inability of management to successfully integrate the operations of the two
companies, in particular, to integrate and retain key scientific personnel, or
the inability to successfully integrate two technology platforms, could have a
material adverse effect on our business, results of operations and financial
condition.
BECAUSE WE DEPEND ON OUR COLLABORATION PARTNERS FOR REVENUE, WE MAY NOT BECOME
PROFITABLE IF WE CANNOT INCREASE THE REVENUE FROM OUR COLLABORATION PARTNERS OR
OTHER SOURCES.
We have received all our revenue from payments made under our
collaboration agreements with GlaxoSmithKline and, to a lesser extent, other
agreements. The GlaxoSmithKline collaboration agreement and many of our other
collaboration agreements expired in 2001. None of these collaboration agreements
was renewed. We may not be able to enter into additional collaboration
agreements. We are entitled to certain milestone and royalty payments from the
existing collaborators, but may not receive payments if our collaborators fail
to:
- develop marketable products;
- obtain regulatory approvals for products; or
- successfully market products based on our research.
IF ONE OF OUR COLLABORATORS PURSUES A PRODUCT THAT COMPETES WITH OUR PRODUCTS,
IT MAY HAVE A CONFLICT OF INTEREST AND WE MAY NOT RECEIVE THE MILESTONE OR
ROYALTY PAYMENTS THAT WE EXPECT.
Each of our collaborators is developing a variety of products, some with
other partners. Our collaborators may pursue existing or alternative
technologies instead of products they are developing in collaboration with us.
Our collaborators may also develop products that are similar to or compete with
products they are developing in collaboration with us. If our collaborators
pursue these other products instead of our products, we may not receive
milestone or royalty payments.
FINANCIAL AND MARKET RISKS
BECAUSE OF OUR SUBSTANTIAL INDEBTEDNESS, WE MAY BE UNABLE TO ADJUST OUR STRATEGY
TO MEET CHANGING CONDITIONS IN THE FUTURE.
As of December 31, 2001, we had long-term obligations of approximately
$504.0 million. We also had future guarantee obligations of approximately $459.4
million under certain facility leases. Our substantial debt and future
24
guarantees will have several important consequences for our future operations.
For instance:
- payments of interest on, and principal of, our indebtedness will be
substantial, and may exceed then current revenues;
- we may be unable to obtain additional future financing for capital
expenditures, acquisitions or general corporate purposes;
- we may be unable to withstand changing competitive pressures, economic
conditions and governmental regulations; and
- we may be unable to make acquisitions or otherwise take advantage of
significant business opportunities that may arise.
WE HAVE ENTERED INTO TWO FACILITY LEASE ARRANGEMENTS THAT ARE NOT REQUIRED TO BE
REFLECTED ON OUR BALANCE SHEET BUT THAT CONSTITUTE SIGNIFICANT FINANCIAL
OBLIGATIONS AND POSSIBLE RISKS.
In the fourth quarter of 2001, we entered into two facility leases with
respect to three facilities that are currently in design or under construction
and one previously-constructed facility. We lease these facilities from trusts
controlled by third parties established solely for the transactions. Under
accounting principles generally accepted in the United States, these leases are
treated as operating leases. Economically, we may be responsible for up to
$526.0 million of the cost of these facilities because of guarantees we made in
connection with the leases in the event we default on our obligations under the
leases. These obligations are not required to be reflected as liabilities on our
balance sheet, but are described in footnotes to our financial statements. We
are required to pledge marketable securities as security for our obligations
under the leases and the related documents. As of December 31, 2001, we included
approximately $144.9 million of restricted investments on our balance sheet, of
which approximately $132.1 million was held as restricted investments providing
collateral for our obligations with respect to these facilities. As the
facilities are constructed, we will be required to restrict additional cash or
investments as collateral for our obligations under these leases in order to
reach the full amount of collateralization, which will reduce our working
capital. When the facilities are completed, we expect that we will include
approximately $526.0 million in restricted investments on our balance sheet. If
the value of our pledged investments declines, because of an increase in
interest rates or otherwise, we would need to pledge additional investments
which would further reduce our working capital. The rent under these leases is
based on a floating interest rate, but the trusts at our request can lock in a
fixed interest rate at an interest rate premium. To date, the trusts have fixed
the interest rate for approximately $56.0 million of the financed project cost.
To the extent the trusts do not lock in a fixed interest rate, if interest rates
increase, our rent obligations would also increase. These leases have a term of
seven years. If we desire to remain in the facilities upon lease expiration, we
would need to refinance or buy the facilities at the financed project cost. We
cannot assure you that refinancing will be available on comparable terms, if at
all. Further, in the event the facilities are sold, we have guarantee
obligations which make us responsible to the extent that the value of the
facilities is less than the financed project cost and which reach a maximum
guarantee obligation of approximately $459.4 million if the value of the
facilities declined below approximately 15% of the financed project cost. While
we believe that these leases provide a useful financing mechanism for the
facilities, adverse public perception of such lease arrangements and the
associated risks may cause our stock price to decline. In addition, we
understand that the accounting treatment for these leases may be changed by the
Financial Accounting Standards Board in 2002 and may require us to include these
leased facilities and the related lease obligations on our balance sheet as
assets and liabilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
IF WE DO NOT OBTAIN SUBSTANTIAL ADDITIONAL FUNDING ON ACCEPTABLE TERMS, WE MAY
NOT BE ABLE TO CONTINUE TO GROW OUR BUSINESS AND GENERATE ENOUGH REVENUE TO
RECOVER OUR INVESTMENT IN OUR PRODUCT DEVELOPMENT EFFORT.
Since inception we have expended, and will continue to expend,
substantial funds to continue our research and development programs. If we incur
unanticipated expenses or delays in receipt of revenue, we may need additional
financing beyond that which we have projected to fund our operating expenses and
capital requirements. We may not be able to obtain additional financing on
acceptable terms. If we raise additional funds by issuing equity securities, the
new securities may dilute the interests of our existing stockholders.
25
BECAUSE OUR STOCK PRICE HAS BEEN AND WILL LIKELY CONTINUE TO BE VOLATILE, THE
MARKET PRICE OF OUR COMMON STOCK MAY BE LOWER OR MORE VOLATILE THAN YOU
EXPECTED.
Our stock price, like the stock prices of other emerging and biotechnology
companies, has been highly volatile. During 2001, the closing price of our
common stock has been as low as $28.00 per share and as high as $75.31 per
share. The market price of our common stock could fluctuate widely because of:
- future announcements about our company or our competitors, including the
results of testing, technological innovations or new commercial products;
- regulatory actions and changes in government regulations;
- announcements relating to health care reform;
- our failure to acquire or maintain proprietary rights to the gene
sequences we discover or the products we develop;
- litigation; and
- public concern as to the safety of our products.
The stock market has experienced extreme price and volume fluctuations that
have particularly affected the market price for many emerging and
biotechnology companies. These fluctuations have often been unrelated to the
operating performance of these companies. These broad market fluctuations may
cause the market price of our common stock to be lower or more volatile than
you expected.
INTELLECTUAL PROPERTY RISKS
IF PATENT LAWS OR THE INTERPRETATION OF PATENT LAWS CHANGE, OUR COMPETITORS
MAY BE ABLE TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES.
The patent protection available to biotechnology firms is highly uncertain
and involves complex legal and factual questions that will determine who has
the right to develop a particular product. There have been, and continue to
be, intensive discussions on the scope of patent protection for both partial
gene sequences and full-length genes. The Patent and Trademark Office issued
new guidelines for patents in 2001 which clarify certain requirements for
obtaining a patent on a gene sequence. The biotechnology patent situation is
even more uncertain outside the U.S. and is currently undergoing review and
revision in many countries. Changes in, or different interpretations of,
patent laws in the U.S. and other countries may result in patent laws which
allow others to use our discoveries or develop and commercialize our products.
IF OUR PATENT APPLICATIONS DO NOT RESULT IN ISSUED PATENTS, OUR COMPETITORS
MAY OBTAIN RIGHTS TO AND COMMERCIALIZE THE DISCOVERIES WE ATTEMPTED TO PATENT.
Our pending applications covering full-length genes and their corresponding
proteins may not result in the issuance of any patents. As of March 1, 2002,
we had filed patent applications for many human genes and their corresponding
proteins and all or portions of genomes of eight infectious microorganisms and
one non-infectious microorganism. As of that date, we had only 205 U.S.
patents covering human genes and proteins. Our applications may not be
sufficient to meet the statutory requirements for patentability in all cases.
As a result, we may not obtain enforceable patents on genes we may want to
commercialize.
IF INFORMATION ABOUT THE GENES WE DISCOVER IS PUBLISHED BY OTHERS BEFORE WE
APPLY FOR PATENT PROTECTION, WE MAY BE UNABLE TO OBTAIN PATENT PROTECTION,
WHICH WOULD ENABLE OTHERS TO DEVELOP AND COMMERCIALIZE OUR DISCOVERIES.
Washington University has identified genes through partial sequencing
funded by Merck & Co. and has deposited those partial sequences in a public
database. In January 1997, The Institute for Genomic Research, or TIGR, in
collaboration with the National Center for Biological Information, disclosed
full-length DNA sequences
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which are reportedly in excess of 35,000 sequences that were assembled from
partial gene sequences available in publicly accessible databases or sequenced
at TIGR. In June 2000, the Human Genome Project and Celera Genomics
Corporation completed an initial sequencing of the human genome and published
papers on this sequencing in February 2001. These public disclosures mig