UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Form 10-K

 

 

Commission File Number 001-33054

Trubion Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

 

(206) 838-0500
(Telephone number, including area code)

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 þ     No o

 

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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the common stock held by non-affiliates of the registrant based on the closing sale price of the registrant’s common stock on June 30, 2009, as reported on the National Association of Securities Dealers Automated Market, was $47,268,191.

 

As of February 26, 2010, 20,386,800 shares of the registrant’s common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Specified portions of the registrant’s definitive proxy statement with respect to the 2009 Annual Meeting of Stockholders to be held May 26, 2010, which are to be filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2009, are incorporated by reference into Part III of this annual report.

 

 

TRUBION PHARMACEUTICALS, INC.

 

2009 Form 10-K Annual Report

 

Table of Contents

 

 

Forward-Looking Statements

 

This annual report on Form 10-K and the documents incorporated herein by reference contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended, or the Securities Act. These forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by management. Words such as “may,” “anticipate,” “expect,” “could,” “intend,” “plan,” “believe,” “seek” and “estimate” or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and actual actions or results may differ materially. These statements are subject to certain risks, uncertainties, and assumptions that are difficult to predict, including those identified in the sections of Item 1 entitled “Strategic Collaborations,” “Competition,” “Intellectual Property,” “Manufacturing,” “Government Regulation” and “Reimbursement,” and in the sections of Item 1A entitled “Risk Factors.” We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations. Readers should, however, carefully review the risk factors included in other reports or documents filed by us from time to time with the Securities and Exchange Commission, or SEC, particularly our quarterly reports on Form 10-Q and any current reports on Form 8-K.

 

 

Overview

 

We are a biopharmaceutical company creating a pipeline of novel protein therapeutic product candidates to treat autoimmune and inflammatory diseases and cancer. Our mission is to develop a variety of first-in-class and best-in-class product candidates customized in an effort to optimize safety, efficacy, and convenience that we believe may offer improved patient experiences. Our current product development efforts are focused on three proprietary technologies that comprise the expanded foundation for Trubion product development — Small Modular Immunopharmaceutical, or SMIP^tm, protein therapeutics, SCORPION^tm protein therapeutics, and TRU-ADhanCe^tm potency enhancing technology for immunopharmaceuticals. Our current clinical-stage therapeutics target specific antigens on B cells, CD20 and CD37, and are designed using our custom drug assembly technology. In order to fund ongoing development activities and commercialize our products, we will, in some cases, enter into collaboration agreements that would likely include licenses to our technology and arrangements to provide research and development services for others.

 

Our lead product candidate, TRU-015, which we are developing with our partner, Pfizer Inc., or Pfizer, has completed a Phase 2b clinical trial for the treatment of rheumatoid arthritis, or RA. A second Phase 2b (study 2203) clinical trial for RA is under way and enrollment was completed in September 2009. The randomized, parallel, double-blind, placebo-controlled, dose-regimen finding study is evaluating the safety and efficacy of two dosing regimens of TRU-015 administered to patients with active seropositive rheumatoid factor, or RF, on a background of methotrexate. This study was designed in a way that we believe could be supportive of a registration package with the Food and Drug Administration, or FDA.

 

In October 2009, we announced positive data from the second course of re-treatment in the first Phase 2b clinical trial for RA demonstrating that administration of TRU-015 every 24 weeks produces well-tolerated results that are comparable with the more than four and a half years of re-treatment data compiled to date.

 

In collaboration with us, Pfizer is also developing SBI-087, our next generation CD20-directed product candidate. SBI-087 for RA builds on our and Pfizer’s clinical experience with TRU-015 and is based on our SMIP technology. Enrollment was completed in a Phase 1 study of SBI-087 for RA and patient dosing commenced in a Phase 2 study in December 2009. In addition, patient recruitment is under way in an additional Phase 1 study of SBI-087 for RA in Japan. Finally, Pfizer is conducting a Phase 1 clinical trial of SBI-087 in systemic lupus erythematosus, or SLE, in which patient dosing has commenced and recruitment is ongoing.

TRU-016, which we are developing with our partner Facet Biotech Corporation, or Facet, is a novel CD37-directed SMIP protein therapeutic. A TRU-016 Phase 1 clinical trial for patients with chronic lymphocytic leukemia, or CLL, is currently under way and has recently been expanded to treat patients with non-Hodgkins lymphoma, or NHL. TRU-016 uses a different mechanism of action than CD20-directed therapies. As a result, we believe its novel design may provide patients with improved therapeutic options and enhance efficacy when used alone or in combination with chemotherapy and/or CD20-directed therapeutics.

 

In June and December 2009, we announced positive results following each of two preliminary analyses from the Phase 1 clinical trial of TRU-016 for the treatment of CLL. The objectives of the Phase 1 TRU-016 CLL study are to define safety and tolerability, identify a maximum tolerated dose, or MTD, evaluate pharmacology and pharmacodynamics, and assess preliminary clinical activity. As of March 2010, we have not reached a MTD.

 

Our product candidates are as follows:

 

 

We and our partner Pfizer have completed a Phase 2b clinical trial of TRU-015 for the treatment of RA (study 15002). A second Phase 2b clinical trial (study 2203) is ongoing and enrollment was completed in September 2009. The interim analysis of the second Phase 2b clinical trial of TRU-015 in RA (study 2203) met the pre-defined primary endpoint demonstrating superiority of TRU-015 over placebo. The study’s pre-defined primary endpoint is ACR50 response at week 24. We expect to receive final data from study 2203 in mid 2010. Pfizer will determine whether to commence a Phase 3 study of TRU-015 for the treatment of RA after reviewing data from the ongoing Phase 2 SBI-087 RA study, in addition to final data from the ongoing Phase 2b TRU-015 (study 2203) RA study. Patient dosing in the Phase 2 SBI-087 RA study commenced in December 2009 and an interim data review is planned that we believe could occur in late 2010 or early 2011 and final data is anticipated at the end of 2011.

 

 

In addition to our current product candidates, we are also developing additional alliance and proprietary product candidates that build on our existing product experience. To date, none of our product candidates has been approved for marketing and sale to patients nor have we received any product revenue.

 

In August 2009, we entered into a collaboration agreement with Facet for the joint worldwide development and commercialization of TRU-016, a product candidate in Phase 1 clinical development for CLL. TRU-016 is a CD37-directed SMIP protein therapeutic. The collaboration agreement includes TRU-016 in all indications and all other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, the parties will not develop or commercialize protein therapeutics directed to CD37 outside of the collaboration agreement.

 

In December 2005, we entered into a collaboration agreement with Wyeth, now a wholly-owned subsidiary of Pfizer, for the development and worldwide commercialization of TRU-015 and other therapeutics directed to CD20, an antigen that is a validated clinical target present on B cells. Pursuant to the agreement, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20. During the period in which we will be providing research services for Pfizer, Pfizer has the right, subject to our reasonable consent, to replace a limited number of these targets. In addition, we also have the option to co-promote with Pfizer, on customary terms to be agreed, CD20-directed therapies in the United States for niche indications. We retain the right to develop and commercialize, on our own or with others, product candidates directed to all targets not included within the agreement, including CD37. Unless it is terminated earlier, our agreement with Pfizer will remain in effect on a product-by-product basis and on a country-by-country basis until the later of the date that any such product shall no longer be covered by a valid claim of a United States or foreign patent or application and, generally, ten years after the first commercial sale of any product licensed under the agreement.

 

Product Technologies

 

Our current product development efforts are focused on three proprietary technologies that comprise the expanded foundation for Trubion product development — SMIP^tm protein therapeutics, SCORPION^tm protein therapeutics, and TRU-ADhanCe^tm potency enhancing technology for immunopharmaceuticals. We believe our product candidates offer the potential for safer and more effective therapies than existing or other potential products. Additionally, we believe that these technologies will provide the basis for the long-term development of additional first-in-class and best-in-class product candidates.

 

SMIP^tm Protein Therapeutics vs. mAbs

 

Our custom SMIP drug assembly technology was designed to specifically address the limitations of monoclonal antibodies, or mAbs. SMIP therapeutics are single chain polypeptides comprising a binding domain, a hinge domain and an effector domain designed in an effort to meet predetermined therapeutic criteria for specific diseases. SMIP proteins are mono-specific therapeutics — a drug that recognizes and attaches to a single antigen target and initiates biological activity. SMIP therapeutics have engineered structural design characteristics and are significantly smaller than whole antibodies, which we believe allows for better in vivo penetration.

 

SMIP technology enables us to design and develop differentiated product candidates for a range of targets and biological activities that have the following advantages:

 

 

 

 

 

SCORPION^tm Multispecific Protein Therapeutics

 

SCORPION therapeutics are a novel platform for the development of multi-specific protein therapeutics. SCORPION therapeutics are single chain proteins comprised of one binding domain, an effector domain, and another binding domain. This proprietary molecular class leverages Trubion’s SMIP^tm product format by combining single-chain binding and effector domain libraries, and adding additional binding domains. We utilize human protein sequences selected for stability, manufacturability, geometry of the binding domains, and low immunogenicity.

 

SCORPION therapeutics offer several potential advantages:

 

 

TRU-ADhanCe^tm Technology: Greater ADCC Potency

 

Our TRU-ADhanCe^tm technology enhances the antibody-dependent cellular cytotoxicity, or ADCC, potency of immunopharmaceutical product candidates. In contrast to existing approaches that impose challenges on product development, Trubion has created a proprietary manufacturing methodology with the following advantages:

 

 

Our TRU-ADhanCe technology is capable of yielding a well defined glycovariant product with ADCC via the addition of the glycosidase inhibitor castanospermine during the cell-culture stage of production. Although many other ADCC technologies require genetic modifications to the producing cell line, TRU-ADhanCe technology instead interferes with carbohydrate maturation in production cell lines, yielding products with enhanced ADCC.

 

Our Product Candidates

 

Our current clinical product candidates target B cells. B cells are important to the basic functioning of the body’s immune system. In addition to producing antibodies that attack and kill bacteria and viruses circulating within the body, they also help recruit and coordinate other types of immune system cells to perform specialized functions in the body’s fight against disease and infection. When B cells fail to appropriately distinguish the body’s own cells, tissues or organs from foreign pathogens or proteins, the mistaken identification can result in the B cells initiating an immune response against healthy cells, which results in an autoimmune disease that can lead to progressive disability. Autoimmune diseases include RA, SLE, multiple sclerosis, type 1 diabetes, and Graves’ disease. As a group, autoimmune diseases are among the most prevalent illnesses in the United States, affecting up to 5-8% of the population, or up to 24 million people. In addition, when B cells become malignant or otherwise multiply uncontrollably, they can result in cancers known as lymphomas, leukemias and myelomas.

The following table sets forth the development stages of our product candidates:

 

 

TRU-015

 

We designed TRU-015 for a desired therapeutic label surrounding B-cell depletion in multiple indications, including autoimmune and inflammatory diseases and different types of cancer. TRU-015 binds to its target, CD20, and is engineered to promote specific biological activity designed for optimized safety and efficacy. Specifically, general systemic complement activation is thought to initiate or exacerbate symptoms in RA patients. There is evidence that CDC may be associated with certain side effects, particularly intravenous infusion reactions observed in currently marketed protein immunopharmaceuticals. We have designed TRU-015 for reduced CDC activity, while preserving potent ADCC activity and apoptotic signaling. In addition, TRU-015’s smaller size may provide improved therapeutic options for patients through more rapid diffusion to disease sites.

 

Rheumatoid Arthritis

 

Background.  RA is an autoimmune disease characterized by inflammation of the joint lining, called the synovium. In RA, a person’s immune system attacks the synovium, resulting in the thickening of the normally thin membrane and degradation of the cartilage and bone at the joint. Though the primary symptoms of RA are pain, stiffness and swelling of joints, additional symptoms may include fatigue, weakness, muscle pain, and lumps of tissue under the skin. Tissue damage from the inflammation ultimately results in deformity and disability.

 

Potential Market.  According to Datamonitor, RA is estimated to affect approximately 5.2 million people in the United States, Japan and and the five major European markets. In 2009 total reported worldwide sales of therapeutics used for the treatment of RA were greater than $10 billion. Notwithstanding the administration of currently available treatments, approximately two-thirds of the RA patient population experiences pain, stiffness and fatigue on a daily basis. As a result, we believe there is a large unmet medical need in the RA patient population for an effective drug therapy.

 

Current Treatments.  Initially, a patient presenting symptoms of RA is typically prescribed non-steroidal anti-inflammatory drugs, or NSAIDS. As the disease progresses, the RA patient may be prescribed a regimen of disease modifying anti-rheumatic drugs, or DMARDS, an anti-tumor necrosis factor, or anti-TNF, or other biologics. It is estimated that 20% of the RA patient population takes a combination of therapies that include biologics. Most biologics currently on the market for RA attempt to block the activity of immune system cytokines, which are chemical messengers thought to be associated with the autoimmune reactions, joint

inflammation and bone damage characteristic of RA. These biologics include anti-TNF drugs such as Remicade^®, Enbrel^®, Humira,^® and Cimzia^®. Biologics are typically administered to patients with moderate to severe RA who need therapy in addition to NSAIDS or DMARDS. In addition to biologics that target immune system cytokines such as Kineret^®, Orencia^®, a drug that targets co-receptors on T cells, Actemra^®, which targets IL-6 receptors and Rituxan^® that, like TRU-015, is targeted to the CD20 antigen, have been approved for RA.

 

TRU-015 for RA Clinical Trial Results.  A second Phase 2b clinical trial (study 2203) is ongoing and enrollment was completed in September 2009. The interim analysis of the second Phase 2b clinical trial of TRU-015 in RA (study 2203) met the pre-defined primary endpoint demonstrating superiority of TRU-015 over placebo. The study’s pre-defined primary endpoint is ACR50 response at week 24. We expect to receive final data from study 2203 in mid 2010.

 

In October 2009 we announced positive data from the second course of re-treatment in the first Phase 2b clinical trial (study 15002) for RA demonstrating that administration of TRU-015 every 24 weeks produces well-tolerated results that are comparable with the more than four and a half years of re-treatment data compiled to date. Clinical disease activity parameters such as tender and swollen joint counts, patient and physician global assessments, patient assessment of pain and disability, and laboratory measures of inflammation may be combined to form composite measures of clinical response derived from the American College of Rheumatology that are known as ACR20, ACR50, and ACR70. In these measures of clinical response, ACR70 indicates a greater response from a baseline measure than ACR20, which is defined as an improvement of at least 20% from baseline in counts of both tender and swollen joints, as well as in at least three of five other disease activity parameters. At 24 weeks after the second re-treatment course, subjects in the group that had received 800 mg of TRU-015 in the initial treatment and the first and second re-treatments achieved ACR 20, 50 and 70 response rates of 72%, 39% and 21%, respectively.

 

In November 2007 we presented initial results from our first Phase 2b clinical trial of TRU-015 for the treatment of RA at the ACR Annual Meeting. Data from the Phase 2b trial demonstrated that TRU-015 provided statistically significant efficacy after a single infusion of 800 mg or 1600 mg. Our clinical program is designed to optimize dose and schedule for maximal efficacy and patient convenience without resulting in long term B-cell depletion.

 

 

American College of Rhuematology (ACR) Criteria for Improvement

 

FDA Approved CD20-Directed Therapies in RA.  Rituxan^® is a mAb that is targeted to the CD20 antigen and was previously approved for the treatment of NHL. In February 2006, it was approved for marketing in the United States by the FDA, for the treatment of patients with moderate to severe RA who have failed one or more anti-TNF therapies. The recommended dose and schedule for Rituxan in RA is two intravenous infusions of 1 gm each separated by two weeks, in combination with continued methotrexate (10 to 25 mg weekly). Patients given this regimen show B-cell depletion for at least six months with some showing B- cell depletion for over three years. There is no recommended treatment for patients with symptomatic RA and

concomitant B-cell depletion. We believe that the dose-dependent B-cell depletion shown by TRU-015 may allow us to choose a dose and schedule that offers similar or greater efficacy while improving safety as a result of a shorter period of B-cell depletion. Additionally, the Rituxan -product label contains warnings related to infusion reactions, including fatal infusion reactions. We believe that the attenuated CDC activity of TRU-015 relative to Rituxan may allow for safer infusion protocols. TRU-015 is a smaller molecule than Rituxan and may diffuse more rapidly to disease sites. We believe this characteristic of TRU-015 may allow it to show greater efficacy or more rapid onset of action in future studies.

 

TRU-015 for RA Ongoing Clinical Development.  Our partner, Pfizer, has fully enrolled the second Phase 2b (study 2203) clinical trial for TRU-015. The randomized, parallel, double-blind, placebo-controlled, dose-regimen finding study will evaluate the safety and efficacy of two dosing regimens administered to patients with active seropositive rheumatoid factor, or RF, on a background of methotrexate. This study has been designed in a way that we believe could be supportive of a registration package with the FDA. The interim analysis of the second Phase 2b clinical trial of TRU-015 in RA (study 2203) met the pre-defined primary endpoint demonstrating superiority of TRU-015 over placebo. The study’s pre-defined primary endpoint is ACR50 response at week 24. We expect to receive final data from study 2203 in mid 2010. Pfizer will determine whether to commence a Phase 3 study of TRU-015 for the treatment of RA after reviewing data from the ongoing Phase 2 SBI-087 RA study, in addition to final data from the ongoing Phase 2b TRU-015 (2203) RA study. Patient dosing in the Phase 2 SBI-087 RA study commenced in December 2009 and an interim data review is planned that we believe could occur in late 2010 or early 2011 and final data is anticipated at the end of 2011.

 

SBI-087

 

SBI-087 is our next generation, humanized, CD20-directed product candidate for the treatment of RA, SLE, and other autoimmune and inflammatory diseases. Pfizer is evaluating both intravenous and subcutaneous formulations of SBI-087 in multiple clinical studies. Preclinical studies conducted by Pfizer evaluated the PK and PD of SBI-087 following a single intravenous dose. Administration of SBI-087 in preclinical studies resulted in dose-dependent B-lymphocyte depletion in peripheral blood and lymphoid tissues that was more profound and sustained in SBI-087-treated groups compared with rituximab. In collaboration with us, our partner Pfizer has commenced two clinical studies of SBI-087 for the treatment of RA including a Phase 2 randomized, placebo-controlled, double-blind, parallel-group, outpatient dose regimen-finding study in which patient dosing commenced in December 2009, with interim data review anticipated to occur in late 2010/early 2011.

 

Rheumatoid Arthritis

 

Background.  As discussed with TRU-015, RA is an autoimmune disease characterized by inflammation of the joint lining, called the synovium. In RA, a person’s immune system attacks the synovium, resulting in the thickening of the normally thin membrane and degradation of the cartilage and bone at the joint. Though the primary symptoms of RA are pain, stiffness and swelling of joints, additional symptoms may include fatigue, weakness, muscle pain, and lumps of tissue under the skin. Tissue damage from the inflammation ultimately results in deformity and disability.

 

SBI-087 for RA Ongoing Clinical Development.  Our partner Pfizer has completed a Phase 1 study of SBI-087 for RA and a Phase 2 study of SBI-087 for RA has commenced and is ongoing. In addition, patient recruitment is under way in an additional Phase 1 study of SBI-087 for RA in Japan.

 

Systemic Lupus Erythematosus

 

Background.  SLE is a debilitating, chronic, inflammatory autoimmune disease characterized by the presence of auto-reactive antibodies. It can cause disease in the skin, internal organs, and the nervous system. Some of the most common symptoms include extreme fatigue, painful or swollen joints, fever, skin rashes, and kidney problems.

SLE is a chronic condition with episodic periods of disease activity, known as flares, and periods of remission. Currently, there is no cure for SLE, and symptomatic treatment is used in an effort to prevent flares or treat them when they occur. We believe that B- cell-depletion therapy is a promising approach toward a targeted therapy in SLE.

 

Potential Market.  According to Datamonitor, SLE is estimated to affect 236,000 people in the United States. The prevalence of SLE varies significantly on a country-by-country basis and could be up to five times greater with expanding disease definitions and increasing diagnosis. No new pharmaceutical or biologic treatments have been approved for SLE in over 40 years. We believe there is a large, unmet medical need in the SLE patient population as SLE patients have a death rate three times higher than that of the general population despite the fact that most patients are young and middle-aged individuals.

 

Current Treatment.  No protein therapeutics have been approved specifically for use in the treatment of SLE. Current drug therapies are predominantly palliative in nature and are targeted to the patient’s specific symptoms. Different medications are used to treat specific manifestations of SLE. Treatments include acetaminophen and/or NSAIDs, immunosuppressants such as methotrexate and cylcophosphamide, corticosteroids such as methylprednisolone, and antimalarials such as hydroxychloroquine.

 

SBI-087 for SLE Ongoing Clinical Development.  Our partner, Pfizer, is conducting a Phase 1 clinical trial of SBI-087 in systemic lupus erythematosus, or SLE, in which patient dosing has commenced and recruitment is ongoing.

 

Commercialization Rights

 

Our collaboration agreement with Pfizer includes a worldwide licensing and commercialization agreement for the development of TRU-015 and other therapies. We retain an option to co-promote with Pfizer, on customary terms to be agreed, CD20-directed therapies in the United States for niche indications. See “Business — Our Strategic Collaboration with Pfizer.”

 

TRU-016

 

Our TRU-016 program, in collaboration with Facet, is focused on the development of a novel CD37-directed therapy for B-cell malignancies, such as CLL and NHL. CD37 is a clinically validated target for the treatment of B-cell malignancies and our TRU-016 product candidate has been designed for a desired therapeutic label surrounding B-cell depletion in these B-cell malignancies. CD37 is found at high levels on B cells and at lower levels on a subpopulation of T cells and myeloid cells. Experiments suggest that CD37 plays an important role in B-cell regulation. In addition, CD37 is known to be overexpressed in patients with CLL. TRU-016 uses a different mechanism of action than CD20-directed therapies. As a result, we believe its novel design may provide patients with improved therapeutic options and enhance efficacy when used alone or in combination with chemotherapy and/or other CD20-directed therapeutics. We are currently conducting a Phase 1 clinical trial of TRU-016 in CLL and have filed an amendment to include treatment of patients with NHL. Expansion of the development program to other indications in oncology and AIID is planned.

 

B-cell Malignancies: Chronic Lymphocytic Leukemia and Non-Hodgkin’s Lymphoma

 

Background.  B cells and T cells are the two major types of lymphocytes responsible for defending the body against infection. Lymphocytic malignancies arise when these cells multiply uncontrollably. CLL is a type of cancer affecting the blood and bone marrow. It is a slowly progressing disease and in most patients the abnormal proliferating lymphocytes are clonal B cells arrested in the differentiation pathway between pre B cells and mature B cells. NHL is a diverse group of lymphocytic malignancies, approximately 85% of which are B-cell malignancies.

 

Preclinical data has demonstrated that TRU-016 induces potent ADCC against primary B-CLL cells, demonstrates significant in vivo therapeutic efficacy, and induces potent apoptosis in primary CLL cells. In addition, as shown below, combination therapy with a CD37-directed SMIP^tm product candidate and CD20-directed therapy with Rituxan^® has shown greater preclinical efficacy than either therapy alone.

Potential Market.  According to the National Cancer Institute, CLL is estimated to affect approximately 70,000 people in the United States. Approximately 12,000 new cases of CLL are diagnosed each year in the United States according to Datamonitor. In addition, NHL, another B-cell malignancy, is one of the most common types of cancer accounting for about 4% of all cancers. About 66,000 people in the United States are expected to be diagnosed with NHL in 2009 according to the American Cancer Society. Total reported worldwide sales of one of the most common used biologics in NHL, Rituxan^® surpassed $3 billion in 2009.

 

Current Treatments.  While available CLL and NHL therapies include chemotherapy, radiation therapy, surgery and bone and stem cell transplantation, biologics have become the standard of care to treat these cancers. Biologic therapies for NHL include interferon and mAbs such as Rituxan^®/Mabthera, Bexxar^®, Zevalin^® and Arzerra^®. These mAbs all target CD20 on B cells, and Bexxar and Zevalin are radiolabeled. In addition, Campath^® is a CD52-targeted mAb indicated for CLL, and Treanda^®, a cytotoxic, is also indicated for CLL. FCR, a combination of fludaraline, cyclophosphamide and rituximab is currently the most effective combination for the treatment of CLL.

 

TRU-016 for CLL Ongoing Clinical Development.  A TRU-016 Phase 1 clinical trial for patients with CLL is currently under way. The open label clinical trial is composed of two parts- a dose escalation study designed to evaluate the safety, tolerability and pharmacokinetics of TRU-016; and an expansion cohort designed to further evaluate safety and to estimate clinical activity of TRU-016 in patients with previously treated CLL or small lymphocytic leukemia.

 

TRU-016 for CLL Clinical Trial Results.  In December 2009, we announced positive data from a phase 1 study of TRU-016 in patients with relapsed and refractory CLL. Evidence of TRU-016 biological activity was seen beginning with patients dosed at the 0.3 mg/kg dose level, including in high-risk patients. Partial response was observed in five patients, including one patient with the 17p deletion cytogenetic abnormality. Partial response was determined following investigator assessment and the two-month confirmation of these responses is pending. Two patients with leukemia cutis experienced clearing, one complete and one partial. At the 10 mg/kg dose, four of five patients with elevated peripheral lymphocyte counts were reduced to normal levels. A total of 16 serious adverse events have been reported. The MTD has not yet been reached.

 

TRU-016 Phase 1 Clinical Results: Dose Response in Evaluable Patients — Reduction in Peripheral
Lymphocytes

 

 

Strategic Collaborations

 

Facet

 

In August 2009, we entered into a collaboration agreement with Facet for the joint worldwide development and commercialization of TRU-016, a product candidate in Phase 1 clinical development for CLL. TRU-016 is a CD37-directed SMIP protein therapeutic. The collaboration agreement includes TRU-016 in all indications and all other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, the parties will not develop or commercialize protein therapeutics directed to CD37 outside of the collaboration agreement.

 

We received an up-front payment of $20 million in cash in September 2009 and may receive up to $176.5 million in additional contingent payments upon the achievement of specified development, regulatory

and sales milestones. We and Facet share equally the costs of all development, commercialization and promotional activities and all global operating profits. In connection with the collaboration agreement, we and Facet also entered into a stock purchase agreement, pursuant to which Facet purchased 2,243,649 shares of our common stock for an aggregate purchase price of $10 million, or $4.46 per share. The per share price of $4.46 represents a 35% equity premium over the sixty-day trading average of our common stock on NASDAQ for the trading period ending immediately prior to the execution of the stock purchase agreement.

 

With respect to control over decisions and responsibilities, the collaboration agreement provides for a joint steering committee, or JSC, consisting of representatives of Trubion and Facet, which makes decisions by consensus. If the JSC is unable to reach a consensus, then the matter will be referred to Trubion’s and Facet’s chief executive officers for resolution. If the chief executive officers are unable to resolve the matter, then it will be resolved by arbitration. Both Trubion and Facet, at their sole discretion, may discontinue participation on the JSC with 90 days written notice to the other party.

 

At predefined times, the parties have the right to opt-out of the collaboration entirely or on a product-by-product basis. Upon a change of control of a party, the other party will have the right to opt-out of the collaboration entirely and if the successor party is conducting a program that competes with the programs under the collaboration agreement, then the successor party must either (i) opt-out of the collaboration entirely or (ii) divest the competing program to a third party. If a party exercises its opt-out right with respect to a product, then the parties will no longer share development and commercialization costs for such product and such opting-out party will receive certain royalty payments upon the sale of such product, rather than half of the profits derived from such product. Even if Facet exercises its opt-out right, its obligation to make milestone payments to us continues. In addition, if the party that opts-out is the lead manufacturing party for the opt-out product, then such party must continue to supply the product to the continuing party for up to eighteen months following the opt-out.

 

On March 9, 2010, Abbott Laboratories, or Abbott, announced a definitive agreement to purchase Facet. Abbott further announced that it expects the transaction to close in the second quarter of 2010, subject to certain conditions. We intend to continue to pursue the objectives in the approved development plan.

 

Facet can terminate the collaboration agreement at any time, in which event all rights to TRU-016 and other CD37-directed protein therapeutics under the collaboration agreement would revert to us. If Facet terminates the collaboration agreement in the first 18 months, then Facet must pay us a $10 million termination fee.

 

If there is a material breach of the collaboration agreement, then the non-breaching party may either terminate the collaboration agreement or continue the collaboration agreement and force the breaching party to opt-out and accept royalties at a reduced rate.

 

Either party may assign its interest in the collaboration agreement to a third party, provided that the non-assigning party maintains a right of first negotiation over any proposed assignment. In addition, either we or Facet can freely assign the collaboration agreement without the consent of the other party in connection with certain specified change of control transactions, such as an acquisition.

 

Pfizer

 

In December 2005 we entered into a collaboration agreement with Wyeth, now a wholly-owned subsidiary of Pfizer, for the development and worldwide commercialization of TRU-015 and other CD20-directed therapeutics. Pursuant to the agreement, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20. During the period in which we will be providing research services for Pfizer, Pfizer has the right, subject to our reasonable consent, to replace a limited number of these targets. In addition, we have the option to co-promote with Pfizer, on customary terms to be agreed, CD20-directed therapies in the United States for niche indications. We retain the right to develop and commercialize, on our own or with others, product candidates directed to all targets not included within the agreement. Unless it is terminated earlier, our agreement with Pfizer will remain in effect on a product-by-product basis and on a country-by-country basis until the later of the date that any such product shall no longer be covered by a valid claim of a U.S. or foreign patent or application and, generally, ten years after the first commercial sale of any product licensed under the agreement. Pfizer may terminate the agreement without cause at any time upon 90 days’ prior written notice.

In connection with the agreement, Wyeth paid us a $40 million non-refundable, non-creditable, up-front fee in January 2006 and purchased directly from us in a private placement, concurrent with our initial public offering, 800,000 shares of our common stock at the initial public offering price of $13.00 per share, resulting in net proceeds to us of $10.4 million. Under the agreement, we provided research services for an initial three-year period ended December 22, 2008 with the option for Wyeth to extend the service period for two additional one-year periods. Wyeth’s financial obligations during the initial research service term included collaborative research funding commitments of $9.0 million in exchange for such committed research services. This $9.0 million was subject to an increase if the service period was extended beyond three years as well as annual increases pursuant to percentage changes in the CPI. In June 2008, Wyeth exercised the first option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2009. In June 2009, Wyeth exercised the second option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2010. Due to the research period extension in 2009, the collaboration research funding commitments to us initially from Wyeth and now from Pfizer, increased to approximately $3.3 million per year in exchange for committed research services from us through December 22, 2010.

 

Pfizer’s financial obligations include additional amounts for reimbursement of agreed-upon external research and development costs and patent costs. Pursuant to the agreement, Pfizer is also obligated to make payments to us of up to $250 million based on the achievement of specified regulatory and sales milestones for CD20-directed therapies and payments to us of up to $535 million based on the specified achievement of regulatory and sales milestones for therapies directed to the small number of targets other than CD20. In addition, we will receive royalty payments in the event of future licensed product sales. Pfizer may terminate the agreement without cause at any time upon 90 days’ prior written notice.

 

In October 2009, Pfizer completed its acquisition of Wyeth. Our collaboration agreement remains in effect with Pfizer and in response to our request, Pfizer has provided further written assurances reaffirming its commitment to comply with the terms and conditions of the agreement.

 

If during the 12 month period following Pfizer’s acquisition of Wyeth, Pfizer is required or voluntarily decides to divest itself of one or more of the products under the collaboration agreement, then subject to any governmental limitations, Pfizer must offer us an exclusive opportunity to negotiate the acquisition or license of all of Pfizer’s rights to that product on commercially reasonable terms. If we do not conclude an agreement with Pfizer covering the product, Pfizer can divest itself of the product but the terms of that divestiture cannot be more favorable than those that were last offered to us unless we are given the opportunity to accept those more favorable terms.

 

Upon a change of control of Trubion, the agreement would remain in effect, subject to the right of Pfizer to terminate specified provisions of the agreement.

 

Assuming TRU-015 and other product candidates under the collaboration with Pfizer continue to progress in development, expenses for future clinical trials may be higher than those incurred in prior clinical trials. These expenses will, however, likely be incurred by Pfizer and expenses incurred by us, if any, will be substantially offset by reimbursement revenue from Pfizer. In addition, Pfizer is responsible for a substantial portion of costs related to patent prosecution and patent litigation for products directed to targets selected by Pfizer pursuant to the collaboration agreement.

 

Competition

 

The pharmaceutical and biotechnology industries are intensely competitive, and any product candidate developed by us would likely compete with other drugs and therapies. There are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies, and research organizations actively engaged in research and development of products targeting the same markets as our product candidates. Many of these organizations have substantially greater financial, technical, manufacturing, marketing and personnel resources than we have. Several of them have developed or are developing therapies that could be used for treatment of the same diseases that we are targeting. In addition, many of these

competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:

 

 

We expect to compete on, among other things, product efficacy, safety, convenience, time to market and price. In order to compete successfully we will need to identify, secure the rights to and develop products and exploit these products commercially before others are able to develop competitive products. In addition, our ability to compete may be affected if insurers and other third-party payors seek to encourage the use of generic products, making branded products less attractive to buyers from a cost perspective.

 

We believe our product development programs will be subject to significant competition from companies utilizing alternative technologies. In addition, as the principles of our SMIP^tm product candidates become more widely known and appreciated based on patent and scientific publications and regulatory filings, we expect the field to become highly competitive. Pharmaceutical companies, biotechnology companies, and academic and research institutions may succeed in developing products based upon the principles underlying our proprietary technologies earlier than us, obtaining approvals for such products from the FDA more rapidly than us or developing products that are safer, more effective, and/or more cost effective than those under development or proposed to be developed by us.

 

Product Candidates for Autoimmune and Inflammatory Diseases.  If approved for the treatment of RA, we anticipate that our product candidates would compete with other marketed protein therapeutics for the treatment of RA in this $10 billion market including: Rituxan^® (Genentech, Roche and Biogen Idec), Enbrel^® (Amgen and Pfizer), Remicade^® (JNJ and Schering-Plough), Humira^® (Abbott), Orencia^® (BMS), Cimzia^® (UCB), Simponi^® (JNJ and Schering-Plough) and Actemra^® (Roche and Chugai).

 

If approved for the treatment of SLE, we anticipate that our product candidates would have to compete with other B-cell depleting therapies, including CD20-directed therapeutics.

 

Product Candidates for B-cell Malignancies.  If approved for the treatment of CLL, NHL, or other B-cell malignancies, we anticipate that our product candidates would compete with other B-cell depleting therapies in these billion dollar markets. Although we are not aware of any CD37-directed therapeutics in development or on the market, for the treatment of CLL, NHL, or other B-cell malignancies, other biologic therapies are marketed for the treatment of NHL or CLL or both, such as Rituxan^® (Genentech), Zevalin^® (Spectrum Pharmaceuticals, Inc. and Bayer Schering AG), Bexxar^® (GSK), Campath^® (Genzyme and Bayer Schering AG) and Arzerra^® (GSK and Genmab).

 

Intellectual Property

 

Because of the length of time and expense associated with bringing new products through development and the governmental approval process, pharmaceutical and biotechnology companies have traditionally placed considerable importance on obtaining and maintaining patent protection for significant new technologies, products and processes.

 

We intend to seek patent protection for appropriate proprietary technologies by filing patent applications when possible in the United States and selected other jurisdictions. Our policy is to seek patent protection for the inventions that we consider important to the development of our business. We intend to continue using our scientific expertise to pursue and file patent applications on new developments with respect to uses, methods,

and compositions to enhance our intellectual property position in the areas that are important to the development of our business. We have applied, and are applying for, patents directed to our SMIP^tm technology and product candidates, our SCORPION^tm technology and our TRU-ADhanCe^tm technology as well as other aspects of our technology both in the United States and, when appropriate, in other jurisdictions.

 

Even if we are granted patents by government authorities or obtain the right to utilize them through licensing, our patents may not provide significant protection, competitive advantage or commercial benefit. The validity and enforceability of patents issued to pharmaceutical and biotechnology companies has proven highly uncertain. For example, legal considerations surrounding the validity of patents in the fields of pharmaceuticals and biotechnology are in transition, and we cannot assure you that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses relating to issued patents in these fields will be sufficient in the future. In addition, we cannot assure you as to the degree and range of protections any of our patents, if issued, may afford us or whether patents will be issued. For example, patents that may issue to us may be subjected to further governmental review that may ultimately result in the reduction of their scope of protection, and pending patent applications may have their requested breadth of protection significantly limited before being issued, if issued at all. Further, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot assure you that we were the first creator of inventions covered by our pending patent applications, or that we were the first to file patent applications for these inventions.

 

Many pharmaceutical and biotechnology companies and university and research institutions have filed patent applications or have received patents in our areas of product development. Many of these entities’ applications, patents and other intellectual property rights could prevent us from obtaining patents or could call into question the validity of any of our patents, if issued, or could otherwise adversely affect the ability to develop, manufacture or commercialize product candidates. If use of technology incorporated into or used to produce our product candidates is challenged, or if a conflicting patent issued to others is upheld in the courts or if a conflicting patent application filed by others is issued as a patent and is upheld, we may be unable to market one or more of our product candidates, or we may be required to obtain a license to market those product candidates. To contend with these possibilities, we may have to enter into license agreements in the future with third parties for technologies that may be useful or necessary for the manufacture or commercialization of some of our product candidates. In addition, we are routinely in discussions with academic and commercial entities that hold patents on technology or processes that we may find necessary in order to engage in some of our activities. We cannot, however, assure you that these licenses, or any others that we may be required to obtain to market our product candidates, will be available on commercially reasonable terms, if at all, or that we will be able to develop alternative technologies if we cannot obtain required licenses.

 

To protect our rights to any of our patents, if issued, and proprietary information, we may need to litigate against infringing third parties, or otherwise avail ourselves of the courts or participate in administrative proceedings to determine the scope and validity of those patents or other proprietary rights. These types of proceedings are often costly and could be very time-consuming to us, and we cannot assure you that the deciding authorities will rule in our favor. An unfavorable decision could allow third parties to use our technology without being required to pay us licensing fees or may compel us to license needed technologies to avoid infringing third-party patent and proprietary rights. Although we believe we would have valid defenses to allegations that our current product candidates, production methods and other activities infringe the valid and enforceable intellectual property rights of any third parties, we cannot be certain that a third party will not challenge our position in the future. Even if some of these activities were found to infringe a third party’s patent rights, we may be found to be exempt from infringement under 35 U.S.C. § 271(e) to the extent that these are found to be pre-commercialization activities related to our seeking regulatory approval for a product candidate. The scope of protection under 35 U.S.C. § 271(e), however, is uncertain and we cannot assure you that any defense under 35 U.S.C. § 271(e) would be successful. Further, the defense under 35 U.S.C. § 271(e) is only available for pre-commercialization activities, and could not be used as a defense for sale and marketing of any of our product candidates. There has been, and we believe that there will continue to be,

significant litigation in the biopharmaceutical and pharmaceutical industries regarding patent and other intellectual property rights.

 

Third parties could bring legal actions against us claiming we infringe their patents or proprietary rights, and seek monetary damages and/or enjoin clinical testing, manufacturing and marketing of the affected product or products. If we become involved in any litigation, it could consume a substantial portion of our resources, and cause a significant diversion of effort by our technical and management personnel regardless of the outcome of the litigation. If any of these actions were successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents. We cannot, however, assure you that any such license will be available on acceptable terms, if at all. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material and adverse effect on our business, financial condition, and results of operations. Further, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party. This is especially true in intellectual property cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree.

 

While we pursue patent protection and enforcement of our product candidates and aspects of our technologies when appropriate, we also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, suppliers and collaborators. Our employment policy requires each new employee to enter into an agreement that contains provisions generally prohibiting the disclosure of confidential information to anyone outside of Trubion and providing that any invention conceived by an employee within the scope of his or her employment duties is our exclusive property. Furthermore, our know-how that is accessed by third parties through collaborations and research and development contracts and through our relationships with scientific consultants is generally protected through confidentiality agreements with the appropriate parties. We cannot, however, assure you these protective arrangements will be honored by third parties, including employees, suppliers, and collaborators, or that these arrangements will effectively protect our rights relating to unpatented proprietary information, trade secrets and know-how. In addition, we cannot assure you that other parties will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information and technologies.

 

We are aware of intellectual property, including European patent No. EP-B-1176981, in which Genentech has an ownership interest with claims directed to the second medical use of an anti-CD20 antibody for treatment of RA. On August 8, 2006, we filed an opposition to this patent raising objections as to its validity. Subsequent to the submission of our opposition, other parties filed oppositions to the Genentech patent prior to August 30, 2006, including MedImmune, Inc., Genmab A/S, Centocor, Inc., Glaxo Group Limited, Serono S.A, and Pfizer. On September 11, 2008 we announced that the Opposition Division, or OD, of the EPO had revoked the European patent in its entirety. On February 19, 2009, Genentech and Biogen Idec appealed the decision. Final resolution of the opposition proceedings will likely take a number of years. In addition to its opposition, Glaxo Group Limited filed an action with the United Kingdom High Court to revoke the U.K. counterpart of EP-B-1176981. Pfizer also initiated a revocation action. On May 19, 2008 the U.K. counterpart was revoked by Court order.

 

The Genentech European patent claims the benefit of priority to two U.S. provisional patent applications that are unpublished and the status of which will remain confidential unless a U.S. patent or patent application claiming priority to the provisional patent applications publishes. In the event any such corresponding U.S. patent issues, and if our activities are determined to be covered by such a patent, we cannot assure you that Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all, which could prevent us from manufacturing and marketing TRU-015 for the treatment of RA in the United States and have a material adverse effect on our business, financial condition,

operating results and our collaboration with Pfizer. The Genentech patent has also been applied for in other countries including Japan, where the application is pending.

 

Manufacturing

 

We do not currently own or operate manufacturing facilities for the production of clinical or commercial quantities of our product candidates. We currently rely on a small number of third-party manufacturers to produce our compounds and expect to continue to do so to meet the clinical requirements of our product candidates and for all of our commercial needs. Our product candidates are currently manufactured in mammalian cell expression systems from readily available starting materials. To the extent that TRU-015 and TRU-016 advance through clinical trials, and to the extent we bring our future product candidates into clinical trials and partner the development and commercialization of any of the product candidates, we and our existing and prospective partners will be required to assess the manufacturing needs of the product candidates for clinical requirements as well as for commercial production. We may need to obtain one or more licenses to intellectual property rights held by third parties in order to manufacture each of our product candidates. While such licenses may be available, they may not be available on terms that are commercially acceptable to our existing or prospective partners or us. Should such licenses prove unavailable, we or our existing or prospective partners may choose to modify our manufacturing processes to use alternative manufacturing methods. Such modifications may result in greater expenditures of capital by us or our partners, delay commercialization, or prevent us or our partners from successfully commercializing our product candidates.

 

We have multiple potential sources for manufacturing our product candidates. Pfizer manufactures TRU-015 and has significant process development capabilities and extensive commercial-scale production capabilities at numerous facilities worldwide. Pfizer’s manufacturing commitment is contingent upon the effectiveness of our collaboration agreement which they may terminate without cause at any time upon 90 days’ prior written notice. However, in the event we or Pfizer terminate our collaboration agreement for certain reasons specified in the collaboration agreement, Pfizer would have limited manufacturing obligations to us. In addition to Pfizer, we have entered into agreements with Lonza Biologics and related entities for certain license rights related to Lonza’s manufacturing technology, research and development services, and for the manufacture of TRU-015 as well as other product candidates. As of December 31, 2009, we had committed to purchase $2.1 million of manufacturing services for TRU-016 from Lonza in 2010. Under our manufacturing agreement with Lonza, we could incur cancellation fees if we cancel the production run with insufficient advance notice. Our commitments with Lonza for manufacturing expire in the second quarter of 2010 and we currently do not have any future manufacturing agreements at this time. We plan on negotiating additional manufacturing capacity with Lonza or other third party manufacturers during 2010.

 

We rely and expect to continue to rely on a number of contract manufacturers to produce sufficient quantities of our product candidates in accordance with current good manufacturing practices, or cGMP, for use in clinical trials. We will ultimately depend on contract manufacturers for the manufacture of our products for commercial sale. Contract manufacturers are subject to extensive government regulation.

 

Government Regulation

 

Government authorities in the United States at the federal, state and local level, and other countries, extensively regulate, among other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing, and export and import of immunopharmaceutical products such as those we are developing.

 

United States Government Regulation

 

In the United States the information that must be submitted to the FDA in order to obtain approval to market a new drug varies depending on whether the drug is a new product whose safety and effectiveness has not previously been demonstrated in humans or a drug whose active ingredient(s) and certain other properties are the same as those of a previously approved drug. A new biologic will follow the Biologics License Application, or BLA, route for approval, a new drug will follow the New Drug Application, or NDA, route for

approval, and a drug that claims to be the same as an already approved drug may be able to follow the Abbreviated New Drug Application route for approval.

 

BLA and NDA Approval Process

 

In the United States, the FDA regulates drugs and biologics under the Federal Food, Drug and Cosmetic Act, and, in the case of biologics, also under the Public Health Service Act, and the FDA’s implementing regulations. If we fail to comply with the applicable U.S. requirements at any time during the product development process, approval process or after approval, we may become subject to administrative or judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, license suspension or revocation, withdrawal of an approval, a clinical hold, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency or judicial enforcement action could have a material adverse effect on us.

 

The major steps required before a biologic drug may be marketed in the United States include:

 

 

Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Long term preclinical tests, such as animal tests for reproductive toxicity and carcinogenicity, may continue after the IND is submitted. The IND must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. Submission of an IND does not guarantee that the FDA will allow clinical trials to commence. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the study subjects.

 

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators. Clinical trials must be conducted in compliance with federal regulations, good clinical practices, or GCPs, and under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each clinical protocol must be submitted to the FDA as part of the IND.

 

Clinical trials typically are conducted in three sequential phases, but the phases may overlap or be combined. Each trial must be reviewed and approved by an independent institutional review board, or IRB, before it can begin at that site. An IRB may require the clinical trial be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.

Phase 1 clinical trials usually involve the initial introduction of the investigational drug into humans to evaluate the product’s safety, dosage tolerance and pharmacodynamics and, if possible, to gain an early indication of its efficacy.

 

Phase 2 clinical trials usually involve controlled trials in a limited patient population to:

 

 

Phase 3 clinical trials usually further evaluate clinical efficacy and further test for safety in an expanded patient population. Phase 1, Phase 2 and Phase 3 trials may not be completed successfully within any specified period, if at all. The FDA or we, or our partners may suspend or terminate clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Prior to conducting Phase 3 trials, an applicant may seek a special protocol assessment which is an agreement between an applicant and the FDA on the design and size of clinical trial(s) that is/are intended to form the basis of a BLA or NDA.

 

Assuming successful completion of the required clinical trials, the results of the preclinical studies and of the clinical studies, together with other detailed information, including information on the chemistry, manufacture, and control criteria of the product, are submitted to the FDA in the form of a BLA or NDA requesting approval to market the product for one or more indications. The FDA reviews a BLA or NDA to determine, among other things, whether the product is safe, pure, and potent and whether the facility in which it is manufactured, processed, packed, or held meets standards designed to assure the product’s continued safety, purity and potency. The FDA also reviews a BLA or NDA to determine whether a product is safe and effective for its intended use.

 

Before approving an application, the FDA will inspect the facility or the facilities at which the product is manufactured. The FDA will not approve the product unless cGMP compliance is satisfactory. If the FDA determines the application, manufacturing process, or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. Before approving a BLA or NDA, the FDA will also typically inspect one or more clinical sites to assure compliance with GCP.

 

The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not grant approval on a timely basis, if at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our product candidates. The FDA may limit the indications for use or place other conditions on any approvals that could restrict the commercial application of our product candidates. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval.

 

Priority Review

 

The FDA has established priority and standard review classifications for original BLAs and NDAs and efficacy supplements. The classification of an application indicates the anticipated time frame for FDA review of completed marketing applications. The classification system, which does not preclude the FDA from doing work on other projects, provides a way of prioritizing certain BLAs and NDAs upon receipt and throughout the FDA application review process.

 

Under FDA policies, a biologic or drug candidate is eligible for priority review, or review within a six-month time frame from the time a complete BLA or NDA, as applicable, is accepted for filing, if the drug candidate provides a significant improvement compared to marketed drugs in the treatment, diagnosis or prevention of a disease. Even if a BLA or NDA is initially classified as a priority application, this status can change during the FDA review process, such as in the situation where another product is approved for the

same disease for which previously there was no available therapy. In addition, priority review does not guarantee that a product candidate will receive regulatory approval.

 

Post-Approval Requirements

 

After regulatory approval of a product is obtained, we would be required to comply with a number of post-approval requirements. For example, as a condition of approval of a BLA or NDA, the FDA may require post-marketing clinical studies and surveillance to monitor the product’s safety or efficacy.

 

In addition, holders of an approved BLA or NDA are required to report certain adverse reactions and production problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and promotional labeling for their products. Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new BLA/NDA or BLA/NDA supplement before the change can be implemented. A BLA/NDA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing BLA/NDA supplements as it does in reviewing BLAs/NDAs.

 

Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes certain procedural, substantive and recordkeeping requirements. Accordingly, biologics and drug companies and their manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

 

Foreign Regulation

 

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and distribution of our product candidates. Whether or not we obtain FDA approval for a product candidate, we must obtain approval by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product candidate in those countries. The approval process varies from country to country, and the time may be longer or shorter than that required for FDA approval. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from country to country.

 

Under European Union regulatory systems, a marketing authorization for a medical product derived from biotechnology processes must be submitted under a centralized procedure. The centralized procedure provides for the grant of a single marketing authorization that is valid for all European Union member states

 

Reimbursement

 

Sales of biopharmaceutical products depend in significant part on the availability of third-party reimbursement. Each third-party payor may have its own policy regarding what products it will cover, the conditions under which it will cover such products, and how much it will pay for such products. It will be time consuming and expensive for us to seek reimbursement from third-party payors. Reimbursement may not be available or sufficient to allow us to sell our products on a competitive and profitable basis.

 

The passage of the Medicare Prescription Drug and Modernization Act of 2003, or the MMA, sets forth the requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries, which may affect the marketing of our products. The MMA also introduced a new reimbursement methodology. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

 

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products

for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market.

 

We expect there will continue to be a number of federal and state proposals to implement governmental pricing controls. While we cannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on our business, financial condition, and profitability.

 

Employees

 

As of December 31, 2009, we had 73 full-time employees, 18 of whom held Ph.D. or M.D. degrees and 57 of whom were engaged in full-time research and development activities. None of our employees is represented by a labor union and we consider our employee relations to be good.

 

Available Information

 

Our corporate website address is www.trubion.com. We make available free of charge on our website our annual, quarterly and current reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. These SEC reports can be accessed through the “Investors” section of our website. We also make available on our website our corporate governance guidelines, the charters for our audit committee, compensation committee, and nominating and corporate governance committee, our whistleblower and corporate communications policies and our code of business conduct and ethics, and such information is available in print to any stockholder of Trubion who requests it. In addition, we intend to disclose on our website any amendments to, or waivers from, our code of business conduct and ethics that are required to be publicly disclosed pursuant to rules of the SEC and The Nasdaq Global Market. The information found on our corporate website is not, however, part of this or any other report.

 

We were founded as a limited liability company in the state of Washington in March 1999, and operated as a development-stage company. We converted into a corporation and redomiciled in the state of Delaware in October 2002.

 

 

Investment in our common stock involves a high degree of risk and uncertainty. You should carefully consider the risks described below together with all of the other information included in this annual report on Form 10-K as well as our quarterly reports on Form 10-Q and current reports on Form 8-K. The risks and uncertainties described below are not the only ones facing us. If any of the following risks actually occurs, our business, financial condition, or operating results could be harmed. In such case, the trading price of our common stock could decline, and investors in our common stock could lose all or part of their investment.

 

Risks Related to Our Business

 

Our success depends on the success of our clinical product candidates, TRU-015, TRU-016, and SBI-087, and we cannot be certain that they will be safe or effective, complete clinical trials, receive regulatory approval or be successfully commercialized.

 

Although our lead product candidate, TRU-015, has completed a Phase 2b clinical trial for the treatment of RA, additional clinical trials would be required before we are able to submit a Biologic License Application, or BLA, to the FDA for approval. In addition, our Facet collaboration clinical candidate, TRU-016, and our Pfizer collaboration clinical candidate, SBI-087, commenced initial clinical testing in 2008 and even if we and Facet, in the case of TRU-016, or Pfizer, in the case of SBI-087, determine to proceed with further clinical testing, a number of additional clinical trials will be required before a BLA can be submitted to the FDA for product approval.

The regulatory approval process can take many years and require the expenditure of substantial resources. We are a party to a collaboration agreement with Pfizer pursuant to which Pfizer is responsible for regulatory approval of, and any subsequent commercialization of TRU-015 and SBI-087. Ultimate decision-making authority as to most matters within the collaboration, including development plans and timeline, is vested with Pfizer. Pfizer may not advance the development and commercialization of TRU-015 and SBI-087, or either of these product candidates as quickly as we would like, if at all. For example, Pfizer will determine whether to commence a Phase 3 study of TRU-015 for the treatment of RA after reviewing data from the ongoing Phase 2 SBI-087 RA study, in addition to final data from the ongoing Phase 2b TRU-015 (2203) RA study. Patient dosing in the Phase 2 SBI-087 RA study commenced in December 2009 and an interim data review is planned that we believe could occur in late 2010 or early 2011 and final data is anticipated at the end of 2011.

 

In addition, prior to its acquisition by Pfizer, Wyeth had determined not to pursue TRU-015 for any oncology indications and discontinued the TRU-015 Phase 1/2 clinical trial for the treatment of non-Hodgkins’ lymphoma, or NHL, that it had initiated in December 2007. We are also party to a collaboration agreement with Facet pursuant to which we and Facet must jointly agree to all development and commercialization plans and timelines for TRU-016. Acting jointly, we and Facet may be unable to advance the development and commercialization of TRU-016 as quickly as we would, acting alone.

 

Clinical trials required for FDA approval of TRU-015 for RA, SBI-087 for RA or SLE or TRU-016 for CLL and NHL may not be successfully completed. If required clinical trials are not completed or their results do not meet safety and efficacy thresholds required by the FDA, our product candidates will likely not receive regulatory approval. Even if any of these product candidates receive regulatory approval, the approved product candidate may never be successfully commercialized. If our product candidates do not receive regulatory approval or are not successfully commercialized, we may not be able to generate revenue, or become profitable, which would negatively affect our ability to continue operations.

 

If we fail to obtain the capital necessary to fund our operations, we may be unable to develop our product candidates and we could be forced to share our rights to these product candidates with third parties on terms that may not be favorable to us.

 

We need large amounts of capital to support our research and development efforts. We may seek to raise funds through additional strategic partnerships, by selling additional equity or debt securities, or both, or by incurring other indebtedness. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will be prevented from pursuing research and development efforts or we may instead elect to enter into collaborations that could require us to share rights to our product candidates to a greater extent than we currently intend, which could harm our business prospects and financial condition. The sale of additional equity or equity-linked securities could result in the issuance of additional shares of our capital stock and could result in dilution to our stockholders. The incurrence of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely impact our ability to conduct our business. The capital markets have been experiencing disruption for more than 16 months. The scope and extent of this disruption in the capital markets could make it difficult or impossible to raise additional capital in public or private capital markets until conditions stabilize and appetite for additional investment grows. Whether or not the capital markets stabilize, future financing may not be available in sufficient amounts or on terms acceptable to us, if at all.

 

We have incurred operating losses in each year since our inception and expect to continue to incur substantial and increasing losses for the foreseeable future.

 

We have been engaged in designing and developing compounds and product candidates since 1999 and have not generated any product revenue to date. Our net losses were $29.2 million, $25.6 million and $23.3 million in the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, we had an accumulated deficit of $121.7 million. We expect our research and development expenses to increase in the future due to increased manufacturing and clinical development costs primarily related to TRU-

016, our Facet collaboration clinical candidate, as well as the advancement of our preclinical programs, and to product candidate manufacturing costs. As a result, we expect to continue to incur substantial and increasing losses for the foreseeable future. We are uncertain when or if we will be able to achieve or sustain profitability. Failure to become and remain profitable would adversely affect the price of our common stock and our ability to raise capital and continue operations. Continued operating losses and depletion of our cash balance may also result in non-compliance with our existing debt covenants and may require us to dedicate a substantial portion of our cash to repay our debt. As of December 31, 2009, our outstanding indebtedness under agreements with financial debt covenants that could be affected by continued operating losses or our cash position totaled $8.3 million. In addition, our net operating loss carry forwards and credits were substantially exhausted as a result of the payments we received from Wyeth in January 2006 pursuant to our Pfizer collaboration agreement, and any remaining net operating loss carry forwards and credits may be subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state law provisions, which would have an adverse effect on our ability to reduce future tax expenses.

 

We depend on our collaborative relationship with Pfizer to develop, manufacture, and commercialize TRU-015, SBI-087, and other selected product candidates.

 

In October 2009, Pfizer completed its acquisition of Wyeth and Pfizer is now our collaboration partner for TRU-015 and SBI-087. We have no prior relationship with Pfizer and, as a result, we cannot predict how or whether Pfizer will proceed with the collaboration or the development of any of the collaboration product candidates. In addition to our collaboration agreement with Pfizer for the development and worldwide commercialization of TRU-015, SBI-087 and other therapeutics directed to CD20, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20 that have been established pursuant to the agreement. Our ability to receive any significant revenue from our product candidates covered by the collaboration agreement depends on the efforts of Pfizer and on our ability to collaborate effectively. Any future payments, including royalties to us, will depend on the extent to which we and Pfizer advance product candidates through development and commercialization. Pfizer may terminate the collaboration relationship, in whole or in part, without cause, by giving 90 days’ written notice to us. Pfizer also has the right to terminate the agreement, on a target-by-target basis, upon 60 days’ written notice, if any safety or regulatory issue arises that would have a material adverse effect on Pfizer’s ability to develop, manufacture, or commercialize one or more product candidates.

 

With respect to control over decisions and responsibilities, the collaboration agreement provides for a research committee and a CD20-directed therapy development committee consisting of representatives of Pfizer and us. Ultimate decision-making authority as to most matters within the collaboration, including development plans and timelines, however, is vested in Pfizer. Pfizer has the right to develop multiple product candidates against the targets licensed to it under our collaboration. Pfizer has begun clinical development of SBI-087, another CD20-directed therapy, for RA and is currently enrolling patients in a phase 1 trial for the evaluation of SBI-087 for SLE. Pfizer could decide to focus its resources on only one CD-20-directed therapy and, as a result, discontinue efforts to further develop TRU-015. For example, Pfizer will determine whether to commence a Phase 3 study of TRU-015 for the treatment of RA after reviewing data from the ongoing Phase 2 SBI-087 RA study, in addition to final data from the ongoing Phase 2b TRU-015 (2203) RA study. SBI-087 is at an earlier stage in clinical development than TRU-015 and a decision by Pfizer to develop SBI-087 instead of TRU-015 would therefore likely delay the potential commercialization of any product under our collaboration with Pfizer, which could adversely affect our business and cause the price of our common stock to decline.

 

Pfizer may not develop and commercialize our product candidates as quickly as we would like, if at all. If Pfizer terminates the agreement or fails to fulfill its obligations under the agreement, we would need to obtain the capital necessary to fund the development and commercialization of our product candidates or enter into alternative arrangements with a third party. We could also become involved in disputes with Pfizer, which could lead to delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration. If Pfizer terminates or breaches its agreement with us, or

otherwise fails to complete its obligations in a timely manner, our collaboration product development programs would be substantially delayed and the chances of successfully developing or commercializing our collaboration product candidates would be materially and adversely affected.

 

We depend on our collaborative relationship with Facet to develop, manufacture, and commercialize TRU-016 and other CD37-directed protein therapeutics.

 

In August 2009, we entered into a collaboration agreement with Facet for the joint worldwide development and commercialization of TRU-016, our product candidate in Phase 1 clinical development for chronic lymphocytic leukemia, or CLL, and other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, neither we nor Facet have the right to develop or commercialize protein therapeutics directed to CD37 outside of the collaboration.

 

Our ability to receive funding for TRU-016 under the collaboration depends on our ability to collaborate effectively with Facet. Any future payments, including milestones payable to us, will depend on the extent to which we and Facet advance TRU-016 through development and commercialization. Facet may terminate the collaboration agreement without cause, and would not be obligated to pay us a termination fee if such a termination was more than 18 months after the beginning of the collaboration. Facet also has the right upon 90 days’ written notice to terminate the agreement for any uncured material breach by us.

 

With respect to control over decisions and responsibilities, the collaboration agreement provides for a joint steering committee, or JSC, that must make decisions by consensus. The failure of the JSC to reach consensus on material aspects of the development or commercialization of TRU-016 would lead to dispute resolution by our and Facet’s chief executive officers, and potentially arbitration, any of which may delay the development of TRU-016, which may harm our business.

 

Under certain circumstances, the parties have the right to opt-out of the collaboration or may be deemed to have opted-out of the collaboration. If Facet opts-out of the collaboration with respect to a product, then we would become responsible for all development and commercialization costs for that product and be obligated to pay Facet certain royalty payments upon the sale of that product. We are currently the lead manufacturing party for TRU-016 and if we opt-out of the collaboration and are the lead TRU-016 manufacturing party at that time, we would be obligated to continue to supply TRU-016 to Facet for up to 18 months.

 

On March 9, 2010, Abbott Laboratories, or Abbott, announced a definitive agreement to purchase Facet. Abbott further announced that it expects the transaction to close in the second quarter of 2010, subject to certain conditions. We intend to continue to pursue the objectives in the approved development plan.

 

If Facet opts-out of or terminates the agreement or fails to fulfill its obligations under the agreement, we would need to obtain the capital necessary to fully fund the development and commercialization of TRU-016 or enter into alternative arrangements with a third party. We could also become involved in disputes with Facet, which could lead to delays in or termination of our development and commercialization programs and time-consuming and expensive litigation or arbitration. If Facet terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, our collaboration product development programs would be substantially delayed and the chances of successfully developing or commercializing our collaboration product candidates would be materially and adversely affected.

 

We currently rely on third-party manufacturers to supply our product candidates for clinical trials and will rely on third-party manufacturers to manufacture our product candidates in commercial quantities, which could delay, prevent or increase the costs associated with the clinical development and future commercialization of our product candidates.

 

We currently depend on Pfizer for the supply of TRU-015 and SBI-087. We also currently depend on contract manufacturers for certain biopharmaceutical development and manufacturing services for TRU-016, our Facet collaboration clinical candidate. Any disruption in production, inability of these third-party manufacturers to produce adequate quantities to meet our needs, or other impediments with respect to development or manufacturing could adversely affect our ability to successfully complete clinical trials, delay submissions of our regulatory applications, increase our costs or otherwise adversely affect our ability to

commercialize our product candidates in a timely manner, if at all. For example, our commitments with Lonza for manufacturing TRU-016 expire in the second quarter of 2010 and we currently do not have any future manufacturing agreements at this time. We plan on negotiating for additional manufacturing capacity with Lonza during 2010. We may be unable to do so in a timely manner or on terms that are consistent with our existing agreements. If we are unable to negotiate for additional manufacturing capacity with Lonza, we will need to contract with other third-party manufacturers, which will result in additional costs and may cause delays in the future supply of TRU-016 and the clinical development of TRU-016.

 

Our product candidates have not yet been manufactured for commercial use. If any of our product candidates becomes a product approved for commercial sale, in order to supply our or our collaborators’ commercial requirements for such an approved product, the third-party manufacturer may need to increase its manufacturing capacity, which may require the manufacturer to fund capital improvements to support the scale-up of manufacturing and related activities. The third-party manufacturer may not be able to successfully increase its manufacturing capacity for such an approved product in a timely or economic manner, if at all. If any manufacturer is unable to provide commercial quantities of such an approved product, we will have to successfully transfer manufacturing technology to a new manufacturer. Engaging a new manufacturer for such an approved product could require us to conduct comparative studies or utilize other means to determine bioequivalence of the new and prior manufacturers’ products, which could delay or prevent our ability to commercialize such an approved product. If any of these manufacturers is unable or unwilling to increase its manufacturing capacity or if we are unable to establish alternative arrangements on a timely basis or on acceptable terms, the development and commercialization of such an approved product may be delayed or there may be a shortage in supply. Any inability to manufacture our products in sufficient quantities when needed would seriously harm our business.

 

Any manufacturer of our product candidates and approved products, if any, must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include quality control, quality assurance, and the maintenance of records and documentation. Manufacturers of our product candidates and approved products, if any, may be unable to comply with these cGMP requirements and with other FDA, state, and foreign regulatory requirements. We have little control over our manufacturers’ compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or recall, or withdrawal of product approval. If the safety of any quantities supplied is compromised due to our manufacturers’ failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or successfully commercialize our products, which would seriously harm our business.

 

Our success depends on the proper management of our current and future business operations, and the expenses associated with them.

 

Our business strategy requires us to manage our operations to provide for the continued development and potential commercialization of our product candidates and to manage our expenses generated by these activities. In an effort to reduce costs, we announced in February 2009 a workforce reduction of approximately 25%, which included the elimination of certain existing positions across our research and administrative functions. As a result of this reduction in force, we recorded a restructuring charge of $0.8 million in the first quarter of 2009. We continue to believe that strict cost containment in the near term is essential if our current funds are to be sufficient to allow us to continue our currently planned operations.

 

If we are unable to effectively manage our current operations, we may not be able to implement our business strategy and our financial condition and results of operations may be adversely affected. If we are unable to effectively manage our expenses, we may find it necessary to reduce our expenses through another reduction in our workforce, which could adversely affect our operations.

 

We rely on highly skilled personnel, and if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to maintain our operations.

 

Our operations and our ability to execute our business strategy are highly dependent on the efforts of our executive management team. In November 2009, our Chief Executive Officer, or CEO, and Chairman of the Board retired after serving since February 2003. Following his departure, our Board of Directors appointed our

prior Lead Director to serve as Executive Chairman and Acting President until a qualified replacement is found. We have retained a recruiting firm and are currently conducting a nationwide search for a new CEO. The departure of our CEO and Chairman could have a disruptive effect on our ability to attract and retain qualified team members and execute our strategic plan. Though we intend to hire a qualified candidate for CEO in the near term, no assurances can be given that we will be able to attract and retain a suitable CEO. An extended period of time without a permanent CEO could materially and adversely affect our business, financial condition or results of operations. Furthermore, in recruiting a new CEO we will incur expenses related to recruiting, relocation, training and possibly experience operational inefficiencies. In the event we are unable to effect a smooth transition from our Interim Executive Chairman and Acting President to a new CEO, or if a new CEO should unexpectedly prove to be unsuitable, the resulting disruption could negatively impact our operations and impede our ability to execute our strategic plan. In addition, although the members of our senior management team have employment agreements with us, these agreements may not provide sufficient incentives for these officers to continue employment with us. The loss of one or more of the members of our senior management team could adversely affect our operations.

 

In February 2009, as part of our efforts to reduce our operating expenses through prioritization of our development portfolio and streamlining our infrastructure, we announced a reduction of approximately 25% of our workforce, across our research and administrative functions. This reduction in workforce may impair our ability to recruit and retain qualified employees and to effectively complete research and administrative functions. As a result, our ability to respond to unexpected challenges may be impaired and we may be unable to take advantage of new opportunities. If we need to rehire terminated individuals or hire individuals with similar skills, we may be unable to do so or we may be required to pay above market rates. Our future success depends on our continuing ability to develop, motivate, and retain qualified management, clinical, and scientific personnel for all areas of our organization. If we do not succeed in retaining and motivating our remaining personnel, our existing operations may suffer and we may be unable to effectively engage in planned operations.

 

We cannot assure you any of our product candidates will be safe or effective, or receive regulatory approval.

 

The clinical trials and the manufacturing of our product candidates are, and marketing of our products will be, subject to extensive and rigorous review and regulation by numerous government authorities in the United States and in other countries where we intend to test and market our product candidates. Before obtaining regulatory approvals for the commercial sale of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe and effective for use in each target indication. This process can take many years and require the expenditure of substantial resources, and may include post-marketing studies and surveillance. To date, we have not successfully demonstrated in clinical trials safety or efficacy sufficient for regulatory approval. Although our lead product candidate, TRU-015, has completed a Phase 2b clinical trial for the treatment of RA, additional clinical trials would be required before we are able to submit a BLA to the FDA for approval and Pfizer will determine whether to commence a Phase 3 study of TRU-015 for the treatment of RA after reviewing data from the ongoing Phase 2 SBI-087 RA study, in addition to final data from the ongoing Phase 2b TRU-015 (2203) RA study. In addition, our Facet collaboration clinical candidate TRU-016 and our Pfizer collaboration clinical candidate SBI-087 commenced initial clinical testing in 2008 and as a result we only have limited clinical trial results regarding the safety or efficacy of either of these product candidates. Even if, based on the results of the initial clinical trials for TRU-016 and SBI-087, we and Facet, in the case of TRU-016, or Pfizer, in the case of SBI-087, determine to proceed with further clinical testing, a number of additional clinical trials will be required before a BLA can be submitted to the FDA for product approval. The results from preclinical testing and clinical trials that we have completed may not be predictive of results in future preclinical tests and clinical trials, and we cannot assure you we will demonstrate sufficient safety and efficacy to seek or obtain the requisite regulatory approvals. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. All of our other product candidates remain in the discovery and pre-clinical testing stages. We may also encounter delays or rejections due to additional government regulation from future legislation, administrative action, or changes in FDA policy. We cannot assure you that regulatory approval will be obtained for any of our product candidates,

and even if the FDA approves a product, the approval will be limited to those indications covered in the approval. If our current product candidates are not shown to be safe and effective in clinical trials, the resulting delays in developing other product candidates and conducting related preclinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition, and operating results. If we are unable to discover or successfully develop drugs that are effective and safe in humans and receive regulatory approval, we will not have a viable business. We do not expect any of our current product candidates to be commercially available in major markets before 2014, if at all.

 

Any failure or delay in commencing or completing clinical trials for product candidates could severely harm our business.

 

Each of our product candidates must undergo extensive preclinical studies and clinical trials as a condition to regulatory approval. Preclinical studies and clinical trials are expensive and take many years to complete. To date we have not initiated any Phase 3 clinical trials of any product candidate. The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including:

 

 

It is possible that none of our product candidates will complete the required clinical trials in any of the markets in which we or our collaborators intend to commercialize those product candidates. Accordingly, we or our collaborators may not seek or receive the regulatory approvals necessary to market our product candidates. Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for product candidates would prevent or delay their commercialization and severely harm our business and financial condition.

 

We rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.

 

We do not currently have the ability to conduct clinical trials and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators, and contract laboratories, to conduct our clinical trials. We have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational plan and protocol. Moreover, the FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording, and reporting the results of clinical trials to ensure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory

obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our clinical trials may be extended, delayed, suspended, or terminated, and we may not be able to obtain regulatory approval for our product candidates.

 

If we enter into additional strategic partnerships we may be required to relinquish important rights to and control over the development of our product candidates or otherwise be subject to terms unfavorable to us.

 

If we enter into any strategic partnerships, we will be subject to a number of risks, including:

 

 

The occurrence of any of these risks could negatively impact the development of our product candidates which would have an adverse effect on our business prospects.

 

If our technology or our product candidates conflict with the rights of others we may not be able to manufacture or market our product candidates, which could have a material adverse effect on us.

 

Our commercial success will depend in part on not infringing the patents or violating the proprietary rights of third parties. Issued patents held by others may limit our ability to develop commercial products. All issued U.S. patents are entitled to a presumption of validity under U.S. law. If we need licenses to such patents to permit us to manufacture, develop, or market our product candidates we may be required to pay significant fees or royalties, and we cannot be certain that we would be able to obtain such licenses. Competitors or third parties may obtain patents that may cover subject matter we use in developing the technology required to bring our products to market, producing our products, or treating patients with our products. We know that others have filed patent applications in various jurisdictions that relate to several areas in which we are developing products. Some of these patent applications have already resulted in patents and some are still

pending. We may be required to alter our processes or product candidates, pay licensing fees, or cease activities. For example, certain parts of our SMIP^tm product technology, including the current expression system responsible for the production of the recombinant proteins used in our product candidates and certain nucleic acids, originated from third-party sources. These third-party sources include academic, government, and other research laboratories, as well as the public domain. If use of technology incorporated into or used to produce our product candidates is challenged, or if our processes or product candidates conflict with patent rights of others, third parties could bring legal actions against us in Europe, the United States, and elsewhere claiming damages and seeking to enjoin manufacturing and marketing of the affected products. Additionally, it is not possible to predict with certainty what patent claims may issue from pending applications. In the United States, for example, patent prosecution can proceed in secret prior to issuance of a patent. As a result, third parties may be able to obtain patents with claims relating to our product candidates which they could attempt to assert against us. Further, as we develop our products, third parties may assert that we infringe the patents currently held or licensed by them and we cannot predict the outcome of any such action.

 

We are aware of previously filed U.S. provisional patent applications owned by Genentech and Biogen Idec, which patent applications are related to a revoked European patent that was generally directed to the use of an anti-CD20 antibody for the treatment of RA. A U.S. patent or patent application claiming the benefit of priority to the provisional patent applications, if it exists, has not yet published. In the event any such U.S. patent issues, and if our activities are determined to be covered by such a patent, we cannot assure you Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all, which could prevent us from manufacturing and marketing TRU-015 or SBI-087 for the treatment of RA in the United States, and have a material adverse effect on our business, financial condition, operating results, and our collaboration with Pfizer. With regard to the related European patent, we announced on September 11, 2008 that the Opposition Division, or OD, of the European Patent Office, or EPO, had revoked the European patent in its entirety. On February 19, 2009, Genentech and Biogen Idec appealed the decision to the Board of Appeals of the EPO. If Genentech and Biogen Idec succeed in their appeal of the OD’s decision the opposition proceeding will be reopened before the OD. If upon these further proceedings the European patent is held to be valid, either as amended prior to the OD hearing or with a more limited scope, and if our activities are determined to be covered by that patent, we cannot assure you that Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all. As a consequence, we and Pfizer could be prevented from manufacturing and marketing TRU-015 or SBI-087 for the treatment of RA in the designated and extended states of the European Patent Convention where the patent is validated, which could have a material adverse effect on our business, financial condition, and operating results. The revoked Genentech European patent claimed the benefit of priority to two U.S. provisional patent applications and a U.S. patent or patent application claiming priority to the provisional patent applications that have not been published. In the event any such U.S. patent issues, and if our activities are determined to be covered by such a patent, we cannot assure you Genentech would be willing to grant us or Pfizer a license on terms we or they would consider commercially reasonable, if at all, which could prevent us from manufacturing and marketing TRU-015 or SBI-087 for the treatment of RA in the United States, and have a material adverse effect on our business, financial condition and operating results, and our collaboration with Pfizer.

 

If we are unable to obtain, maintain, and enforce our proprietary rights, we may not be able to compete effectively or operate profitably.

 

Our success depends in part on obtaining, maintaining, and enforcing our patents and other proprietary rights, and will depend in large part on our ability to:

 

 

The degree of future protection for our proprietary rights is uncertain. For example:

 

 

The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded under patents. Although we believe our potential rights under patent applications provide a competitive advantage, we cannot assure you that patent applications owned by or licensed to us will result in patents being issued or that, if issued, the patents will give us an advantage over competitors with similar technology, nor can we assure you that we can obtain, maintain, and enforce all ownership and other proprietary rights necessary to develop and commercialize our product candidates.

 

Even if any or all of our patent applications issue as patents, others may challenge the validity, inventorship, ownership, enforceability, or scope of our patents or other technology used in or otherwise necessary for the development and commercialization of our product candidates. Further, we cannot assure you that any such challenge would not be successful. Moreover, the cost of litigation to uphold the validity of patents to prevent infringement or to otherwise protect our proprietary rights can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use the challenged technologies without payment to us. We cannot assure you that our patents, if issued, will not be infringed or successfully avoided through design innovation. Intellectual property lawsuits are expensive and would consume time and other resources, even if the outcome were successful. In addition, there is a risk that a court would decide that our patents, if issued, are not valid and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of a patent were upheld, a court would refuse to stop the other party from using the inventions, including on the ground that its activities do not infringe that patent. If any of these events were to occur, our business, financial condition, and operating results would be materially adversely affected.

 

We also will rely on current and future trademarks to establish and maintain recognized brands. If we fail to acquire and protect such trademarks, our ability to market and sell our products, and therefore our business, financial condition and operating results, would be materially adversely affected. For example, in November 2005, Merck KGaA filed a proceeding with the Office for Harmonisation in the Internal Market opposing our European registration of the trademark TRUBION and seeking to place certain restrictions on the identification of goods, services, and channels of trade description in our European trademark registration. Merck claims rights resulting from its prior trademark registration of TRIBION HARMONIS. Our action with the Court of First Instance of the European Community to annul the Board decision has been denied. Merck also filed a similar opposition in Brazil in February 2009. We intend to vigorously pursue registration of the mark TRUBION for products in the European Union and Brazil and to challenge Merck’s claimed rights as necessary to obtain such registration; however, if we are unable to effectively defend against the opposition,

we may be prohibited from using the TRUBION trademark in certain European Union jurisdictions, which could have an adverse effect on our ability to promote the Trubion brand in those jurisdictions.

 

In addition to the intellectual property and other rights described above, we also rely on unpatented technology, trade secrets, and confidential information, particularly when we do not believe that patent or trademark protection is appropriate or available. Trade secrets are difficult to protect and we cannot assure you that others will not independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our unpatented technology, trade secrets, and confidential information. In addition, we cannot assure you that the steps we take with employees, consultants, and advisors will provide effective protection of our confidential information or, in the event of unauthorized use of our intellectual property or the intellectual property of third parties, provide adequate or effective remedies or protection.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

 

There has been significant litigation in the biotechnology industry over patents and other proprietary rights, and if we become involved in any litigation it could consume a substantial portion of our resources, regardless of the outcome of the litigation. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. If these legal actions are successful, in addition to any potential liability for damages, we could be required to obtain a license, grant cross-licenses, and pay substantial royalties in order to continue to manufacture or market the affected products. We cannot assure you we would prevail in any legal action or that any license required under a third-party patent would be made available on acceptable terms, if at all. In addition, uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to continue our operations. Ultimately we could be prevented from commercializing a product or be forced to cease some aspect of our business operations as a result of claims of patent infringement or violation of other intellectual property rights, which could have a material adverse effect on our business, financial condition, and operating results. Should third parties file patent applications, or be issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings in the United States Patent and Trademark Office to determine priority of invention, which could result in substantial costs to us and an adverse decision as to the priority of our inventions. An unfavorable outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing third parties. We cannot assure you that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms.

 

We face substantial competition, which may result in others discovering, developing, or commercializing products before, or more successfully than, we do.

 

Our future success depends on our ability to demonstrate and maintain a competitive advantage with respect to the design, development, and commercialization of our product candidates. We expect any product candidate that we commercialize with our collaborative partners, or on our own, will compete with other products.

 

Product Candidates for Autoimmune and Inflammatory Diseases.  If approved for the treatment of RA, we anticipate that our product candidates would compete with other marketed protein therapeutics for the treatment of RA, including: Rituxan^® (Genentech, Roche and Biogen Idec), Enbrel^® (Amgen and Pfizer), Remicade^® (JNJ and Schering-Plough), Humira^® (Abbott), Orencia^® (BMS), Cimzia^® (UCB), Simponi^® (JNJ and Schering-Plough), and Actemra^® (Roche and Chugai). If approved for the treatment of SLE, our product candidates will compete with other therapies.

 

Product Candidates for B-cell Malignancies.  If approved for the treatment of CLL, NHL, or other B-cell malignancies, we anticipate that our product candidates would compete with other B-cell depleting therapies. While we are not aware of any CD37-directed therapeutics in development or on the market, other biologic therapies are marketed for the treatment of NHL or CLL or both, such as Rituxan/Mabthera^®

(Genentech, Roche and Biogen Idec), Zevalin^® (Spectrum Pharmaceuticals, Inc. and Bayer Schering AG), Bexxar^® (GSK), , Campath^® (Genzyme and Bayer Schering AG) and Arzerra^® (GSK and Genmab).

 

Many of our potential competitors have substantially greater financial, technical, manufacturing, marketing and personnel resources than we have. In addition, many of these competitors have significantly greater commercial infrastructures than we have. Our ability to compete successfully will depend largely on our ability to:

 

 

Established competitors may invest heavily to quickly discover and develop novel compounds that could make our product candidates obsolete. In addition, any new product that competes with a generic market-leading product must demonstrate compelling advantages in efficacy, convenience, tolerability, and safety in order to overcome severe price competition and to be commercially successful. If we are not able to compete effectively against our current and future competitors, our business will not grow, and our financial condition and operating results will suffer.

 

We may fail to select or capitalize on the most scientifically, clinically, or commercially promising or profitable product candidates.

 

We have limited technical, managerial, and financial resources to determine which of our product candidates should proceed to initial clinical trials, later-stage clinical development, and potential commercialization and, further, we may make incorrect determinations as a result of our limited resources or information available to us at the time of our determination. Our decisions to allocate our research and development, management, and financial resources toward particular product candidates or therapeutic areas may not lead to the development of viable commercial products and may divert resources from better opportunities. Similarly, our decisions to delay or terminate drug development programs may also be incorrect and could cause us to miss valuable opportunities.

 

Even if our product candidates receive regulatory approval, they could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our products.

 

Any product candidate for which we receive regulatory approval, together with the manufacturing processes, post-approval clinical data, and advertising and promotional activities for such product, will be subject to continued review and regulation by the FDA and other regulatory agencies. Even if regulatory approval of a product candidate is granted, the approval may be subject to limitations on the indicated uses for which the product candidate may be marketed or on the conditions of approval, or contain requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product candidate. Later discovery of previously unknown problems with our products or their manufacture, or failure to comply with regulatory requirements, may result in, among other things:

 

 

 

If we are slow or otherwise unable to adapt to changes in existing regulatory requirements, we may lose marketing approval for any products that may be approved in the future.

 

Failure to obtain regulatory approval in foreign jurisdictions would prevent us from marketing our products internationally.

 

We intend to have our product candidates marketed outside the United States. In order to market our products in the European Union and many other non-U.S. jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements. To date, we have not filed for marketing approval of any of our product candidates and may not receive the approvals necessary to commercialize our product candidates in any market. The approval procedure varies among countries and can involve additional testing and data review. The time required to obtain foreign regulatory approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval, or may include different or additional risks. We may not obtain foreign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory agencies in other countries, and approval by one foreign regulatory authority does not ensure approval by regulatory agencies in other foreign countries or by the FDA. A failure or delay in obtaining regulatory approval in one jurisdiction may have a negative effect on the regulatory approval process in other jurisdictions, including approval by the FDA. The failure to obtain regulatory approval in foreign jurisdictions could seriously harm our business.

 

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

 

Even if we obtain regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payors, and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

 

 

If our product candidates do not become widely accepted by physicians, patients, third-party payors, and other members of the medical community, our business, financial condition, and operating results would be materially adversely affected.

If we are unable to establish a sales and marketing infrastructure or enter into collaborations with partners to perform these functions, we will not be able to commercialize our product candidates.

 

We currently do not have any internal sales, marketing, or distribution capabilities. In order to commercialize any of our product candidates that are approved for commercial sale, we must either acquire or internally develop a sales, marketing, and distribution infrastructure or enter into collaborations with partners able to perform these services for us. In December 2005, we entered into a collaboration agreement with Wyeth, now Pfizer, to develop and commercialize therapeutics directed to the CD20 protein and other targets. In August 2009 we entered into a collaboration agreement with Facet to develop and commercialize TRU-016. If we do not enter into collaborations with respect to product candidates not covered by the Pfizer or Facet collaborations, or if any of our product candidates are the subject of collaborations with partners that are not able to commercialize such product candidates, we will need to acquire or internally develop a sales, marketing, and distribution infrastructure. For example, neither we nor Facet currently have a sales, marketing or distribution infrastructure. Factors that may inhibit our efforts to commercialize our product candidates without partners that are able to commercialize the product candidates include:

 

 

If we are not able to partner with a third party able to commercialize our product candidates, or are not successful in recruiting sales and marketing personnel or in building a sales, marketing, and distribution infrastructure, we will have difficulty commercializing our product candidates, which would adversely affect our business and financial condition.

 

If any products we develop become subject to unfavorable pricing regulations, third-party reimbursement practices, or healthcare reform initiatives, our business could be harmed.

 

Our ability to commercialize any product candidate profitably will depend in part on the extent to which reimbursement for such product candidate and related treatments will be available from government health administration authorities, private health insurers, or private payors, and other organizations in the United States and internationally. Even if we succeed in bringing one or more product candidates to market, these products may not be considered cost-effective, and the amount reimbursed for any product may be insufficient to allow us to sell it profitably. Because our product candidates are in the early stages of development, we are unable at this time to determine their cost-effectiveness and the level or method of reimbursement. There may be significant delays in obtaining coverage for newly approved products, and coverage may be more limited than the purposes for which the product candidate is approved by the FDA or foreign regulatory agencies. Moreover, eligibility for coverage does not mean that any product will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale, and distribution. Increasingly, the third-party payors who reimburse patients, such as government and private payors, are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. If the reimbursement we are able to obtain for any product we develop is inadequate in light of our development and other costs, our business could be harmed.

 

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

 

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health-care providers, pharmaceutical companies, or others selling our products. If

we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

 

 

Although we currently have product liability insurance coverage for our clinical trials for expenses or losses, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

 

If we use biological and hazardous materials in a manner that causes contamination or injury or violates laws, we may be liable for damages.

 

Our research and development activities involve the use of potentially harmful biological materials, as well as hazardous materials, chemicals, and various radioactive compounds. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling, or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could exceed our resources. We do not maintain liability insurance coverage for our handling of biological or hazardous materials. We, the third parties that conduct clinical trials on our behalf, and the third parties that manufacture our product candidates are subject to federal, state, and local laws and regulations governing the use, storage, handling, and disposal of these materials and waste products. The cost of compliance with these laws and regulations could be significant. The failure to comply with any of these laws and regulations could result in significant fines and work stoppages and may harm our business.

 

Risks Related to Our Common Stock

 

The trading price of our common stock may be subject to significant fluctuations and volatility, and our stockholders may be unable to resell their shares at a profit.

 

The trading prices of many smaller publicly traded companies are highly volatile, particularly companies such as ours that have limited operating histories. Accordingly, the trading price of our common stock has been subject to significant fluctuations and may continue to fluctuate or decline. Since our initial public offering, which was completed in October 2006, the price of our common stock has ranged from an intra-day low of $1.00 to an intra-day high of $22.50. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

 

 

In addition, the U.S. stock market in the last 16 months has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of trading companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.

 

The trading market for our common stock will rely in part on the availability of research and reports that third-party industry or financial analysts publish about us. There are many large, publicly traded companies active in the biopharmaceutical industry, which may mean it will be less likely that we receive widespread analyst coverage. Furthermore, if one or more of the analysts who do cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

The concentration of our capital stock ownership with insiders will likely limit your ability to influence corporate matters.

 

As of December 31, 2009, our executive officers, directors, current five percent or greater stockholders, and affiliated entities together beneficially owned approximately 81% of our outstanding common stock. As a result, these stockholders, acting together, have control over most matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate action might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of us that other stockholders may view as beneficial.

 

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our certificate of incorporation and bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some

stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act.

 

The Sarbanes-Oxley Act requires that we maintain effective internal controls over financial reporting and disclosure controls and procedures. Among other things, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Compliance with Section 404 requires substantial accounting expense and significant management efforts. Our testing, or the subsequent review by our independent registered public accounting firm, may reveal deficiencies in our internal controls that would require us to remediate in a timely manner so as to be able to comply with the requirements of Section 404 each year. If we are not able to comply with the requirements of Section 404 in a timely manner each year, we could be subject to sanctions or investigations by the SEC, NASDAQ or other regulatory authorities that would require additional financial and management resources and could adversely affect the market price of our common stock.

 

 

None.

 

 

In June 2003 we entered into a lease agreement for 31,507 square feet of office and laboratory facilities in Seattle, Washington. On February 10, 2006, we amended the lease agreement to add an additional 15,892 square feet in the same building. The lease expires on April 30, 2013, subject to our option to extend the term for up to 10 years. On February 2, 2007, we leased an additional 3,067 square feet in the same building, through April 30, 2013. The annual lease payments for these facilities are approximately $1.5 million in the aggregate. We believe that the facilities we currently lease are sufficient for our anticipated near-term needs.

 

 

In November 2005, Merck KGaA filed a proceeding with the Office of Harmonisation for the Internal Market, or the Office, opposing our European application for registration of the trademark TRUBION for certain products and services. The Office has held in our favor with respect to the services, and in Merck’s favor with respect to the products. Our action with the Court of First Instance (CFI) of the European Community to annul the decision at the Office has been denied. In February 2009, Merck filed a similar opposition in Brazil. We intend to vigorously pursue registration of the mark TRUBION for products in the European Union and Brazil, and to challenge Merck’s claimed rights as necessary to obtain such registration.

 

On August 8, 2006, we filed with the European Patent Office, or EPO, an opposition to European patent No. EP-B-1176981, in which Genentech has an ownership interest with claims directed to the second medical use of an anti-CD20 antibody for the treatment of RA, raising objections as to its validity. Subsequent to the submission of our opposition, other parties filed oppositions to the Genentech patent prior to August 30, 2006, including MedImmune, Inc., Genmab A/S, Centocor, Inc., Glaxo Group Limited, Serono S.A., and Pfizer. On September 11, 2008, we announced that the Opposition Division, or OD, of the EPO had revoked the European patent in its entirety. On February 19, 2009, Genentech and Biogen Idec appealed the decision. Final resolution of the opposition proceeding may take a number of years.

 

 

No matters were submitted for a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2009.

 

 

Market Information for Common Stock

 

Our common stock trades on The Nasdaq Global Market under the symbol “TRBN.”

 

The following table sets forth, for the periods indicated, the range of high and low quarterly closing sales prices of the common stock as quoted on The Nasdaq Global Market:

 

 

Stockholders

 

As of February 26, 2010, there were approximately 35 holders of record of our common stock.

 

Dividend Policy

 

No cash dividends have been paid on the common stock. We currently intend to retain all future income to fund the development and growth of our business and do not anticipate paying any cash dividends in the foreseeable future. In 2008, we entered into a loan and security agreement that may restrict our ability to pay cash dividends.

Stock Performance Graph

 

The graph set forth below compares the cumulative total stockholder return on our common stock between October 18, 2006 (the date of our initial public offering) and December 31, 2009, with the cumulative total return of (i) the Nasdaq Biotechnology Index and (ii) the Nasdaq Stock Market Index, over the same period. This graph assumes the investment of $100 on October 18, 2006 in our common stock, the Nasdaq Biotechnology Index and the Nasdaq Stock Market Index, and assumes the reinvestment of dividends, if any. The graph assumes the initial value of our common stock on October 18, 2006 was the closing sales price of $13.09 per share.

 

The comparisons shown in the graph below are based on historical data. We caution that the stock price performance shown in the graph below is not necessarily indicative of, nor is it intended to forecast, the potential future performance of our common stock. Information used in the graph was obtained from the Nasdaq website, a source believed to be reliable, but we are not responsible for any errors or omissions in such information.

 

 

 

 

Recent Sales of Unregistered Securities

 

In connection with the collaboration agreement, we and Facet entered into a stock purchase agreement, pursuant to which Facet purchased 2,243,649 shares of our common stock for an aggregate purchase price of $10 million, or $4.46 per share. The per share price of $4.46 represents a 35% equity premium over the sixty-day trading average of our common stock on NASDAQ for the trading period ending immediately prior to the execution of the stock purchase agreement.

 

The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and the related notes thereto included in this annual report.

 

 

 

 

 

The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes thereto that appear elsewhere in this annual report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this annual report.

 

Overview

 

We are a biopharmaceutical company creating a pipeline of novel protein therapeutic product candidates to treat autoimmune and inflammatory diseases and cancer. Our mission is to develop a variety of first-in-class and best-in-class product candidates customized in an effort to optimize safety, efficacy, and convenience that we believe may offer improved patient experiences. Our current product development efforts are focused on three proprietary technologies that comprise the expanded foundation for Trubion product development — SMIP^tm protein therapeutics, SCORPION^tm protein therapeutics, and TRU-ADhanCe^tm potency enhancing technology for immunopharmaceuticals. Our current clinical-stage therapeutics target specific antigens on B cells, CD20 and CD37, and are designed using our custom drug assembly technology. In order to fund ongoing development activities and commercialize our products, we will, in some cases, enter into collaboration agreements that would likely include licenses to our technology and arrangements to provide research and development services for others.

 

We were founded as a limited liability company in the state of Washington in March 1999. We converted into a corporation and redomiciled in the state of Delaware in October 2002. To date, we have funded our operations primarily through the sale of equity securities, strategic alliances, equipment financings and interest earned on investments.

 

Product Candidates and Recent Developments

 

Our lead product candidate, TRU-015, which we are developing with our partner Pfizer Inc., or Pfizer, has completed a Phase 2b clinical trial for the treatment of rheumatoid arthritis, or RA. A second Phase 2b (study 2203) clinical trial for RA is under way and enrollment was completed in September 2009. The randomized, parallel, double-blind, placebo-controlled, dose-regimen finding study is evaluating the safety and efficacy of two dosing regimens of TRU-015 administered to patients with active seropositive rheumatoid factor on a background of methotrexate. This study was designed in a way that we believe could be supportive of a registration package with the Food and Drug Administration, or FDA. Pfizer will determine whether to commence a Phase 3 study of TRU-015 for the treatment of RA after reviewing data from the ongoing Phase 2 SBI-087 RA study, in addition to final data from the ongoing Phase 2b TRU-015 (2203) RA study. Patient dosing in the Phase 2 SBI-087 RA study commenced in December 2009 and an interim data review is planned that we believe could occur in late 2010 or early 2011 and final data is anticipated at the end of 2011.

 

In October 2009, we announced positive data from the second course of re-treatment in the first Phase 2b clinical trial for RA demonstrating that administration of TRU-015 every 24 weeks produces well-tolerated results that are comparable with the more than four and a half years of re-treatment data compiled to date.

 

In collaboration with us, Pfizer is also developing SBI-087, our next generation CD20-directed product candidate. SBI-087 for RA builds on our and Pfizer’s clinical experience with TRU-015 and is based on our SMIP technology. Enrollment was completed in a Phase 1 study of SBI-087 for RA. Patient dosing has commenced and recruitment is ongoing in a Phase 2 study of SBI-087 for RA. In addition, patient recruitment is under way in an additional Phase 1 study of SBI-087 for RA in Japan. Finally, Pfizer is conducting a Phase 1 clinical trial of SBI-087 in systemic lupus erythematosus, or SLE, in which patient dosing has commenced and recruitment is ongoing.

 

TRU-016, which we are developing with our partner Facet Biotech Corporation, or Facet, is a novel CD37-directed SMIP protein therapeutic. A TRU-016 Phase 1 clinical trial for patients with chronic

lymphocytic leukemia, or CLL, is currently under way. TRU-016 uses a different mechanism of action than CD20-directed therapies. As a result, we believe its novel design may provide patients with improved therapeutic options and enhance efficacy when used alone or in combination with chemotherapy and/or CD20-directed therapeutics.

 

In June and December 2009, we announced positive results following each of two preliminary analysis from the Phase 1 clinical trial of TRU-016 for the treatment of CLL. The objectives of the Phase 1 TRU-016 CLL study were to define safety and tolerability, identify a maximum tolerated dose, evaluate pharmacology and pharmacodynamics, and assess preliminary clinical activity. As of February 2010, we have not reached a maximum tolerated dose and have filed an amendment to include treatment of patients with non-Hodgkins lymphoma, or NHL.

 

Collaborations

 

Facet

 

In August 2009, we entered into a collaboration agreement with Facet for the joint worldwide development and commercialization of TRU-016, a product candidate in Phase 1 clinical development for chronic lymphocytic leukemia, or CLL. TRU-016 is a CD37-directed SMIP protein therapeutic. The collaboration agreement includes TRU-016 in all indications and all other CD37-directed protein therapeutics. Under the terms of the collaboration agreement, the parties will not develop or commercialize protein therapeutics directed to CD37 outside of the collaboration agreement.

 

We received an up-front payment of $20 million in cash in September 2009 and may receive up to $176.5 million in additional contingent payments upon the achievement of specified development, regulatory and sales milestones. We and Facet share equally the costs of all development, commercialization and promotional activities and all global operating profits. In connection with the collaboration agreement, we and Facet also entered into a stock purchase agreement, pursuant to which Facet purchased 2,243,649 shares of our common stock for an aggregate purchase price of $10 million, or $4.46 per share. The per share price of $4.46 represents a 35% equity premium over the sixty-day trading average of our common stock on NASDAQ for the trading period ending immediately prior to the execution of the stock purchase agreement.

 

With respect to control over decisions and responsibilities, the collaboration agreement provides for a joint steering committee, or JSC, consisting of representatives of Trubion and Facet, which makes decisions by consensus. If the JSC is unable to reach a consensus, then the matter will be referred to Trubion’s and Facet’s Chief Executive Officers for resolution. If the Chief Executive Officers are unable to resolve the matter, then it will be resolved by arbitration. Both Trubion and Facet, at their sole discretion, may discontinue participation on the JSC with 90 days written notice to the other party.

 

At predefined times, the parties have the right to opt-out of the collaboration entirely or on a product-by-product basis. Upon a change of control of a party, the other party will have the right to opt-out of the collaboration entirely and if the successor party is conducting a program that competes with the programs under the collaboration agreement, then the successor party must either (i) opt-out of the collaboration entirely or (ii) divest the competing program to a third party. If a party exercises its opt-out right with respect to a product, then the parties will no longer share development and commercialization costs for such product and such opting-out party will receive certain royalty payments upon the sale of such product, rather than half of the profits derived from such product. Even if Facet exercises its opt-out right, its obligation to make milestone payments to us continues. In addition, if the party that opts-out is the lead manufacturing party for the opt-out product, then such party must continue to supply the product to the continuing party for up to eighteen months following the opt-out.

 

Facet can terminate the collaboration agreement at any time, in which event all rights to TRU-016 and other CD37-directed protein therapeutics under the collaboration agreement would revert to us. If Facet terminates the collaboration agreement in the first 18 months, then Facet must pay us a $10 million termination fee.

If there is a material breach of the collaboration agreement, then the non-breaching party may either terminate the collaboration agreement or continue the collaboration agreement and force the breaching party to opt-out and accept royalties at a reduced rate.

 

Either party may assign its interest in the collaboration agreement to a third party, provided that the non-assigning party maintains a right of first negotiation over any proposed assignment. In addition, either we or Facet can freely assign the collaboration agreement without the consent of the other party in connection with certain specified change of control transactions, such as an acquisition.

 

Pfizer

 

In December 2005 we entered into a collaboration agreement with Wyeth, now a wholly-owned subsidiary of Pfizer, for the development and worldwide commercialization of TRU-015 and other CD20-directed therapeutics. Pursuant to the agreement, we are also collaborating with Pfizer on the development and worldwide commercialization of certain other product candidates directed to a small number of targets other than CD20. During the period in which we will be providing research services for Pfizer, Pfizer has the right, subject to our reasonable consent, to replace a limited number of these targets. In addition, we have the option to co-promote with Pfizer, on customary terms to be agreed, CD20-directed therapies in the United States for niche indications. We retain the right to develop and commercialize, on our own or with others, product candidates directed to all targets not included within the agreement. Unless it is terminated earlier, our agreement with Pfizer will remain in effect on a product-by-product basis and on a country-by-country basis until the later of the date that any such product shall no longer be covered by a valid claim of a U.S. or foreign patent or application and, generally, ten years after the first commercial sale of any product licensed under the agreement. Pfizer may terminate the agreement without cause at any time upon 90 days’ prior written notice.

 

In connection with the agreement, Wyeth paid us a $40 million non-refundable, non-creditable, up-front fee in January 2006 and purchased directly from us in a private placement, concurrent with our initial public offering, 800,000 shares of our common stock at the initial public offering price of $13.00 per share, resulting in net proceeds to us of $10.4 million. Under the agreement, we provided research services for an initial three-year period ended December 22, 2008 with the option for Wyeth to extend the service period for two additional one-year periods. Wyeth’s financial obligations during the initial research service term included collaborative research funding commitments of $9.0 million in exchange for such committed research services. This $9.0 million was subject to an increase if the service period was extended beyond three years as well as annual increases pursuant to percentage changes in the CPI. In June 2008, Wyeth exercised the first option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2009. In June 2009, Wyeth exercised the second option under the terms of the agreement to extend the research period for an additional one-year period through December 22, 2010. Due to the research period extension in 2009, the collaboration research funding commitments to us initially from Wyeth and now from Pfizer, increased to approximately $3.3 million per year in exchange for committed research services from us through December 22, 2010.

 

Pfizer’s financial obligations include additional amounts for reimbursement of agreed-upon external research and development costs and patent costs. Pursuant to the agreement, Pfizer is also obligated to make payments to us of up to $250 million based on the achievement of specified regulatory and sales milestones for CD20-directed therapies and payments to us of up to $535 million based on the specified achievement of regulatory and sales milestones for therapies directed to the small number of targets other than CD20. In addition, we will receive royalty payments in the event of future licensed product sales. Pfizer may terminate the agreement without cause at any time upon 90 days’ prior written notice.

 

In October 2009, Pfizer completed its acquisition of Wyeth. Our collaboration agreement remains in effect with Pfizer and, as allowed under the collaboration agreement, we requested and Pfizer has provided further written assurances reaffirming Pfizer’s commitment to comply with the terms and conditions of the agreement.

If Pfizer has ongoing development and/or commercialization activities that would violate the mutual exclusivity provisions of the collaboration agreement, we have the right to require Pfizer to engage in good faith discussions regarding the terms and conditions on which Pfizer would pay reasonable financial consideration to us with respect to those development and commercialization activities. If we and Pfizer do not agree to terms, we have the right to require Pfizer to enter into an agreement to divest such development and commercialization activities, or to divest the relevant collaboration agreement products to a third party. If Pfizer does not divest such development and commercialization activities or such collaboration agreement products, we have the right to terminate all licenses related to CD20 and/or the additional specified target, as applicable.

 

If during the 12 month period following Pfizer’s acquisition of Wyeth, Pfizer is required or voluntarily decides to divest itself of one or more of the products under the collaboration agreement, then subject to any governmental limitations, Pfizer must offer us an exclusive opportunity to negotiate the acquisition or license of all of Pfizer’s rights to that product on commercially reasonable terms. If we do not conclude an agreement with Pfizer covering the product, Pfizer can divest itself of the product but the terms of that divestiture cannot be more favorable than those that were last offered to us unless we are given the opportunity to accept those more favorable terms.

 

Upon a change of control of Trubion, the agreement would remain in effect, subject to the right of Pfizer to terminate specified provisions of the agreement.

 

Assuming TRU-015 and other product candidates under the collaboration with Pfizer continue to progress in development, expenses for future clinical trials may be higher than those incurred in prior clinical trials. These expenses will, however, likely be incurred by Pfizer and expenses incurred by us, if any, will be substantially offset by reimbursement revenue from Pfizer. In addition, Pfizer is responsible for a substantial portion of costs related to patent prosecution and patent litigation for products directed to targets selected by Pfizer pursuant to the collaboration agreement.

 

Outlook

 

The continued research and development of our product candidates will require significant additional expenditures, including preclinical studies, clinical trials, manufacturing costs, and the expenses of seeking regulatory approval. We rely on third parties to conduct a portion of our preclinical studies, all of our clinical trials and all of the manufacturing of current Good Manufacturing Process, or cGMP material. We expect expenditures associated with these activities to increase in future years as we continue developing our product candidates. Expenses associated with our product candidates included in the Pfizer collaboration are substantially offset by reimbursement revenue from Pfizer. Expenses associated with our product candidates included in the Facet collaboration are shared equally.

 

We have incurred significant losses since our inception. As of December 31, 2009, our accumulated deficit was $121.7 million and total stockholders’ equity was $15.1 million. During the years ended December 31, 2009, 2008 and 2007, we recognized net losses of $29.2 million, $25.6 million and $23.3 million, respectively. We expect our net losses to increase in the future as we continue our existing and anticipated preclinical studies, manufacturing, and clinical trials. Our revenues and research and development expenses under the Facet collaboration may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period. However, we expect revenue to increase in the future as a result of the additional collaboration revenue from our Facet collaboration. This increase in revenue from the Facet collaboration will be partially offset by decreases in revenue from Pfizer due to the transfer to Pfizer of the responsibility for the majority of the clinical development efforts and related costs for product candidates covered by our collaboration agreement with Pfizer.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of

assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. An accounting policy is considered to be critical if it is important to a company’s financial condition and results of operations, and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed our related disclosures in this annual report on Form 10-K. Although we believe our judgments and estimates are appropriate, actual results may differ from those estimates.

 

Our significant accounting policies are described in Note 1 to our audited financial statements for the year ended December 31, 2009 in this annual report on Form 10-K. Of our significant accounting policies, we believe that the following accounting policies relating to revenue recognition, preclinical study, clinical trial and manufacturing accruals, stock-based compensation and valuation of investments are the most critical to understanding and evaluating our reported financial results.

 

Revenue Recognition

 

We recognize revenue from our collaboration agreements with Pfizer and Facet, which consists of non-refundable, non-creditable up-front fees and license fees, collaborative research funding, regulatory and sales milestones future product royalties and future product sales. Revenue related to our collaboration agreements is recognized as follows:

 

Up-Front Fees and License Fee.  Non-refundable, non-creditable up-front fees and license fees received in connection with collaborative research and development agreements are deferred and recognized on a straight-line basis over the estimated term of the research and development service period. The estimated term of the research and development service period is reviewed and adjusted based on the status of the project against the estimated timeline as additional information becomes available. We also consider the time frame of our substantive contractual obligations related to research and development agreements when estimating the term of the research and development period. For each collaboration agreement, we review our ongoing performance obligations on a regular basis and make adjustments to the estimated term as additional information becomes available. During the third quarter of 2008, the estimated term of the research and development service period related to the Pfizer agreement was adjusted from six years and three months to seven years, or through December 2012, due to an extension of the estimated service period of our obligations to conduct clinical activities under our agreement with Pfizer. The adjustment during the third quarter of 2008 was the second adjustment to the estimated research and development service period since the inception of the collaboration agreement with Pfizer. Adjustments to the research and development service period are made prospectively. We have made adjustments to the research and development service periods in the past and we expect to revise our estimate of the development term in future periods due to the inherently uncertain nature of development terms. As a result, revenue may fluctuate materially in the future due to adjustments to the estimated term of the research and development service periods and our substantive contractual obligations under our collaborations.

 

Collaborative Research Funding.  Certain internal and external research and development costs and patent costs are reimbursed in connection with our collaboration agreements. Reimbursed costs under the Pfizer collaboration are recognized as revenue in the same period the costs are incurred. With respect to the reimbursement of development costs under the Facet collaboration, each quarter, we and Facet reconcile what each party has incurred for development costs, and we record either a net receivable or a net payable in our financial statements. For each quarterly period, if we have a net receivable from Facet, we recognize revenues by such amount, and if we have a net payable to Facet, we recognize additional research and development expenses by such amount. As a result, our revenues and research and development expenses may fluctuate depending on which party in the collaboration is incurring the majority of the development costs in any particular quarterly period. Reimbursed costs are subject to the estimation processes described in the preclinical study, clinical trial and manufacturing accruals processes

described below and are subject to change in future periods when actual activity is known. To date we have not made any material adjustments to these estimates.

 

Milestones.  Payments for milestones that are based on the achievement of substantive and at-risk performance criteria will be recognized in full at such time as the specified milestone has been achieved according to the terms of the agreement. When payments are not for substantive or at-risk milestones, revenue will be recognized on a straight-line basis over the remaining estimated term of the research and development service period. The estimated term of the research and development service period is reviewed and adjusted based on the status of the project against the estimated timeline as additional information becomes available.

 

Preclinical Study, Clinical Trial and Manufacturing Accruals

 

We estimate our preclinical study, clinical trial and manufacturing accrued expenses based on our estimates of the services received pursuant to contracts with multiple research organizations and contract manufacturers that conduct, manage, and provide materials for preclinical studies and clinical trials on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Research and development costs are expensed as the related goods are delivered or the related services are performed. Our preclinical study, clinical trial and manufacturing expenses include fees paid to the following:

 

 

We record accruals for these preclinical studies, clinical trial and manufacturing expenses based on the estimated amount of work completed. All such costs are included in research and development expenses based on these estimates. Costs of setting up a preclinical study or clinical trial are expensed as the related services are performed. Costs related to patient enrollment in clinical trials are accrued as patients are enrolled in the trial. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussions with research organizations. If we have incomplete or inaccurate information, we may, however, underestimate or overestimate activity levels associated with various preclinical studies and clinical trials at a given point in time. In the event we underestimate, we could record significant research and development expenses in future periods when the actual activity level becomes known. To the extent any of these expenses are reimbursable under our collaboration agreements with Pfizer or Facet, we could also record significant adjustments to revenue when the actual activity becomes known. To date, we have not made any material adjustments to our estimates of preclinical study, clinical trial and manufacturing expenses. We make good-faith estimates that we believe to be accurate, but the actual costs and timing of preclinical studies, clinical trials and manufacturing runs are highly uncertain, subject to risks, and may change depending on a number of factors, including our clinical development plan. If any of our product candidates enter Phase 3 clinical trials, the process of estimating clinical trial costs will become more difficult because the trials will involve larger numbers of patients and clinical sites.

 

Stock-Based Compensation

 

We account for stock-based compensation for employees and directors based on estimated fair values. Employee stock-based compensation expense recognized in the years ended December 31, 2009, 2008 and 2007 was calculated based on awards ultimately expected to vest, and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The forfeiture estimate is based on historical employee turnover rates and could differ from actual forfeitures. Compensation costs for employee stock options granted prior to January 1, 2006 were accounted for using the option’s intrinsic value or the difference, if any, between the fair market value of our common stock and the exercise price of the option.

The fair value of each employee option grant in the years ended December 31, 2009, 2008 and 2007, respectively, was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

 

For stock options granted to non-employees, the fair value of the stock options is estimated using the Black-Scholes valuation model. The Black-Scholes model utilizes the estimated fair value of common stock and requires that, at the date of grant, we make assumptions with respect to the expected life of the option, the volatility of the fair value of the underlying common stock, risk-free interest rates and expected dividend yields of our common stock. We have assumed that non-employee stock options have an expected life of one to ten years and assumed common stock volatility between 65% and 105%.

 

Stock-based compensation expense is recognized over the period of expected service by the non-employee. As the service is performed, we are required to update our valuation assumptions, remeasure unvested options and record the stock-based compensation using the valuation as of the vesting date. These adjustments may result in higher or lower stock-based compensation expense in the statement of operations than originally estimated. Changes in the market price of our stock could materially change the value of an option and the resulting stock-based compensation expense. We expect stock-based compensation expense associated with non-employee options to fluctuate in the future based on the volatility of our future stock price.

 

Valuation of Investments

 

We classify our investment portfolio as available-for-sale. The cost of securities sold is based on the specific identification method. We carry our investments in debt securities at fair value, estimated as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. In accordance with our investment policy, we diversify our credit risk and invest in debt securities with high credit quality. The majority of our investments held as of December 31, 2009 are in active markets and our estimate of fair value is based upon quoted market prices. The remainder of our investments held as of December 31, 2009 are valued using observable inputs. We regularly evaluate the performance of our investments individually for impairment, taking into consideration the investment, volatility and current returns. If a determination is made that a decline in fair value is other-than-temporary, the related investment is written down to its estimated fair value. To date, the carrying values of our investments have not been written down due to declines in value because such declines are judged to be temporary. Declines in the fair value of our investments judged to be other than temporary could adversely affect our future operating results. We continue to monitor our credit risks and evaluate the potential need for impairment charges related to credit risks in future periods.

 

Recent Accounting Pronouncements

 

In October 2009, the FASB issued new guidance for multiple-deliverable revenue arrangements. The new guidance addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly

expands required disclosures related to a vendor’s multiple-deliverable revenue arrangements. We expect to adopt this guidance on January 1, 2011 and it will be applied prospectively for revenue arrangements entered into or materially modified after the date of adoption. We are evaluating the impact this guidance will have on our financial position, results of operations, cash flows and disclosures.

 

Results of Operations for the Years Ended December 31, 2009, 2008 and 2007

 

Revenue

 

Revenue recognized under our collaboration agreements for the years ended December 31, 2009, 2008 and 2007 was as follows (in thousands):

 

 

Revenue increased to $18.0 million in 2009 from $16.5 million in 2008. Revenue was $20.1 million in 2007. The increase in 2009 compared to 2008 was due to revenue recognized from our Facet collaboration of $2.1 million. The $2.1 million is comprised of $0.8 million for recognition of the $20 million up-front fee and $1.4 million equity premium and $1.3 million for collaborative research funding. The increase in revenue related to our Facet collaboration was partially offset by lower revenue recognized from our Pfizer collaboration due to an extension of the recognition period of the up-front fee and lower reimbursement revenue due to lower costs related to the Phase 2b clinical trial for TRU-015 in the treatment of RA. Revenue from our Pfizer collaboration for the year ended December 31, 2009 was comprised of $11.0 million for collaborative research funding and $4.9 million for recognition of the $40 million up-front fee.

 

The decrease in 2008 compared to 2007 was due to a decrease in reimbursement revenue from our Pfizer collaboration related to the Phase 2b clinical trial for TRU-015 in the treatment of RA, an extension of the recognition of the up-front fee and a decline in reimbursable legal costs. Revenue for the year ended December 31, 2008 was comprised of $11.1 million for Pfizer collaborative research funding and $5.4 million for recognition of the $40 million Pfizer up-front fee.

 

The Pfizer and Facet up-front fees are being deferred and recognized on a straight-line basis over the estimated term of the research and development service periods. The Pfizer estimated service period is through 2012 and the Facet estimated service period is through 2018. Reimbursement revenue is expected to fluctuate in the future due to the timing of reimbursed development and legal costs, and the recognition of the associated collaborative research revenue under our collaboration agreements. However, we expect revenue to increase in the future as a result of the additional collaboration revenue from our Facet collaboration. This increase in revenue from the Facet collaboration will be partially offset by decreases in revenue from Pfizer due to the transfer to Pfizer of the responsibility for the majority of the clinical development efforts and related costs for product candidates covered by our collaboration agreement with Pfizer. Our actual revenue, however, could differ materially from anticipated revenue.

 

Research and Development Expenses

 

Research and development expenses increased to $34.4 million from $31.6 million in 2008. Research and development expenses were $36.5 million in 2007. The increase in 2009 compared to 2008 was primarily due to higher outside manufacturing and clinical development costs related to our TRU-016 product candidate, partially offset by decreased lab expense and personnel costs. In connection with the restructuring in February 2009, we incurred a $0.8 million charge in the first quarter of 2009 related to employee severance, benefits and outplacement services, $0.6 million of which was classified as research and development expense.

 

The decrease in 2008 compared to 2007 was primarily due to decreased outside manufacturing costs related to our TRU-016 product candidate, decreased clinical costs related to our Phase 2b clinical trial for TRU-015 and decreased costs for lab expenses for TRU-016. We expect research and development expenses to

increase in the future due to additional clinical trials and manufacturing expenses associated with TRU-016 development and increases in preclinical research. These costs may fluctuate depending on which party in the Facet collaboration is incurring the majority of the development costs in any particular period. Our actual research and development expenses could differ materially from those anticipated.

 

At any time, we have many ongoing research projects. Our internal resources, employees and infrastructure are not directly tied to any individual research project and are typically deployed across multiple projects. Through our clinical development programs, we are developing each of our product candidates in parallel for multiple disease indications, and through our basic research activities, we are seeking to design potential drug candidates for multiple new disease indications. Due to the number of ongoing projects and our ability to utilize resources across several projects, we do not record or maintain information regarding the costs incurred for our research and development programs on a program-specific basis. In addition, we believe that allocating costs on the basis of time incurred by our employees does not accurately reflect the actual costs of a project.

 

Our research and development activities can be divided into research and preclinical programs and clinical development programs. The costs associated with research and preclinical programs and clinical development programs approximate the following (in thousands):

 

 

Research and preclinical program costs consist of costs associated with our product development efforts, conducting preclinical studies, personnel costs, lab expenses and indirect costs such as rent, utilities and depreciation. Research and preclinical program costs decreased in 2009 compared to 2008 due to decreased lab expense and personnel costs as a result of the restructuring in February 2009. Research and preclinical program costs decreased in 2008 compared to 2007 due to decreased lab expenses for TRU-016 as this program moved from a preclinical program to a clinical program.

 

Clinical development costs consist of direct expenses such as clinical manufacturing costs, clinical trial site and investigator fees. Indirect costs include items such as personnel costs, rent, utilities and depreciation. Costs for TRU-015 decreased in 2009 compared to 2008 and 2007 due to lower costs related to the Phase 2b clinical trial for TRU-015 in the treatment of RA. Costs for TRU-016 increased in 2009 compared to 2008 due to increased manufacturing costs and clinical development costs. Costs for TRU-016 decreased in 2008 compared to 2007 due to decreased outside manufacturing costs and decreased lab supplies. Costs for SBI-087 are incurred by our partner, Pfizer, and as such are not included in the table above.

 

The majority of our research and development programs are at an early stage and may not result in any approved products. Product candidates that may appear promising at early stages of development may not reach the market for a variety of reasons. Product candidates may be found to be ineffective or to cause harmful side effects during clinical trials, may take longer to pass through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals and may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality. As part of our business strategy, we may enter into collaborative arrangements with third parties to complete the development and commercialization of our product candidates and it is uncertain which of our product candidates may be subject to future collaborative arrangements. The participation of a collaborative partner may accelerate the time to completion and reduce the cost to us of a product candidate or it may delay the time to completion and increase the cost to us due to the alteration of our existing strategy.

As a result of the uncertainties discussed above, the uncertainty associated with clinical trial enrollments, and the risks inherent in the development process, we are unable to determine the duration and completion costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenue from the commercialization and sale of any of our product candidates. Development timelines, probability of success and development costs vary widely. Under our collaboration with Pfizer, we are responsible for completing the Phase 2a and 2b clinical retreatment trials of TRU-015 for RA. In addition, we are responsible for conducting clinical studies for TRU-015 niche indications. Under our collaboration agreement with Facet, we are the lead party responsible for the ongoing clinical trial for patients with CLL, manufacturing activities, and regulatory activities. While we are currently focused on developing TRU-015, SBI-087 and other preclinical product candidates with Pfizer and our TRU-016 product candidate with Facet, together with other SMIP^tm product candidates that are outside of our collaborations, we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidate’s commercial potential and value to potential partners. In addition, due to the limited availability of capital we may not be able to fund programs adequately, or at all. We anticipate developing additional product candidates, which will also increase our research and development expenses in future periods. We do not expect any of our current product candidates to be commercially available in major markets before 2014, if at all.

 

General and Administrative Expenses

 

General and administrative expenses increased to $12.4 million in 2009 from $11.4 million in 2008. General and administrative expenses were $10.8 million in 2007. The increase in 2009 compared to 2008 was primarily due to charges associated with the resignation of our former CEO, partially offset by lower personnel-related costs as a result of the restructuring in February 2009. In connection with the restructuring in February 2009, we incurred a $0.8 million charge in the first quarter of 2009 related to employee severance, benefits and outplacement services, $0.2 million of which was classified as general and administrative expense. The increase in 2008 compared to 2007 was primarily due to increased consulting and outside service fees and increased non-cash stock-based compensation expense partially offset by decreased fees related to filings for the protection of our intellectual property. We expect our general and administrative expenses to remain relatively stable in the future. Our actual general and administrative expenses could differ materially from those anticipated.

 

Net Interest Income (Expense)

 

Net interest income (expense) decreased to an expense of $0.4 million in 2009 from a gain of $1.0 million in 2008 and a gain of $3.8 million in 2007. The decreases were the result of a decline in interest rates and a decrease in our average cash and investment balance We expect net interest expense to increase in the near future as a result of lower interest income from a declining cash balance and low interest rates that are not great enough to exceed interest expense on our debt.

 

Income Taxes

 

Since inception, we have incurred operating losses and, accordingly, have not recorded a provision for income taxes for any of the periods presented. As of December 31, 2009, we had net operating loss carry forwards for federal income tax purposes of $64.2 million. We also had federal research and development tax credit carry forwards of $2.7 million. If not utilized, the net operating loss and tax credit carry forwards will expire between 2021 and 2029.

 

Liquidity and Capital Resources

 

As of December 31, 2009, we had $54.8 million in cash, cash equivalents and investments. We have received the majority of our funding from the issuance of common stock, proceeds from our collaboration agreements, asset-based lease financings and interest earned on investments. Our cash and investment balances are held in a variety of interest bearing instruments, including obligations of United States government

agencies, high credit rating corporate borrowers, and money market accounts. We do not hold auction rate securities within our investment portfolio and as of December 31, 2009 we did not hold any corporate securities. Cash in excess of immediate requirements is invested with regard to liquidity and capital preservation.

 

Operating Activities.  Net cash used in operating activities was $5.1 million, $23.9 million and $26.4 million for the years ended December 31, 2009, 2008 and 2007, respectively. Net cash used in operations during 2009 was due to personnel-related costs, clinical trial costs, manufacturing costs, legal and professional fees, facilities costs, lab supplies to support our research activities and administrative costs, partially offset by up-front fees received under the Facet collaboration. Net cash used in operations during 2008 was primarily used for personnel-related costs, clinical trial costs, legal and professional fees, lab supplies to support our research activities, facilities costs and administrative costs. We expect net cash used in operations to increase in the future as we continue to expand our clinical activities.

 

Investing Activities.  Net cash used in investing activities was $9.9 million in the year ended December 31, 2009. Net cash provided by investing activities was $12.4 million and $9.1 million for the years ended December 31, 2008 and 2007. Investing activities consist primarily of purchases, sales and maturities of marketable securities and capital purchases. Our purchases of securities increased during 2009 as a result of the $30.0 million in cash provided to us as part of the collaboration agreement with Facet. Additionally, we had lower maturities in 2009 as a result of a lower average cash and investment balance. Purchases of property and equipment were $85,000, $1.3 million and $3.8 million in the years ended December 31, 2009, 2008 and 2007, respectively.

 

Financing Activities.  Net cash provided by financing activities was $7.4 million in the year ended December 31, 2009 compared to net cash used in financing activities of $373,000 in the year ended December 31, 2008. Net cash provided by financing activities was $2.7 million in the year ended December 31, 2007. In 2009 financing activities consisted primarily of a private placement of common stock to Facet of $8.6 million and payments on an equipment financing arrangement of $1.3 million. In 2008, financing activities consisted primarily of $10.0 million in proceeds under a new debt facility, offset by $9.5 million in payments against pre-existing equipment financing arrangements and $900,000 in other debt payments. In 2007, financing activities consisted primarily of net proceeds from an equipment financing arrangement of $2.2 million.

 

We entered into a loan and security agreement with Silicon Valley Bank, or SVB, effective July 25, 2008, the terms of which provide for a $10.0 million debt facility secured by a security interest in our assets, other than intellectual property, and used $8.5 million of the proceeds from this debt facility to fully extinguish our obligations with Comerica Bank, or Comerica, under our existing debt facility. In conjunction with extinguishing our obligations under the Comerica debt facility, we also terminated the Comerica loan and security agreement and related interest rate swap agreement. We incurred a fee of $165,000 in connection with the termination of the interest rate swap agreement, which is included in interest expense in the statements of operations for the year ended December 31, 2008. The full $10.0 million available under the SVB facility was drawn at closing and is payable in fixed equal payments of principal plus accrued interest at a fixed rate of 5.75% based on an 84-month amortization schedule with all principal and interest due July 25, 2013. As of December 31, 2009, $8.3 million was outstanding under the SVB loan and security agreement.

 

The loan and security agreement with SVB contains representations and warranties and affirmative and negative covenants that are customary for credit facilities of this type. The debt covenants in place by the loan and security agreement with SVB require us to maintain a liquidity coverage of at least 1.5:1 and remaining months liquidity of at least 3:1. We were in compliance with all covenants under the loan and security agreement as of December 31, 2009. The loan and security agreement could restrict our ability to, among other things, sell certain assets, engage in a merger or change in control transaction, incur debt, pay cash dividends, and make investments. The loan and security agreement also contains events of default that are customary for credit facilities of this type, including payment defaults, covenant defaults, insolvency type defaults, and events of default relating to liens, judgments, material misrepresentations, and the occurrence of certain material adverse events. In addition, the loan and security agreement with SVB contains a material

adverse change clause which may accelerate the maturity of the loan upon the occurrence of certain events. We have no indication that we are in default of the material adverse change clause and no scheduled loan payments have accelerated as a result of this provision.

 

Based on our current operating plans, we believe that our existing capital resources, together with interest thereon, will be sufficient to meet our financial obligations for at least the next 18 months. The key assumption underlying this estimate is that expenditures related to continued preclinical, manufacturing, and clinical development of our product candidates during this period will be within budgeted levels.

 

Our forecast of the period of time that our financial resources will be adequate to support operations is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed in the section of Item 1A entitled “Risk Factors.” In light of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we enter into collaborations with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with product development. Our future funding requirements will depend on many factors, including:

 

 

We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, if at all. The capital markets have been experiencing extreme volatility and disruption. The scope and extent of this disruption in the capital markets could make it difficult or impossible to raise additional capital in public or private capital markets until conditions stabilize. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back, or eliminate some or all of our development programs and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships, or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business and operating results.

Our future contractual obligations as of December 31, 2009 were as follows (in thousands):

 

 

Off-Balance Sheet Arrangements

 

Since inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

 

 

Our exposure to market risk is primarily confined to our investment securities. The primary objective of our investment activities is to preserve our capital to fund operations. We also seek to maximize income from our investments without assuming significant risk. To achieve our objectives, we maintain a portfolio of investments in a variety of securities of high credit quality. As of December 31, 2009 our portfolio of investments consisted of money market accounts and United States treasury securities. We have no exposure to auction rate securities within our investment portfolio. The securities in our investment portfolio are not leveraged, are classified as available for sale and, due to their short-term nature, are subject to minimal interest rate risk. We currently do not hedge interest rate exposure on our investment securities. We actively monitor changes in interest rates.

 

We are exposed to potential loss due to changes in interest rates. Our principal interest rate exposure is to changes in U.S. interest rates related to our investment securities. To estimate the potential loss due to changes in interest rates, we performed a sensitivity analysis using the instantaneous adverse change in interest rates of 100 basis points across the yield curve. On this basis, we estimate the potential loss in fair value that would result from a hypothetical 1% (100 basis points) increase in interest rates to be $86,000 and $47,000 as of December 31, 2009 and 2008, respectively.

 

 

Our financial statements, together with related notes, are listed in Item 15(a) and included herein beginning on page 57.

 

 

None.

 

 

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this annual report, we carried out an evaluation under the supervision and with the participation of our management, including our Executive Chairman and Acting President and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rules 13a — 15 (e) and 15d — 15 (e). Based on this evaluation, our Executive Chairman and Acting President and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report, the disclosure controls and procedures were effective.

 

Internal Control Over Financial Reporting.  Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance

regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on the results of this assessment and on those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2009.

 

The effectiveness of the our internal control over financial reporting as of December 31, 2009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report that appears herein.

 

There was no change in our internal control over financial reporting during our last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

 

The Board of Directors and Stockholders

Trubion Pharmaceuticals, Inc.

 

We have audited Trubion Pharmaceuticals, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Trubion Pharmaceuticals Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Trubion Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2009 financial statements of Trubion Pharmaceuticals, Inc. and our report dated March 15, 2010 expressed an unqualified opinion thereon.

 

 

Seattle, Washington

March 15, 2010

 

None.

 

 

The information required by this Item is contained in part in the sections captioned “Board of Directors,” “Summary of Trubion’s Corporate Governance Guidelines,” “Committees of the Board of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement for Trubion’s Annual Meeting of Stockholders scheduled to be held on or around May 26, 2010, and such information is incorporated herein by reference.

 

 

The information required by this Item is contained in the section captioned “Executive Compensation,” “2009 Director Compensation” and “Committee of the Board of Directors — Compensation Committee Matters — Compensation Committee Interlocks and Insider Participation” of the proxy statement for Trubion’s Annual Meeting of Stockholders scheduled to be held on or around May 26, 2010, and such information is incorporated herein by reference.

 

 

The information required by this Item is contained in part in the sections captioned “Voting Securities and Principal Holders” and “Other Matters — Securities Authorized for Issuance under Equity Compensation Plans” in the proxy statement for Trubion’s Annual Meeting of Stockholders scheduled to be held on or around May 26, 2010, and such information is incorporated herein by reference.

 

 

The information required by this Item is contained in the sections captioned “Transactions with Related Persons” and “Summary of Trubion’s Corporate Governance Guidelines” of the proxy statement for Trubion’s Annual Meeting of Stockholders scheduled to be held on or around May 26, 2010, and such information is incorporated herein by reference.

 

 

The information required by this Item is contained in the section captioned “Audit Committee Matters — Independent Auditor Fees” of the proxy statement for Trubion’s Annual Meeting of Stockholders scheduled to be held on or around May 26, 2010, and such information is incorporated herein by reference.

 

 

(a) 1.  Financial Statements

 

The financial statements required by this item are included herein:

 

 

(a) 2.  Financial Statement Schedules

 

None.

 

(a) 3.  Exhibits

 

 

 

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the city of Seattle, state of Washington, on March 15, 2010.

 

TRUBION PHARMACEUTICALS, INC.

 

Steven Gillis, Ph.D.

Executive Chairman and

Acting President

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michelle Burris and Kathleen Deeley, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place, and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their and her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.

 

 

The Board of Directors and Stockholders

Trubion Pharmaceuticals, Inc.

 

We have audited the accompanying balance sheets of Trubion Pharmaceuticals, Inc. as of December 31, 2009 and 2008, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trubion Pharmaceuticals, Inc. at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 

As discussed in Note 1 to the financial statements, the Company adopted the guidance related to the accounting for nonrefundable advance payments for goods or services received for use in future research and development activities as of January 1, 2008.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

Seattle, Washington

March 15, 2010

TRUBION PHARMACEUTICALS, INC.

 

BALANCE SHEETS

 

 

See accompanying notes

TRUBION PHARMACEUTICALS, INC.

 

STATEMENTS OF OPERATIONS

 

 

See accompanying notes

 

TRUBION PHARMACEUTICALS, INC.

 

STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

See accompanying notes

 

TRUBION PHARMACEUTICALS, INC.

 

STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)