Our company is focused on the discovery, development, manufacture and commercialization of therapeutic proteins for the treatment of human diseases. Our current therapeutic focus is in the areas of hemostasis, inflammatory and autoimmune diseases, cancer and viral infections. Our most advanced internal product candidate, rhThrombin, which is being developed as a replacement for plasma-derived hemostatic products, has completed Phase 3 testing and is currently under regulatory review in the United States. In addition to rhThrombin, our development pipeline of novel proteins, which we identified using our genomics-based discovery platform and are developing on our own or in collaboration with partners, continues to expand and mature. We have established strong discovery, development and clinical manufacturing capabilities and continue enhancing our commercial capabilities as we advance our product candidates toward the market. Our most advanced product candidates are:
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rhThrombin . Recombinant human thrombin (rhThrombin) is being developed as a topical hemostatic agent intended for the control of moderate bleeding during surgical procedures. It is a recombinant version of a blood-clotting protein that is currently marketed in the United States as a stand-alone product in a form derived from bovine (cow) plasma. Our goal is to provide an effective and safer alternative to plasma-derived thrombin products, building on our established expertise in recombinant protein production methods. We completed a pivotal Phase 3 clinical trial of rhThrombin in four surgical indications in September 2006 and filed a biologics license application (BLA) with the U.S. Food and Drug Administration (FDA) in December 2006. We are currently focused on building our commercial infrastructure and establishing a rhThrombin sales force to be ready for U.S. launch in late 2007.
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Atacicept (formerly known as TACI-Ig). Atacicept is a soluble receptor with potential applications for the treatment of cancer and autoimmune diseases. It is being developed in collaboration with Merck Serono S.A. (formerly Serono S.A.), an affiliate of Merck KGaA, Darmstadt, Germany. In December 2006, we initiated a Phase 2 clinical trial of atacicept in patients with rheumatoid arthritis. We plan to initiate Phase 2/3 clinical studies suitable for registration of atacicept in patients with systemic lupus
erythematosus in the second half of 2007. We also expect to begin development of atacicept in multiple sclerosis before the end of 2007. Our Phase 1 program in B-cell malignancies is near completion, with results from clinical trials in non-Hodgkin’s lymphoma and multiple myeloma announced in December 2006 and results from the dose-escalation portion of the chronic lymphocytic leukemia clinical trial expected in the first half of 2007.
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IL-21 . Interleukin-21 (IL-21) is a cytokine with potential applications for the treatment of cancer. We have retained all rights to IL-21 in North America and Novo Nordisk A/S has rights in the rest of the world. Under a data sharing and cross-license agreement between the two companies, a global development plan has been recently established to coordinate clinical development activities for IL-21. Novo Nordisk initiated a Phase 2 clinical trial in Australia in July 2006 and we plan to initiate a higher dose Phase 2 clinical trial in North America in 2007 to test IL-21 as a single agent in patients with metastatic melanoma. In October 2006, we initiated a Phase 1/2 clinical trial to test IL-21 in combination with the tyrosine kinase inhibitor Nexavar ® (a product of Bayer Healthcare AG and Onyx Pharmaceuticals, Inc.) in patients with metastatic renal cell carcinoma. In addition, we initiated a Phase 1 clinical trial of IL-21 in combination with the monoclonal antibody Rituxan ® (a product of Genentech, Inc. and Biogen Idec Inc.) in patients with advanced non-Hodgkin’s lymphoma in June 2006.
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PEG-IFN- l (formerly known as IL-29). Interferon- l 1 (IFN- l 1) is a cytokine with potential applications for the treatment of viral infections. Our product candidate, PEG-IFN- l , is a pegylated version of the IFN- l 1 protein, for which we have retained worldwide rights to PEG-IFN- l . We filed an investigational new drug (IND) application for PEG-IFN- l as a treatment for chronic hepatitis C infection in November 2006 and initiated a Phase 1 clinical trial in January 2007. We continue to expand our capabilities and build our infrastructure. In recent years, we have built a development organization with the skills and expertise necessary to design and implement successful clinical and regulatory strategies. We leverage our resources by accessing our partner’s technologies, infrastructure and expertise through strategic partnerships. In addition to our existing product-related collaborations with Merck Serono for atacicept and Novo Nordisk for IL-21, we are in discussions with potential partners to develop and commercialize rhThrombin outside the United States. Under a broad strategic alliance with Merck Serono, we collaborate to research, develop and commercialize novel protein and antibody therapeutics derived from our proprietary portfolio of genes and proteins.
Our discovery efforts are founded on an advanced bioinformatics program that we developed in the mid-1990’s. Our expertise in biology and protein expression and engineering has enabled us to assess the biological function and potential therapeutic utility of proteins early in the discovery process and has allowed us to focus our efforts on the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. Specifically, we have focused on key protein categories that have members with proven therapeutic value or potent biological activity. More recently, we have added the capability to develop both agonist and antagonist antibodies and antibody-like molecules, allowing us to expand the therapeutic potential of our proteins. Our ability to determine biological function and therapeutic utility at an early stage has improved our prospects of establishing patent priority by enabling us to file detailed patent applications covering both composition of matter and method of use claims. We have issued patents or pending applications covering all of our internal product candidates in clinical development. In total, we have more than 295 unexpired issued or allowed United States patents and over 360 United States patent applications pending.
We have been active in the area of therapeutic proteins since our incorporation in the state of Washington in 1981. For 12 years we were a wholly owned subsidiary of Novo Nordisk, one of the world’s largest producers of therapeutic proteins. We have contributed to the discovery or development of six recombinant protein products currently on the market, which had aggregate sales in 2006 of more than $3.7 billion. In November 2000, as part of a restructuring by Novo Nordisk, we became an independent company. In February 2002, we completed our initial public offering.
Business Strategy
Our corporate objective is to discover, develop, manufacture and commercialize novel therapeutic proteins and other protein-based products for the treatment of human diseases. To achieve this objective, we are pursuing the following key strategies:
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Establish a robust portfolio of proprietary therapeutic proteins supported by strong intellectual property. We currently focus our internal discovery efforts exclusively on therapeutic proteins. Using our unique genomics-based discovery platform and knowledge of immunobiology, we have identified many novel proteins with potential for therapeutic application in cancer, autoimmunity and inflammation. We believe that this approach, combined with strong patent and other intellectual property protections, will ultimately result in proprietary product opportunities, providing potential market exclusivity for our product candidates. In addition, to augment our portfolio of therapeutic proteins, we may in-license product candidates with potential in our areas of therapeutic focus.
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Balance and diversify product portfolio risk. Our goal is to develop a diversified portfolio of product candidates that includes a recombinant protein intended as a replacement for plasma-derived protein products and multiple novel proteins that have potential in multiple disease indications. Our most advanced internal product development candidate, rhThrombin, is a recombinant version of thrombin that is currently marketed in the United States in a form derived from bovine plasma. Our other product development candidates are novel proteins that could have broad therapeutic potential in cancer, autoimmune disease, infectious disease and inflammation.
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Leverage our development resources through partnerships. We have established, and may establish in the future, partnerships that will allow us to further diversify our product development risks, reduce costs, and access complementary technologies and infrastructure possessed by our partners. With this strategy we should be able to pursue more opportunities than working alone.
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Focus on North America. We retain all, or a significant percentage of, commercial rights to our internal product candidates in North America, and typically license commercial rights in the rest of the world. We intend to actively participate in the sales and marketing activities while maintaining our flexibility in establishing commercial infrastructure: building our own, renting it or relying on our partners’ infrastructure.
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License non-core proteins . We intend to continue out-licensing unencumbered proteins that lie outside our areas of interest. We use near-term cash from these transactions to support our internal development efforts. We believe that by out-licensing non-core proteins to licensees with extensive expertise in related areas, we maximize chances of commercial success and ultimately the long-term value that we expect to receive in the form of future milestone payments and royalties. Products and Product Pipeline
Our track record in the field of therapeutic proteins includes contributions to the discovery or development of six recombinant protein products currently being marketed by Novo Nordisk or other companies. Our current focus is the development of a pipeline of internal product candidates. We also have out-licensed several product candidates outside our areas of interest. The following table summarizes our product candidates for internal development or co-development, as well as out-licensed product candidates and marketed products.
| Product/Product Candidate | Indication or Intended Use | Stage of Development |
Development/Commercial Rights | |||||
| rhThrombin | General surgical hemostat Spray application |
BLA Filed Phase 2 |
Internal development in the U.S.; worldwide commercial rights maintained | |||||
| Atacicept (formerly known as TACI-Ig) |
Systemic lupus erythematosus Rheumatoid arthritis Multiple myeloma Non-Hodgkin’s lymphoma Chronic lymphocytic leukemia Multiple sclerosis |
Phase 1 Completed Phase 2 Phase 1 Completed Phase 1 Completed Phase 1 Preclinical |
Co-development with Merck Serono worldwide, excluding Japan; co-promotion with EMD Serono in North America; Merck Serono promotion outside North America | |||||
| Internal Candidates | IL-21 | Metastatic melanoma Metastatic renal cell carcinoma Non-Hodgkin’s lymphoma |
Phase 2 Phase 1/2 Phase 1 |
Internal development in North America; Novo Nordisk development outside North America | ||||
| PEG-IFN- l (formerly known as IL-29) |
Hepatitis C virus infection Cancer Multiple sclerosis |
Phase 1 Preclinical Preclinical |
Internal development in North America; worldwide commercial rights maintained | |||||
| IL-31 | Atopic dermatitis Inflammatory diseases |
Preclinical Research |
Co-development with EMD Serono in U.S. and out-licensed to EMD Serono in Canada and Merck Serono in Mexico; Novo Nordisk development outside North America | |||||
| IL-17RC | Inflammatory diseases | Preclinical | Option for co-development with EMD Serono in the U.S. and development by Merck Serono outside the U.S. | |||||
| GEM-OS1 TM /GEM-OS2 TM (Platelet-derived Growth Factor) | Orthopedic fracture and other bone defects | Phase 2 | Out-licensed to BioMimetic Therapeutics, Inc. | |||||
| Out-Licensed Candidates | rFactor XIII | Congenital Factor XIII deficiency Cardiac surgery Cancer treatment |
Phase 1 Phase 1 Preclinical |
Out-licensed to Novo Nordisk | ||||
| IL-20 | Psoriasis | Preclinical | Out-licensed to Novo Nordisk | |||||
| FGF-18 | Osteoarthritis | Preclinical | Out-licensed to Merck Serono | |||||
| IL-22 receptor | Psoriasis | Preclinical | Out-licensed to Merck Serono | |||||
| Novolin ® (Insulin) and Insulin Analogs | Diabetes | Marketed | Out-licensed to Novo Nordisk | |||||
| NovoSeven ® (Factor VIIa) | Hemophilia | Marketed | Out-licensed to Novo Nordisk | |||||
| Marketed Products | Regranex ® (Platelet-derived Growth Factor) | Wound healing | Marketed | Out-licensed to Johnson & Johnson | ||||
| GEM 21S ® (Platelet-derived Growth Factor) | Periodontal defects | Marketed | Out-licensed to BioMimetic Therapeutics, Inc. | |||||
| GlucaGen ® (Glucagon) | Hypoglycemia; gastrointestinal motility inhibition | Marketed | Out-licensed to Novo Nordisk | |||||
| Cleactor ™ (tPA Analog) | Myocardial infarction | Marketed | Out-licensed to Eisai Co., Ltd. |
In the table above, Research refers to the stage in which we conduct analysis of therapeutic potential of newly discovered proteins using a variety of laboratory methods. Preclinical refers to the stage in which safety, pharmacology and proof of efficacy in non-human animal models of specific human disease are being evaluated. Phase 1 refers to clinical trials designed primarily to determine safety and pharmacokinetics in healthy volunteers or limited patient population. Phase 2 refers to clinical trials designed to evaluate preliminary efficacy, further characterize safety and optimize dosing in a limited patient population. BLA Filed refers to the stage in which a biologics license application (BLA) has been filed with regulatory agencies and awaits regulatory approval.
Internal Product Candidates
We are developing several product candidates to treat a variety of serious diseases and medical conditions. We intend to develop and commercialize these product candidates on our own or in collaboration with other biotechnology or pharmaceutical companies.
rhThrombin
Thrombin is a specific blood-clotting enzyme that converts fibrinogen to fibrin. Fibrin is the primary protein contained in newly formed blood clots. Thrombin also promotes clot formation by activating Factor XIII, which cross-links the fibrin molecules and strengthens the newly forming clot.
Serious bleeding can be caused by trauma or surgery. Surgeons minimize bleeding to maintain visibility in the operating field, limit the use of transfused blood products and reduce peri- and post-operative complications. In situations where direct pressure, ligation, or cautery are not possible or unsuccessful, topical hemostatic agents are needed to achieve hemostasis. Thrombin is widely used to stop diffuse bleeding occurring during surgical procedures. It is generally sold as a lyophilized powder stored at room temperature, which is dissolved in saline and absorbed onto a surgical sponge, embedded onto a hemostatic pad or sprayed directly for topical application to wounds. Only bovine (cow) plasma-derived thrombin, Thrombin-JMI ® , from King Pharmaceuticals, Inc. is currently available in the United States as a stand-alone product. In early November 2006, Omrix Biopharmaceuticals, Inc. filed a license application with FDA for its human plasma-derived thrombin, which is developed in collaboration with Ethicon, Inc. and could be available on the market in 2007. The market for thrombin has grown rapidly since 2000, with Thrombin-JMI net sales totaling $190.1 million during the first nine months of 2006, which implies annualized sales of approximately $250 million. It has been estimated that bovine plasma-derived thrombin is used in over a million surgical procedures annually in the United States.
We believe that there are several potentially important advantages to a recombinant human form of thrombin. Some patients may experience allergic reactions to plasma-derived products or develop antibodies to bovine plasma-derived thrombin or to bovine Factor V or other protein impurities in the bovine plasma-derived product. In some cases, these antibodies can cross-react with analogous human proteins, creating a bleeding condition that can be difficult to manage and which may be fatal in patients who develop the most severe cases. Use of bovine plasma-derived thrombin in patients with pre-existing antibodies to bovine clotting factors may cause abnormal clotting times associated with prolonged bleeding, thrombosis or other post-operative complications, which can result in increased treatment costs. The package insert for bovine plasma-derived thrombin contains a black box warning, the most serious form of warning FDA can require for approved products, describing these potential risks. All human plasma-derived products carry an FDA warning addressing a potential risk of transmitting infectious and other diseases, including HIV, hepatitis, parvovirus, Creutzfeldt-Jakob disease (CJD) and variant CJD. A recombinant human form of thrombin is inherently free from these potential risks and not expected to have a black box warning or be associated with the risk of transmitting blood-borne pathogens or infectious diseases. We also believe that rhThrombin will be more convenient to handle and store as compared to a human plasma-derived thrombin from Omrix/Ethicon. rhThrombin will be available as a lyophilized powder, stored at room temperature, with an anticipated two-year shelf life. The human plasma-derived thrombin must be stored frozen and thawed before use. Once thawed, it is stable in the refrigerator for only 30 days.
We intend to develop rhThrombin in the United States as a preferred alternative to the plasma-derived thrombin products. As with plasma-derived thrombin, rhThrombin would be used in the surgical setting to control bleeding. Primary applications could include a wide range of surgeries as well as the treatment of bleeding from trauma and burn injuries. We believe the market for rhThrombin could be further expanded by developing product line extensions in which rhThrombin is combined with other passive or active hemostatic materials. We are in the process of evaluating potential line extension product concepts. We intend to commercialize rhThrombin in the United States on our own and are in discussions with potential partners to develop and commercialize rhThrombin outside the United States.
We have developed a patent-protected method that enables us to cost-effectively manufacture rhThrombin in a two-step process. First, recombinant human prethrombin-1 (“rhPrethrombin-1”) is produced in mammalian cells. Then, using an enzyme activation step, rhPrethrombin-1 is converted to rhThrombin. A commercial-scale manufacturing process has been developed in collaboration with Abbott Laboratories, our commercial manufacturer, and we have completed manufacturing campaigns to support our BLA filing and provide initial launch inventory. In 2007, we will continue building rhThrombin commercial inventories.
In September 2006, we announced results from the pivotal Phase 3 clinical study designed to evaluate the comparative efficacy of rhThrombin and bovine thrombin, both administered with an absorbable gelatin sponge. The randomized, double-blind study was conducted at 34 sites in the United States and enrolled 411 patients in the same four surgical settings as those examined in our Phase 2 studies: spinal surgery, liver resection, peripheral artery bypass and arteriovenous graft construction. Both the primary and secondary endpoints of the study were met. rhThrombin was shown to have comparable efficacy to bovine thrombin, as measured by the overall percentage of patients achieving hemostasis within 10 minutes. rhThrombin also demonstrated a superior immunogenicity profile to bovine thrombin, based on a significantly lower incidence of post-treatment anti-product antibody development. Both treatments were well tolerated and exhibited similar adverse event profiles. Based on the pivotal Phase 3 study results, we filed a BLA in December 2006 for licensure to market rhThrombin as a general aid to controlling bleeding during surgery. Assuming a 10-month FDA review cycle, approval could be expected in late 2007. While awaiting regulatory approval, we plan to initiate an open-label, non-comparative Phase 3b study to further characterize the favorable safety and immunogenicity profile of rhThrombin.
In August 2006, we began investigating another mode of administration for rhThrombin using a spray applicator device. We initiated an open-label, non-comparative Phase 2 clinical trial in patients with burns or other traumatic skin injuries undergoing autologous skin grafting. The study is being conducted at 14 sites in the United States, with patient enrollment expected to be completed in the first quarter of 2007. Our registration strategy for rhThrombin delivered via spray applicator is currently under discussion with the FDA.
In 2007, we intend to continue activities in preparation for the rhThrombin launch in the United States by establishing our sales force and related commercial infrastructure and building commercial inventories. With a relatively concentrated customer base for thrombin, we believe that a sales force of approximately 50 individuals will be sufficient to target key institutions for rapid conversion of the existing thrombin market to rhThrombin.
We own issued United States and foreign patents directed to certain recombinant human thrombin, methods of producing recombinant human thrombin from a genetically engineered precursor termed “prethrombin-1,” formulations, methods of activation and therapeutic use of the protein. The first patent expiration in our rhThrombin patent portfolio will occur in December 2012. In the United States, we believe the patent could be extended under the Drug Price Competition and Patent Term Restoration Act. Any patents that issue from currently pending thrombin applications would expire in 2025 and 2026.
Atacicept (formerly known as TACI-Ig)
TACI is a member of the tumor necrosis factor receptor family of proteins. Atacicept is a soluble form of the TACI receptor that binds to two ligands, BLyS and APRIL, that are implicated in B-cell survival, maturation
and antibody production. When over-produced in transgenic animals, BLyS has been shown to lead to the development of autoimmune disease with symptoms resembling systemic lupus erythematosus (SLE) and Sjögren’s syndrome. APRIL shares many of the biological activities of BLyS, including promotion of B-cell proliferation and differentiation into antibody secreting cells. There is growing evidence suggesting APRIL’s involvement in several autoimmune diseases. Furthermore, heterotrimers, structures formed by combination of BLyS and APRIL molecules, have been observed in autoimmune diseases. The aim of treatment with atacicept is to neutralize the overactivity of these immune-stimulating ligands and their heterotrimers to prevent the inappropriate activation of B cells and thus the production of harmful autoantibodies, which are antibodies to one’s own cells.
We believe that atacicept could represent a less toxic and more specific immunosuppressive agent than current therapies for the treatment of autoimmune diseases. Such diseases include SLE, rheumatoid arthritis (RA) and multiple sclerosis (MS). In an animal model of SLE, atacicept has been shown to specifically inhibit the development of mature B cells and the development of autoantibody production. It has also been shown to inhibit the development of proteinuria, an indicator of kidney malfunction resulting from excessive autoantibody levels, and to prolong survival of the animals. In a collagen-induced model of RA, atacicept has been shown to inhibit the incidence of disease. Taken together, these data indicate that atacicept acts by inhibiting the production of mature B cells and decreasing autoantibody levels and is associated with disease control in animal models of autoimmune diseases.
In addition to atacicept’s potential in autoimmune disease, an expanding body of literature suggests that atacicept may prove to be an effective treatment for a variety of B-cell cancers. Researchers from multiple laboratories have shown that malignant B cells express one or more of the three known receptors for BLyS and APRIL (TACI, BCMA and BAFF-R). Furthermore, these malignant B cells often abnormally express BLyS and APRIL proteins themselves, while normal B cells do not. These findings seem to suggest that malignant B cells can both produce and consume the BLyS and APRIL growth factors, leading to their survival advantage versus normal B cells. BLyS and APRIL levels are usually elevated in the serum of patients bearing these B-cell tumors. Studies suggest that lymphoma patients with high levels of BLyS present in blood samples fare worse than those with lower levels. Thus, BLyS and/or APRIL appear to enhance the survival of malignant B cells. In support of this theory, scientists have shown that the addition of BLyS or APRIL to cultured cancer cells from non-Hodgkin’s lymphoma (NHL) and multiple myeloma patients enables these cancer cells to survive for extended periods of time. Inhibition of BLyS and APRIL using atacicept causes the cultured malignant B cells to die rapidly. These results suggest that atacicept might represent a new cancer therapeutic, specifically targeting malignant B cells by starving these cells of the essential survival factors BLyS and APRIL.
In August 2001, we entered into a collaborative development and marketing agreement with Serono S.A. relating to atacicept. Under this agreement, atacicept is being developed jointly by the two companies pursuant to a worldwide development plan. In September 2006, Merck KGaA announced the acquisition of Serono. With the transaction completed in January 2007, Serono became Merck Serono S.A. Serono’s rights to atacicept under the collaborative development and marketing agreement are held by Merck Serono S.A.
Based on positive data from animal models, SLE was selected as one of the initial clinical indications for atacicept. The cause of this disease remains unknown, but there is substantial evidence suggesting that B-cell hyperactivity resulting in the secretion of autoantibodies is fundamental to its development. Although estimates on prevalence vary widely, there are believed to be approximately 475,000 treated patients with SLE in major markets. Of these patients, there are an estimated 135,000 in the United States and a roughly equivalent number in major European countries. No new FDA-approved treatment for SLE has been introduced in the last 40 years. Current therapies, including immunosuppressive agents and corticosteroids, have limited efficacy and are associated with severe and debilitating toxicities. We believe that patients diagnosed with moderate to severe SLE would be candidates for treatment with atacicept. Together with our partner, Merck Serono, we completed two Phase 1b clinical trials of atacicept in SLE patients investigating the safety and tolerability of atacicept administered intravenously and subcutaneously. Preliminary results from both studies were announced in July 2006 and detailed results from the subcutaneous study were presented at the American College of Rheumatology
(ACR) annual meeting in November 2006. The results from both studies demonstrated atacicept to be well tolerated across all dose levels and schedules tested. We also observed clear biologic activity as patients showed dose-dependent reductions in several biologic markers, consistent with atacicept’s proposed mechanism of action. Although the studies were not designed to evaluate efficacy, we observed an overall positive trend in disease activity, as measured by SELENA-SLEDAI scores and complement levels, in patients treated with multiple doses of atacicept. Together with Merck Serono, we plan to initiate Phase 2/3 clinical studies suitable for registration of atacicept in SLE patients in the second half of 2007.
Rheumatoid arthritis is another potential clinical indication for atacicept. RA is one of the most prevalent chronic inflammatory diseases, afflicting an estimated 1% of the population in industrialized countries, including approximately five million patients in North America, Europe and Japan. Although the underlying cause of RA is unknown, considerable data indicate a major role of B cells in this disease. RA has been an attractive therapeutic area for drug development because of its large market size and robust measures of disease activity. As a consequence, several drugs have been developed and a large number of drugs are currently being developed. Atacicept represents a novel mode of treatment that could alleviate the symptoms of RA associated with pathogenic B cells. Moreover, the apparent lack of side effects and mode of action of atacicept strengthens its potential as an add-on therapy to existing drugs. Together with our partner, Merck Serono, we completed a Phase 1b clinical trial of atacicept in RA patients who had failed other non-biologic therapies, and reported results in June 2006. The results demonstrated atacicept to be well tolerated across the full range of dose levels and schedules tested. We also observed clear biologic effects as patients showed schedule and dose dependent decreases in immunoglobulin and serum rheumatoid levels. Although the study was not designed to evaluate efficacy, we observed encouraging trends toward improvement of ACR and DAS 28 scores, commonly used measurements of clinical benefits. In December 2006, we initiated a Phase 2 clinical trial of atacicept in RA patients with inadequate response to TNF inhibitor therapy. This randomized, double-blind, placebo-controlled study will enroll approximately 320 patients at multiple sites in North America, Europe and Australia. All patients will be randomized to three dose levels of atacicept or placebo while receiving background methotrexate therapy. The primary objectives of the study are to evaluate the efficacy and safety of atacicept administered over a 26-week period and to select the most effective dose for further studies. The primary efficacy endpoint is reduced RA disease activity at week 26, as measured by ACR 20. Patient enrollment in this study is expected to be completed before the end of 2007. In addition, we plan to initiate a second Phase 2 clinical trial of atacicept in RA in 2007. The study will evaluate the efficacy and safety of atacicept in RA patients who have not previously received TNF inhibitor therapy.
B-cell cancers are a third potential clinical indication for atacicept. B-cell cancers include B-cell chronic lymphocytic leukemia (B-CLL) and multiple myeloma. In addition, between 80% and 85% of diagnosed non-Hodgkin’s lymphoma cases are of B-cell origin. In the United States, over 380,000 people are estimated to have some form of these B-cell cancers and each year, approximately 74,000 new cases and 31,000 deaths occur from these cancers. Despite the introduction of new therapies, there is still a clear need for agents that improve clinical response and survival. Our Phase 1 program in B-cell cancers includes three open-label, dose-escalation Phase 1b clinical studies in patients with relapsed or refractory multiple myeloma, NHL and B-CLL. We announced results from two Phase 1b studies in NHL and multiple myeloma in December 2006. The results from both studies demonstrated treatment with atacicept to be well tolerated. We also observed consistent biological responses and signs of disease stabilization in these heavily pretreated patients. The third Phase 1b study in B-CLL is ongoing, with results from the dose-escalation portion of the study expected to be available in the first half of 2007. Together with our partner Merck Serono, we plan to evaluate the future direction of the atacicept program in B-cell cancer after results from the Phase 1b study in B-CLL are available.
Recently, we decided to expand the atacicept program by adding multiple sclerosis as a fourth potential clinical indication. While the annual number of new cases of MS is low, the long clinical course of the disease results in the relatively large patient population. In 2005, approximately 260,000 people were affected by this disease in the United States, with a predicted annual growth rate of 0.9% through 2010. MS is typically treated
with immunotherapies, which have modest efficacy, inconvenient administration and unfavorable side effect
profiles. There is a scientific and medical rationale that B-cell depletion may provide an effective mode of therapy in this disease. Together with our partner Merck Serono, we decided to pursue clinical development of atacicept in MS and plan to initiate clinical testing in late 2007.
We own or have exclusively in-licensed worldwide patents and patent applications for atacicept, methods of using atacicept and related technology. Our license with St. Jude’s Children’s Hospital of Memphis, Tennessee is central to our patent portfolio for atacicept. St. Jude’s owns the patents covering the TACI protein, related polypeptides, methods of production and antibodies. In addition, we have sole ownership of patents and patent applications that include claims to expression vectors, transformed cells used to produce atacicept and methods of using atacicept to treat various diseases and medical conditions. We will continue to file patent applications as new inventions are made. The first patent expiration in our atacicept patent portfolio will occur in March 2017.
IL-21
IL-21 is a protein belonging to a family of cytokines that modify the function of cells in the immune system. We have shown that IL-21 activates several types of immune cells thought to be critical in eliminating cancerous or virally infected cells from the body. More specifically, IL-21 enhances the activity of mature natural killer (NK) cells; it has multiple effects on cytotoxic T cells (CTL), including increased activation and proliferation, extended longevity in circulation and improved ability to kill cancerous cells; and it enhances B-cell antibody production.
Preclinical studies have indicated that our recombinant version of IL-21 is an effective therapy in a number of animal models of cancer. In an animal model of metastatic melanoma, IL-21 was associated with significant anti-tumor activity. Animals in this model develop aggressive metastases to the lung, which can be readily measured. Treatment with IL-21 led to a significant reduction in the number of lung metastases relative to controls. IL-21 also was found to have potent inhibitory activity in other animal models of cancer, especially renal cell cancer. These models demonstrated that the in vivo effects of IL-21 were mediated through the activation of CTL and NK cells, which contribute to rejection of the tumors in the animal models. Moreover, this led to establishment of immunological memory, which protected animals from rechallenge with the parent tumor.
We believe that IL-21 could represent a potentially better tolerated and more efficacious immunotherapeutic agent than other cancer immunotherapies, such as interleukin-2 (IL-2) and interferon-alpha. In clinical practice, IL-2 is an effective therapy producing durable responses in approximately 5% to 8% of patients with metastatic melanoma and approximately 4% of patients with metastatic renal cell carcinoma. Accompanying this relatively low level of efficacy are significant toxicities, including vascular leak and the release of pro-inflammatory cytokines, which profoundly limit the utility of IL-2 in treating disease. These side effects can be so severe that many patients are either hospitalized or stop the therapy before completion of the treatment program. Although somewhat better tolerated, interferon-alpha therapy is associated with significant chronic toxicities limiting its administration and produces a lower overall response rate with fewer complete responses compared to IL-2.
We have retained all rights to IL-21 within North America and, pursuant to an option and license agreement, Novo Nordisk has licensed the rights to IL-21 outside North America. In August 2005, we signed a collaborative data sharing and cross-license agreement with Novo Nordisk that provided the framework for data and cost sharing as well as development of a single product worldwide. Accordingly, a global development plan was established in 2006, under which the companies have coordinated clinical development activities. In January 2007, we entered into a manufacturing agreement with Novo Nordisk, under which Novo Nordisk will supply clinical materials in quantities sufficient to support IL-21 development according to the global development plan.
We are pursuing metastatic melanoma and metastatic renal cell carcinoma as initial indications for IL-21. There are an estimated 62,000 new cases of melanoma per year in the United States. Metastatic melanoma is essentially an incurable cancer with no established standard of care. There are an estimated 39,000 new cases of renal cell carcinoma per year in the United States. Although two recently FDA-approved tyrosine kinase inhibitors (TKIs) for the treatment of advanced renal cell carcinoma, Nexavar ® (a product of Bayer Healthcare
AG and Onyx Pharmaceuticals, Inc.) and Sutent ® (a product of Pfizer, Inc.), extended the time during which patients live without evident tumor progression, the disease remains incurable. In October 2005, the FDA granted IL-21 orphan drug status for the treatment of melanoma patients with advanced or aggressive disease.
In 2006, we completed a Phase 1 clinical trial in patients with metastatic melanoma or metastatic renal cell carcinoma and Novo Nordisk completed a Phase 1 study in patients with metastatic melanoma. Our Phase 1 study was conducted in the United States and Novo Nordisk’s Phase 1 study was conducted in Australia. The combined results from the Phase 1 studies demonstrated that IL-21 had a favorable safety profile, with no vascular leak, no unacceptable constitutional symptoms, no depression or mood disturbances observed, and can be used in an outpatient setting. We also observed preliminary evidence of anti-tumor activity in both melanoma and renal cell carcinoma patients.
Based on Phase 1 results, we are continuing development of IL-21 in metastatic melanoma as a single agent. In July 2006, Novo Nordisk initiated a Phase 2 clinical trial in Australia. The study is designed to confirm the IL-21 activity at the recommended dose after our Phase 1 program. We also plan to conduct a Phase 2 clinical trial in North America beginning in 2007, which will evaluate IL-21 at a higher dose in previously untreated patients with metastatic melanoma.
Our development strategy for IL-21 in metastatic renal cell carcinoma will focus on a combination approach with recently approved TKIs. We have shown that IL-21 in combination with TKIs has additive anti-tumor effect in vivo in preclinical model(s). In October 2006, we initiated a Phase 1/2 clinical trial of IL-21 in combination with Nexavar. The Phase 1 part of the study will establish the maximum tolerated dose of IL-21 in combination with Nexavar. The Phase 2 part of the study will further evaluate the safety and preliminary anti-tumor activity of IL-21 at the dose established in Phase 1. We expect to complete the Phase 1 part of the study and initiate the Phase 2 part of the study in 2007.
We are exploring additional uses for IL-21 in combination with monoclonal antibodies, particularly those like Rituxan ® (a product of Genentech, Inc. and Biogen Idec Inc.) that function via antibody-dependent cellular cytotoxicity, a process enhanced by IL-21. In July 2006, we initiated an open-label, dose-escalation Phase 1 clinical trial of IL-21 in combination with Rituxan in patients with advanced non-Hodgkin’s lymphoma. The primary objective of the study is to evaluate safety and tolerability of IL-21 when administered with Rituxan. Secondary objectives are to characterize the pharmacokinetics, immunogenicity and preliminary anti-tumor activity of this combination. The results from this study are expected to be available in the second half of 2007.
We own issued patents for IL-21 polypeptides, polynucleotides and methods of using IL-21 to stimulate immune responses, particularly in tumor-bearing subjects. We have filed patent applications for IL-21 antibodies, additional compositions, IL-21 fusion proteins and other methods of using IL-21 for the treatment of disease. We have also filed patent applications relating to IL-21 directed to methods for expressing and purifying recombinant IL-21, methods of treating specific cancers and viral diseases, combination therapies using IL-21 and monoclonal antibodies, and antagonist ligands. We will continue to file patent applications as new inventions are made. The first patent expiration in our IL-21 patent portfolio will occur in March 2020.
PEG-IFN - l (formerly known as IL-29)
IFN- l 1 is a type III interferon that belongs to the 4-helical-bundle cytokine family. IFN- l 1 is generated in response to a viral infection and exhibits broad anti-viral activity similar to type I interferons, such as interferon-alpha. However, IFN- l 1 signals through a receptor that is distinct from the one for type I interferon and has a more selective expression pattern compared to the widely expressed receptor for type I interferon. The difference in the receptor expression pattern suggests that IFN- l 1 may serve as an alternative to interferon-alpha based therapy for viral infection by providing antiviral activity with potentially fewer side effects.
In vitro studies have shown that IFN- l 1 has antiviral activity against human hepatitis C virus (HCV) in the sub-genomic HCV replicon model. Additionally, we have demonstrated that IFN- l 1 induces antiviral gene
expression similar to interferon-alpha in primary human hepatocytes. IFN- l 1 has also been shown to enhance viral antigen presentation, which may promote an immune response against the virus. Combined with the significant expression of the receptor for IFN- l 1 in liver samples from HCV positive individuals, these data provide the rationale for selecting HCV infection as our first clinical indication.
Chronic infection with HCV is a leading cause of cirrhosis, liver failure, and hepatocellular carcinoma worldwide. It is estimated that there are 170 million people worldwide infected with hepatitis C virus. In the United States, an estimated 4.1 million people have been exposed to HCV, and approximately 3.2 million have chronic HCV infection. HCV is associated with an estimated 20,000 deaths per year and is the main indication for liver transplantation in the United States. The current standard of care for chronic HCV infection involves treatment with the combination of pegylated interferon-alpha and ribavirin. Interferon-alpha based therapy has been associated with a number of significant side effects, including flu-like symptoms, anorexia, depression, hemolytic anemia and myelosuppression, which continue to be a treatment-limiting factor. With a response rate to the current standard treatment for the most common form of HCV in the United States of only 40%, there remains a need for better tolerated and more effective therapy for HCV infection.
Our product candidate, PEG-IFN- l , is a pegylated version of the IFN- l 1 protein. Pegylation extends the in vivo half-life of the protein, potentially allowing for convenient dose scheduling, such as once per week. We have submitted an IND application for PEG-IFN- l as a treatment for chronic HCV infection in November 2006 and initiated a single-dose Phase 1 clinical trial in healthy volunteers in January 2007. A multi-dose Phase 1 study in patients infected with HCV is planned to begin in the second half of 2007.
We have retained worldwide rights to IFN- l 1 and our specific product candidate, PEG-IFN- l . We own an issued patent for IFN- l 1 polynucleotides, expression vectors, cells and method of producing IFN- l 1. We have filed patent applications for IFN- l 1 polypeptides, IFN- l 1 fusion proteins, antibodies, methods of expressing and purifying IFN- l 1, methods of using IFN- l 1 alone and in combination with other therapeutic agents to treat various viral diseases, cancers and autoimmune disorders. We will continue to file patent applications as new inventions are made. The first expiration date in our IFN- l 1 patent portfolio will occur in September 2021.
IL-31
IL-31 is a cytokine derived from T cells, which we discovered through our bioinformatics discovery strategy. Current in vivo and in vitro data suggest that IL-31 may affect cellular infiltration and inflammation. Analysis of IL-31 and IL-31 receptor levels in human and murine disease tissues suggests that IL-31 could play a role in atopic dermatitis (AD) and inflammatory bowel disease, such as Crohn’s disease. Transgenic animals expressing the IL-31 gene develop a severe skin phenotype that resembles human AD, resulting from a chronic scratch response to itch induced by over-expression of IL-31. Itch is a characteristic of human AD and the scratch response to itch is thought to be a major contributor to the severity of disease. Treatment of animals in a murine model of AD with a neutralizing antibody against IL-31 results in the reduction of the incidence of the scratch response. Additionally, analysis of peripheral blood T cells from human atopic dermatitis patients provides an association between IL-31 and skin-homing T cells, suggesting that cutaneous diseases, such as AD, should be considered as a leading therapeutic area for IL-31.
Under our strategic alliance with Merck Serono, we entered into a co-development and co-promotion agreement for IL-31 within the United States and granted Merck Serono an exclusive license to IL-31 in Mexico and Canada. Novo Nordisk has licensed the rights to IL-31 outside North America pursuant to an option and license agreement. In February 2006, we entered into a collaboration agreement with Merck Serono and Novo Nordisk to develop a single anti-IL-31 monoclonal antibody for clinical development. The antibody development work is currently underway, and in 2007, we plan to continue our joint IL-31 research and development efforts.
We have filed several patent applications relating to IL-31 on a worldwide basis and will continue to file new patent applications as new inventions are made.
IL-17RC
The IL-17 family of cytokines is generally thought to relate to inflammation. IL-17A and IL-17F are the most closely related cytokines in the family that are produced by the same cell types, primarily activated memory T cells. Both cytokines are highly expressed in a variety of inflammatory and autoimmune diseases, including rheumatoid arthritis, inflammatory bowel disease, multiple sclerosis and transplant rejection. We identified IL-17 receptor C (IL-17RC) and characterized it as a receptor for both IL-17A and IL-17F. We hypothesize that use of a soluble IL-17RC to neutralize the pro-inflammatory properties of IL-17A and IL-17F could have a beneficial therapeutic effect in any or all of these diseases.
Under our strategic alliance with Merck Serono, we began collaborative research efforts on IL-17RC in 2005. Cell line development is underway at Merck Serono to produce material for toxicology studies and initial clinical testing. Upon designating IL-17RC as a product development candidate, Merck Serono would have the option to obtain rights to the candidate for co-development and co-promotion in the United States, through its U.S. operation EMD Serono, and exclusive license to the candidate outside the United States.
We have filed several patent applications relating to IL-17RC on a worldwide basis and will continue to file new patent applications as new inventions are made.
Research and Development
We have developed a fully integrated therapeutic protein research and development infrastructure that draws upon a broad range of skills and technologies, including bioinformatics, molecular and cellular biology, animal models of human disease, protein chemistry, antibody generation and engineering, pharmacology and toxicology, clinical development, medical and regulatory affairs, drug formulation, and protein manufacturing. We believe that this comprehensive approach gives us a competitive advantage, enabling us to further expand our diverse pipeline of therapeutic proteins.
Our discovery and research activities span from identifying genes and proteins with potential therapeutic utility through selecting a product candidate and testing it in animal models of human diseases. We have focused our discovery efforts on identifying the relatively small subset of genes that we believe have the highest probability of coding for proteins with therapeutic potential. We have defined what we consider to be the key protein categories according to structural similarity, sequence similarity and functional activity. These categories have known members with demonstrated therapeutic potential or potent biological activity, and most recombinant human proteins currently marketed as drugs are members of these categories. We believe that newly discovered proteins within these categories are likely to have important novel biological activity, and therefore may have potential as therapeutic products.
To identify a protein’s biological function and determine whether the protein plays a role in disease, we go through several stages of research activities. A protein begins in the exploratory stage, in which experiments are performed to support the development of a biological hypothesis as to the protein’s function, including its function as a ligand or a receptor. Once a biological hypothesis is developed, the protein moves to the validation stage, in which more extensive experiments are performed to confirm the biological hypothesis for the protein and to establish a medical hypothesis. A medical hypothesis involves the identification of specific diseases or conditions for which we believe the protein would have therapeutic importance. In cases where a protein demonstrates beneficial biological effects, it becomes a product candidate. Where a protein has been found to have detrimental effects, we attempt to generate a monoclonal antibody, either to the ligand or the receptor, or a soluble receptor to inhibit the activity of the protein. In those cases, a resulting monoclonal antibody or soluble receptor becomes the product candidate. We use in-licensed technologies from Medarex, Inc. and Dyax Corp. to generate fully-human monoclonal antibodies and protein engineering technology to produce humanized monoclonal antibodies from mice.
Once a product candidate is identified, it moves to the pre-development stage, at which time it is tested in specific animal models of human diseases. At the pre-development stage, we not only learn which diseases or conditions show promise for treatment, but also obtain information about dosing and systemic effects of the product candidate. Assuming positive results, both in terms of efficacy and toxicology, we may decide to move the product candidate into development. At this stage, a commercial hypothesis for the product candidate is developed that requires the identification of a market opportunity and a preliminary determination that it will be economically feasible to manufacture the product candidate and administer it to patients.
Throughout our research effort, we use a variety of in-house approaches to identify the biological functions of genes and proteins. We conduct physiological screens of mice in which the gene of interest has been either over-expressed or eliminated. In addition, using a variety of laboratory tests, or assays, we conduct analyses of animal models of human disease, to detect changes in behavior, physiology and biochemistry to understand how these models mimic human diseases and to determine the cause of disease and response to treatment. Using these models, we identify and validate a gene, or a group of genes, which may demonstrate a causal relationship to disease. We then confirm a role of the gene in disease by identifying a similar gene in human disease tissues. For certain ligands, we can apply laboratory techniques to clone the receptor for the ligand present in a tissue or cell. In addition to providing a marker for tissues that should respond to the protein, the receptor or an antibody to the ligand or the receptor can have therapeutic potential. We rely on an external network of collaborators to investigate biology and conduct additional tests that we do not perform in-house.
In recent years, we have built a development organization with the skills and expertise to design and implement clinical trials for multiple product candidates and to file license applications with FDA and other regulatory agencies worldwide. Our in-house development resources include a clinical development group responsible for designing, conducting and analyzing clinical trials. The group includes clinical research, clinical operations, biometrics, medical writing and drug safety. Our preclinical development group provides support in the areas of bioanalytical research and development, pharmacology, toxicology, pathology and pharmacokinetics. Our regulatory affairs group develops regulatory strategies and manages communications and submissions to regulatory agencies.
Collaborative Relationships
Novo Nordisk Option and License Agreement
As part of our separation from Novo Nordisk, we granted Novo Nordisk options to license certain rights to potential therapeutic proteins pursuant to an option and license agreement, which expired in November 2006. Under this agreement, we retained exclusive rights to these proteins in North America, and Novo Nordisk could obtain exclusive rights in the rest of the world. However, Novo Nordisk maintained the option to obtain exclusive worldwide rights to any licensed protein that acts to generate, expand or prevent the death of insulin-producing beta cells, which are involved in diabetes, a core business of Novo Nordisk. The option agreement also provided that:
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over a four-year period beginning November 10, 2000, Novo Nordisk paid us a fee of $7.5 million per year for the option rights under the agreement;
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during this four-year period, Novo Nordisk had the right, for specified license payments, to license up to the greater of eight proteins or 25% of all proteins discovered by us after August 25, 1995 and for which a hypothesis as to medical utility is generated, except for beta-cell-related proteins, of which Novo Nordisk could license an unlimited number; and
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Novo Nordisk had the right to extend the option agreement for two years, during which time it was required to pay us a fee of $7.5 million per year for the right to license four additional proteins. In June 2004, Novo Nordisk exercised its extension rights, extending the agreement through November 2006. Under the option agreement, we were required to promptly disclose to Novo Nordisk each protein for which we developed a hypothesis as to medical utility, together with information known to us about the protein, such as gene sequence and similarity, exploratory data and relevant patent filings. Novo Nordisk then had 60 days to decide on three possible courses of action:
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exercise one of its options to license the protein;
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decline to exercise one of its options, thereby forgoing any and all future rights to the protein; or
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extend its option on the particular protein by paying a $500,000 extension fee and agreeing to pay half of the research and development costs under a North America research plan to advance the protein to the status of a preclinical lead. Upon the exercise of an option by Novo Nordisk, we negotiated an exclusive license agreement to commercialize the protein containing certain predetermined terms, including up-front payments, milestone payments and royalty terms. The option agreements include the following terms:
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up-front and development milestone payments for each non-beta-cell-related protein licensed totaling up to approximately $20 million, regardless of the point of license;
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up-front and milestone payments for beta-cell proteins licensed totaling up to approximately $28 million;
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varying royalty rates, with the lowest rates applying to the license of a protein at the medical utility hypothesis stage, increasing substantially with each option extension;
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expiration of royalty obligations upon expiration date of the last-to-expire patent on the licensed protein or, if the product is not based on a patented protein, 12 years from the date of the first sale of the product; and
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reduction in royalty obligations if the license of third-party patented technology is required to utilize the licensed protein or if a generic product that is identical to a patented product achieves certain levels of market share. If Novo Nordisk extends its option on a protein, which it has done in one case, then when the protein reaches the status of a preclinical lead meeting certain criteria, Novo Nordisk may exercise the option, extend the option or decline to exercise the option, in which case it forgoes any and all future rights to the protein. If Novo Nordisk elects to extend the option at the preclinical lead stage, it must pay us a $1.0 million extension fee and agree to pay two-thirds of the research and development costs under a North America research and development plan to advance the protein through the completion of Phase 2 clinical trials. Upon completion of Phase 2 clinical trials, Novo Nordisk has one final opportunity to license the protein.
If, at any of Novo Nordisk’s decision points, we decide that we do not wish to move forward in the development of the subject protein, then we have the right to terminate our participation in the development of the protein. In that case Novo Nordisk has the right to continue the research and development on its own, and maintains its right to license the protein under the option agreement.
To date, in addition to one protein for which it extended its option, Novo Nordisk has licensed the rights outside North America to seven proteins, of which three licenses have been subsequently terminated. Currently, licenses are in effect for IL-20, IL-21, IL-31 and one recently licensed undisclosed protein.
In March 2004, we signed a license agreement with Novo Nordisk for exclusive rights to IL-20 in North America, effectively giving them worldwide rights under our intellectual property in this protein. Under the agreement, we have received a total of $4.0 million to date, and have the potential to receive future milestone payments and royalties based on sales.
Novo Nordisk Data Sharing and Cross-License Agreement for IL-21
In August 2005, we signed a collaborative data sharing and cross-license agreement with Novo Nordisk for the development of IL-21. Under the terms of this agreement, we and Novo Nordisk will collaborate to develop and execute a global clinical development plan to achieve regulatory approval of a common product in the companies’ respective territories. All activities falling under the global clinical development plan could be performed separately or jointly by the two companies. In the case of joint activities, we and Novo Nordisk will share all costs; otherwise, each company will be responsible for its own costs. This agreement includes a cross-license for intellectual property that will arise in the implementation of the global clinical development plan. In addition, the new agreement terminates the prior clinical data sharing agreement that was established in March 2004. In January 2007, the parties entered into a clinical manufacturing and chemistry, manufacturing, and control (CMC) development services agreement, under which Novo Nordisk will supply clinical materials, in quantities sufficient to meet requirements of the global clinical development plan, and certain services.
Merck Serono Strategic Alliance Agreement
In October 2004, we executed a strategic alliance agreement with Serono S.A. to research, develop and commercialize novel protein and antibody therapeutics derived from our proprietary gene and protein portfolio. Following the recently completed acquisition of Serono by Merck KGaA, Serono’s rights under this agreement are held by Merck Serono S.A., an affiliate of Merck KGaA. The strategic alliance agreement has a five-year term, with a maximum three-year research period for each candidate that may extend beyond the five-year term on a candidate-by-candidate basis.
As part of the strategic alliance, Merck Serono receives:
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An exclusive option, subordinated to the Novo Nordisk option agreement discussed above, to acquire rights to product development candidates resulting from research under the strategic alliance. The number of candidates within our core research areas to which Merck Serono may obtain rights is limited to twelve, while for candidates in our non-core areas the number is unlimited.
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Exclusive worldwide licenses to two of our preclinical stage candidates, FGF-18 and IL-22RA.
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An agreement for our preclinical stage candidate IL-31 in North America that provides for co-development and co-promotion for any products based on IL-31 within the United States through EMD Serono, the United States operation of Merck Serono, and exclusive licenses to Merck Serono in Mexico and EMD Serono in Canada. In return, we receive:
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A $20 million upfront option fee.
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$11.25 million in license fees for FGF-18, IL-22RA and IL-31, as well as potential future milestone payments of $99.5 million and royalties based on product sales.
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An equal share of the profit from the co-commercialization of any product within the United States.
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Upfront fees and potential milestone payments related to development progress, regulatory submissions and approvals for every candidate exclusively licensed or co-developed by Merck Serono.
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Royalties on product sales outside the United States for co-developed products, and on worldwide product sales for licensed products. Royalties rates for candidates in our core areas are higher than for candidates in our non-core areas. Similarly, royalty rates for protein therapeutics are higher than for antibody therapeutics. In addition, Merck Serono purchased approximately 3.2 million shares of our common stock for a total of $50 million, and entered into a related lockup agreement and a standstill agreement.
During the research stage of the collaboration, the two companies will work together for five years to identify new development candidates from our proprietary portfolio of genes and proteins. Each company may at its own expense work with non-core genes, while we will have exclusive rights to evaluate genes within our core research areas. Upon the generation of a medical hypothesis by either company for a candidate derived from a core or non-core gene, Merck Serono has a specified amount of time to make a decision whether or not to co-fund continued research on the candidate. If Merck Serono declines to continue, all rights to the candidate will revert to us. If Merck Serono decides to collaborate, it will fund the majority of the research costs if we decide to participate, or 100% of the costs if we decline.
The research collaboration for a candidate can continue for up to three years or until the candidate reaches the point of being designated a product development candidate. At this time, Merck Serono has an option to obtain rights to the candidate. If we collaborated and co-funded research on the candidate, we can choose whether or not to co-develop and co-promote in the United States together with EMD Serono, but if Merck Serono funded 100% of the research costs, Merck Serono’s rights to the candidate will be exclusive. Merck Serono has a specified amount of time in which to exercise this option.
For any candidate that is co-developed, the two companies will work together on the clinical development in the United States and European Union and commercialization of related product candidates within the United States. These activities will be governed by a steering committee with equal representation from the two companies. The majority of the development costs will be paid by Merck Serono. The expenses of commercialization and the profit from selling any resulting products in the United States will be split evenly between the two companies. Outside the United States, Merck Serono will pay us a royalty on product sales. At any point in time during the development period, we have an option to stop our contributions and convert a co-development relationship to a license.
Merck Serono Development and Marketing Agreement for Atacicept
In August 2001, we entered into a collaborative development and marketing agreement with Ares Trading S.A., a wholly owned subsidiary of Serono S.A., focused on product candidates derived from two cellular receptors, designated TACI and BCMA, that are involved in the regulation of the human immune system. Following the recently completed acquisition of Serono by Merck KGaA, Serono’s rights under this agreement are held by Merck Serono S.A., an affiliate of Merck KGaA. During the term of the agreement, we will work together exclusively with Merck Serono and its United States operation EMD Serono to develop biopharmaceutical products based on the two receptors. The ongoing co-development of atacicept in autoimmune diseases and cancer is pursuant to this agreement.
We share research and development expenses worldwide with the exception of Japan, where Merck Serono covers all expenses. The research and development activities are governed by a steering committee made up of an equal number of representatives from each company. Merck Serono is responsible for manufacturing all products for both clinical trials and commercial sale. We retain an option to co-promote the sale of products with EMD Serono in North America, which we can exercise provided that we fund our share of the research and development expenses and meet certain sales force and marketing requirements. If we exercise the co-promotion option, we will share commercialization expenses and profits in North America equally with EMD Serono and Merck Serono will have exclusive rights to market and sell products in the rest of the world, for which we will be entitled to receive royalties. In the event of certain changes in control of our company, we could lose our right to co-promote products in North America.
Either company may terminate its co-development and co-funding obligations upon 180 days’ notice. If we were to terminate our co-development and co-funding obligations, Merck Serono would take control of all research and development, and we would forego our co-promotion rights in North America. We still would be entitled to receive royalties on any product sales in North America in lieu of sharing in the profits from the sale of products and Merck Serono would continue to be obligated to make any milestone payments. If Merck Serono were to terminate its co-development and co-funding obligations, all rights in any products would revert to us,
and we could take control and fund all costs of the research and development, subject to negotiation of a commercially reasonable financial consideration to be paid to Merck Serono. Furthermore, Merck Serono would be obligated to manufacture product for use in clinical testing for up to one year from the termination date.
We granted Merck Serono an exclusive license to our intellectual property relating to TACI, BCMA and certain other related technologies to make, use, have made, sell, offer to sell and import products based on TACI and BCMA. Merck Serono is required to pay royalties on sales, which may vary based on annual sales volume and the degree of patent protection provided by the licensed intellectual property. Royalty payments may be reduced if Merck Serono is required to license additional intellectual property from one or more third parties in order to commercialize a product or, in certain circumstances, if a product suffers from competition. Royalty obligations under the agreement continue on a country-by-country basis until the date on which no valid patent claims relating to a product exist or, if the product is not covered by a valid patent claim, 15 years from the date of first sale of the product.
The term of the agreement began on August 30, 2001 and will continue for as long as a TACI or BCMA product is the subject of an active development project or there is an obligation to pay royalties under the agreement. The agreement provides for an initial fee and milestone payments to be paid by Merck Serono in connection with the development and approval of products, up to an aggregate of $52.5 million.
Other Out-licensed Product Candidates
In addition to the products we are developing internally or with co-development partners, we have out-licensed several product candidates to third parties in return for milestone payments and royalties:
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GEM-OS1 TM /GEM-OS2 TM (platelet-derived growth factor) is a combination of platelet-derived growth factor (PDGF-BB) and a synthetic bone matrix. PDGF-BB is a growth factor that stimulates the growth of a variety of cell types, including bone forming cells. We have out-licensed this protein to BioMimetic Therapeutics, Inc. for the treatment of bone defects. BioMimetic is developing GEM-OS1 and GEM-OS2 for the treatment of orthopedic applications, including foot and ankle fusion and wrist fracture. The company is conducting multiple pilot clinical studies to evaluate both products in these indications.
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rFactor XIII is a recombinant version of a protein that is involved in blood clotting, and is being developed for the treatment of bleeding disorders. Novo Nordisk acquired rights to this protein in October 2004 after we completed several Phase 1 clinical trials in healthy volunteers and in patients with congenital Factor XIII deficiency. Novo Nordisk has initiated a Phase 1 study of rFactor XIII in patients undergoing cardiac surgery.
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IL-20 is a new member of the IL-10 cytokine family. In September 2001, Novo Nordisk licensed the rights to IL-20 outside North America pursuant to the option and license agreement. In March 2004, they licensed the rights to IL-20 in North America under a separate agreement. Our preclinical data suggest that IL-20 may play an important role in the regulation of cutaneous inflammation and the pathology of psoriasis, and therefore is a potential target for the treatment of psoriasis.
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Fibroblast growth factor-18 (FGF-18) is a novel member of the fibroblast growth factor family of proteins. Our preclinical data suggest that FGF-18 may be useful for healing cartilage damaged by injury or disease. We out-licensed this protein to Merck Serono in October 2004 as part of the strategic alliance.
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IL-22 receptor subunit alpha (IL-22RA) is a cytokine receptor that signals both IL-20 and IL-22 activities and which is a target for development of a treatment for psoriasis. We have out-licensed this protein to Merck Serono in October 2004 as part of the strategic alliance. Currently Marketed Products
We have participated in the discovery or development of six recombinant protein products marketed by other companies.
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Novolin ® (insulin) and insulin analogs are recombinant human insulin products marketed by Novo Nordisk worldwide for the treatment of diabetes. In collaboration with Novo Nordisk, we developed a process for the production of recombinant human insulin in yeast that is used by Novo Nordisk.
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NovoSeven ® (Factor VIIa), a protein involved in the generation of blood clots, marketed worldwide by Novo Nordisk for the treatment of hemophilia patients. We cloned the gene that codes for human Factor VII and developed a process for the production of activated recombinant human Factor VII, or Factor VIIa, which led to the establishment of the manufacturing process that Novo Nordisk currently uses to produce this protein.
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Regranex ® (platelet-derived growth factor) is a growth factor marketed by Ortho-McNeil Pharmaceuticals, Inc., a Johnson & Johnson company, for the treatment of non-healing diabetic ulcers. We cloned the gene that codes for platelet-derived growth factor and demonstrated the importance of this protein in stimulating wound healing.
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GEM 21S ® (platelet-derived growth factor) is a combination of a platelet-derived growth factor with a synthetic bone matrix, developed by BioMimetic Therapeutics, Inc. and marketed by Osteohealth Company, a division of Luitpold Pharmaceuticals, Inc. for the treatment of bone loss and gum tissue recession associated with advanced periodontal disease. We cloned the gene that codes for platelet-derived growth factor, the active agent in GEM 21S.
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GlucaGen ® (glucagon) is a protein marketed by Novo Nordisk, Bedford Laboratories and Eisai Co., Ltd. for use as an aid for gastrointestinal motility inhibition and for the treatment of severe hypoglycemia in diabetic patients treated with insulin. In collaboration with Novo Nordisk, we developed a process for the production of this protein that is currently used by Novo Nordisk in the manufacture of GlucaGen.
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Cleactor™ (tPA analog) is a modified form of the protein tissue plasminogen activator, marketed in Japan by Eisai for the treatment of myocardial infarction, or heart attacks. In collaboration with Eisai, we developed this modified protein, which has enhanced properties that allow it to be given as a single injection. We earn royalties on sales of all these products except for NovoSeven and NovoRapid, for which we received a one-time payment to satisfy future royalty obligations. In the aggregate, from sales of these products and other technology licenses, we earned royalties of $6.9 million for the year ended December 31, 2006.
Other Collaborations
We recognize external collaborations as an important aspect of our success in analyzing and characterizing protein function. Where possible, we establish collaborations with experts in the field who have a depth of knowledge on a select protein, protein category or disease state that is related to the understanding of our gene and protein discoveries. These collaborations serve to accelerate the rate at which we can assess the biological functions of proteins and confirm medical hypotheses.
Manufacturing
We have established internal manufacturing capabilities to supply various products for toxicology studies and clinical trials. In 2006, we produced initial clinical supplies of PEG-IFN- l in our pilot-scale GMP manufacturing facility, using a high-yield internally developed E. coli process. We plan to continue production of PEG-IFN- l clinical supplies in this facility. We also expect to use this facility to supply our future clinical programs. However, manufacturing for certain collaborative programs under the strategic alliance agreement with Merck Serono is expected to be the responsibility of Merck Serono.
In preparation for the rhThrombin launch in the United States, we are building the rhThrombin commercial supply chain. We have entered into a contract manufacturing agreement with Abbott Laboratories for commercial-scale production of rhThrombin. Under the agreement, Abbott manufactures the rhThrombin bulk drug substance using mammalian cells, according to specifications developed and agreed upon by both companies. Abbott has committed to supply each year up to a maximum amount, which we believe is sufficient to meet our projected market demand. The agreement will terminate ten years after the rhThrombin launch. We have also entered in a manufacturing services agreement with Patheon, Inc. for fill and finish of the rhThrombin bulk product. Agreements with other critical supply chain partners, including packaging and distribution, are expected to be finalized in early 2007.
Under the terms of our collaborative development and marketing agreement, Merck Serono is responsible for manufacturing atacicept for both clinical trials and commercial sale. The product is made in mammalian cells. To date, Merck Serono has manufactured clinical-grade materials in quantities adequate to supply ongoing clinical trials and is expected to have adequate manufacturing capacity to provide sufficient supplies for future clinical trials and, ultimately, the commercial market.
Our initial clinical supply of IL-21, which is made in E. coli , was manufactured by Avecia Limited using a process we developed. In January 2007, we entered into a clinical manufacturing and chemistry, manufacturing, and control (CMC) development services agreement with Novo Nordisk. Under the term of this agreement, Novo Nordisk will supply clinical materials in quantities sufficient to support IL-21 development according to a global development plan adopted by the two companies.
Some of the inventions licensed to us were initially developed at universities or other not-for-profit institutions with funding support from an agency of the United States government. In accordance with federal law, we or our licensees may be required to manufacture products covered by patents in those inventions in the United States, unless we can obtain a waiver from the government on the basis that such domestic manufacture is not commercially feasible.
Commercialization
We intend to commercialize rhThrombin in the United States on our own. We believe that the thrombin market, with its concentrated customer base, could be addressed with a relatively small sales force. In addition, we believe that our recombinant technology gives us a competitive advantage in the current market as rhThrombin is inherently free from the risks of blood-borne pathogens associated with bovine and pooled human plasma-derived thrombin. In 2006, we began building our commercial operations team to support the launch of rhThrombin in the United States. We have hired, and will continue to recruit and hire, key members of the team who have extensive industry and commercial experience. We plan to build a dedicated sales force of approximately 50 surgical sales specialists with experience in surgical and hospital sales. The sales specialists will make sales calls to high-volume hospital accounts, targeting key surgeons, pharmacists, operating room nurses and managers within each account. We also plan to establish other functions within our commercial operations team, including sales operations, marketing, and supply chain and inventory management. Other commercial functions, such as warehousing, distribution, order entry and invoicing, will be provided by a third-party logistics company.
While we intend to self-commercialize rhThrombin in the United States, we will continue to pursue our three-pronged strategy for the development and commercialization of our other product candidates.
Internal development. We intend to independently develop products for North America that we believe can be successfully developed with our current infrastructure, as well as additions made to our infrastructure over the next few years. To qualify for internal development, product candidates must satisfy a number of criteria. Formulation, development and manufacturing of these products must initially be feasible through the use of our own facilities or contract providers. The anticipated clinical trials must be of a reasonable size and with fairly
well-defined endpoints and guidelines. Finally, the clinical indications and target markets must be accessible with a relatively small sales force. We believe that in addition to rhThrombin, IL-21 meets these criteria.
Co-development. We intend to develop certain product candidates jointly with other companies. In these arrangements, we would expect to pay a share of the research and development costs, retain rights to co-promote or co-market the potential products, and share in the profits from selling the potential products. Our criteria for selecting product candidates for co-development include our level of internal expertise related to the field, manufacturing requirements, clinical trial size and complexity, target market size and investment considerations. If we determine that it is desirable to invest our capital in a development program for a product candidate, but we do not believe that we can internally meet the development requirements, we will seek a co-development partner. Atacicept meets the criteria for co-development, and we have an ongoing development and marketing collaboration with Merck Serono to co-develop this product candidate.
Out-licensing. We intend to derive value from other product candidates through out-licensing to biotechnology or pharmaceutical companies. From out-licensing transactions, we would expect to earn up-front license fees, milestone payments and royalties on sales. We also would expect no ongoing participation, financial or otherwise, in development activities of these out-licensed products. We have out-licensed rFactor XIII and IL-20 to Novo Nordisk, and FGF-18 and IL-22RA to Merck Serono. We believe that both of these companies have the infrastructure and expertise to capture and maximize the market value of these product candidates.
Patents and Proprietary Rights
We seek appropriate patent protection for our proprietary technologies by filing patent applications in the United States. We have more than 295 unexpired issued or allowed United States patents, and over 360 pending United States patent applications. When appropriate, we also seek foreign patent protection and to date have more than 650 issued or allowed foreign patents.
Our success will depend in large part on our ability to:
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obtain patent and other proprietary protection for the genes, proteins and other inventions that we discover;
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enforce and defend patents once obtained;
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operate without infringing the patents and proprietary rights of third parties; and
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preserve our trade secrets and confidential information. Our patents and patent applications are directed to therapeutic protein-based products, including composition of matter for genes, proteins and antibodies, methods of using, methods of making and related technologies. Although we believe our patents and patent applications provide a competitive advantage, the patent protection available for therapeutic protein-based products is highly uncertain and involves complex legal and factual questions. No clear policy has emerged regarding the breadth of patents in this area. The law is evolving concerning the scope of patent protection for full-length and partial genes and their corresponding proteins. Also, there is substantial uncertainty regarding patent protection for genes and proteins without known function or correlation with specific diseases. Social and political opposition to patents on genes and proteins may lead to narrower patent protection, or narrower claim interpretation, for genes, their corresponding proteins and inventions related to their use, formulation and manufacture. Similarly, patent protection relating to therapeutic protein-based products is also subject to substantial uncertainty outside the United States, and patent laws are currently evolving in many countries. Changes in, or different interpretations of, patent laws in the United States and other countries may result in our inability to obtain or enforce patents covering the genes or proteins we discover. Consequently, we may not be able to prevent others from using our discoveries to develop and commercialize therapeutic protein-based products.
Although we apply for patents covering our important discoveries and technologies as we deem appropriate, we may fail to apply for such patents in a timely fashion or at all. Because patent applications in the United States and other countries are generally maintained in secrecy for eighteen months after they are filed, we may learn that other parties may have filed patent applications on genes or their corresponding proteins before we filed applications covering the same genes or proteins, and we may not be the first to discover these genes or proteins. Also, our pending patent applications may not result in the issuance of any patents. For example, these applications may not be sufficient to meet the statutory requirements for patentability, and therefore we may be unable to obtain enforceable patents covering the related discoveries or technologies we may want to commercialize. In addition, patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside our own patents, leading to uncertainty over the scope of the patents or the freedom to practice the claimed inventions.
While we have a number of issued patents, the discoveries or technologies covered by these patents may not have any therapeutic or commercial value. Also, these patents may not provide commercially meaningful protection against competitors. Other parties may be able to design around our issued patents or independently develop products having effects similar or identical to our patented protein-based product candidates. Some companies are currently attempting to develop therapeutic protein-based products that would function equivalently to products patented by other parties by altering the amino acid sequence within the therapeutic protein-based product and declaring the altered product as a new product. It may be easier to develop substantially equivalent versions of certain therapeutic protein-based products such as monoclonal antibodies and soluble receptors than it is to develop substantially equivalent versions of the proteins with which they interact because there is often more than one antibody or receptor that can have the same therapeutic effect. Consequently, any existing or future patents we have that cover monoclonal antibodies or soluble receptors may not provide any meaningful protection against competitors. In addition, the scope of our patents is subject to considerable uncertainty and competitors or other parties may obtain similar patents of uncertain scope. For example, other parties may discover uses for genes or proteins different from the uses covered in our patents, and these other uses may be separately patentable. If another party holds a patent on the use of a gene or protein, then even if we hold the patent covering the composition of matter of the gene or protein itself, that party might prevent us from promoting and selling any product directed to such use. Also, other parties may have patents covering the composition of matter of genes or proteins for which we have patents covering only methods of use or methods of manufacture of these genes or proteins. Furthermore, the patents we hold relating to recombinant human proteins, such as our patents covering rhThrombin, may not prevent competitors from developing, manufacturing or selling other versions of these proteins. Moreover, although we hold patents relating to the manufacture of recombinant human thrombin, we have limited composition of matter patent protection covering recombinant human thrombin. Accordingly, we may not be able to prevent other parties from commercializing competing forms of recombinant human thrombin or from manufacturing thrombin using a different method.
Third parties may infringe our patents or may initiate proceedings challenging the validity or enforceability of our patents. The issuance of a patent is not conclusive as to its scope, validity or enforceability. Challenges raised in patent infringement litigation we initiate or in proceedings initiated by third parties may result in determinations that our patents have not been infringed or that they are invalid, unenforceable or otherwise subject to limitations. In the event of any such determinations, third parties may be able to use the discoveries or technologies claimed in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of these discoveries or technologies. Because third parties may have patents that block or dominate our commercialization activities, we may be enjoined from pursuing research, development or commercialization of potential products or may be required to obtain licenses, if available, to the third-party patents or to develop or obtain alternative technology. Responding to challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns. In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts. For example, in August 2006, we filed a lawsuit in the United States District Court for the District of Delaware against Bristol-Myers Squibb Company for infringement of our two patents related to fusion protein technology. The lawsuit, in which we are seeking injunctive relief and damages, is currently in the discovery phase.
In addition, third parties may independently develop intellectual property similar to our patented intellectual property, which could result in, among other things, interference proceedings in the United States Patent and Trademark Office to determine priority of invention. An interference proceeding is an administrative proceeding to determine which party was first to invent the contested subject matter. Responding to interference proceedings or other challenges initiated by third parties may require significant expenditures and divert the attention of our management and key personnel from other business concerns.
Third parties may assert that our potential products, processes, formulations, uses or related technologies infringe their patents. Patent litigation is very common in the biopharmaceutical industry, and the risk of infringement claims is likely to increase as other companies obtain more patents and increase their efforts to discover genes and to develop proteins. Any patent infringement claims that might be brought against us may cause us to incur significant expenses, divert the attention of our management and key personnel from other business concerns and, if successfully asserted against us, require us to pay substantial damages. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products deemed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be nonexclusive, thereby giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some of our business operations as a result of patent infringement suits.
In addition to our patented intellectual property, we also rely on unpatented technology, trade secrets and confidential information, including our genetic sequence database, bioinformatics algorithms, research, preclinical and clinical data and development strategies. Our policy is to require our employees, consultants and advisors to execute a confidentiality and proprietary information agreement before beginning their employment, consulting or advisory relationship with us. These agreements generally provide that the individual must keep confidential and not disclose to other parties any confidential information developed or learned by the individual during the course of their relationship with us except in limited circumstances. These agreements also generally provide that we shall own all inventions conceived by the individual in the course of rendering services to us. The agreements may not provide effective protection of our technology, confidential information or, in the event of unauthorized use or disclosure, may not provide adequate remedies.
As part of our business strategy, we work with third parties in our research and development activities. Accordingly, disputes may arise about inventorship, ownership and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensors, scientific collaborators and consultants. In addition, other parties may circumvent any proprietary protection we do have. These parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information, and confidentially agreements and material transfer agreements we have entered into with them may not provide us with effective protection.
Government Regulation
Regulation by government authorities in the United States, Europe, Japan and other countries is a significant consideration in our ongoing research and product development activities and in the manufacture and marketing of our potential products. The FDA and comparable regulatory bodies in other countries currently regulate therapeutic proteins and related pharmaceutical products as biologics. Biologics are subject to extensive pre- and post-market regulation by the FDA, including regulations that govern the collection, testing, manufacture, safety, efficacy, potency, labeling, storage, record keeping, advertising, promotion, sale and distribution of the products. The time required for completing testing and obtaining approvals of our product candidates is uncertain but will take several years. Any delay in testing may hinder product development. In addition, we may encounter delays in product development or rejections of product applications due to changes in FDA or foreign regulatory policies during the period of product development and testing. Failure to comply with regulatory requirements
may subject us to, among other things, civil penalties and criminal prosecution; restrictions on product development and production; suspension, delay or withdrawal of approvals; and the seizure or recall of products. The lengthy process of obtaining regulatory approvals and ensuring compliance with appropriate statutes and regulations requires the expenditure of substantial resources. Any delay or failure, by us or our corporate partners, to obtain regulatory approvals could adversely affect our ability to commercialize product candidates, receive royalty payments and generate sales revenue.
The nature and extent of the governmental pre-market review process for our potential products will vary, depending on the regulatory categorization of particular products. The necessary steps before a new biological product may be marketed in the United States ordinarily include:
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nonclinical laboratory and animal tests;
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compliance with product manufacturing requirements including, but not limited to, current Good Manufacturing Practices (GMP) regulations;
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submission to the FDA of an investigational new drug (IND) application, which must become effective before clinical trials may commence;
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completion of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug for its intended use;
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submission to the FDA of a biologics license application (BLA) or a new drug application (NDA); and
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FDA review and approval of the BLA or NDA prior to any commercial sale or shipment of the product. Nonclinical tests include laboratory evaluation of the product, as well as animal studies to assess the potential safety concerns and efficacy of the product. Nonclinical safety tests must be conducted by laboratories that comply with current Good Laboratory Practices regulations. The results of nonclinical tests, together with extensive manufacturing information, analytical data and proposed clinical trial protocols, are submitted to the FDA as part of an IND application, which must become effective before the initiation of clinical trials. The IND application will automatically become effective 30 days after receipt by the FDA unless the FDA indicates that the application does not contain sufficient information to permit initiation of the clinical studies. If the FDA raises any concerns related to the clinical program, it is possible that these concerns will not be resolved quickly, if at all. In addition, the FDA may impose a clinical hold on a proposed or ongoing clinical trial if, for example, safety concerns arise, in which case the trial cannot commence or recommence without FDA authorization under terms sanctioned by the agency.
Clinical trials involve the administration of the product to healthy volunteers or to patients under the supervision of a qualified principal investigator. Clinical trials are conducted in accordance with current Good Clinical Practices regulations under protocols that detail the objectives of the trial, inclusion and exclusion criteria, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Protocols for each phase of the clinical trials are submitted to the FDA as part of the original IND application or as an amendment to the IND application. Further, each clinical trial must be reviewed and approved by an independent institutional review board at each institution. The institutional review board will consider, among other things, ethical factors, the safety of human subjects and the possibility of liability of the institution conducting the trial. An institutional review board may require changes in a protocol, and the submission of an IND application does not guarantee that a trial will be initiated or completed.
Clinical trials generally are conducted in three sequential phases that may overlap. In Phase 1, the initial product is administered to healthy human subjects or patients, or both, to assess safety, metabolism, pharmacokinetics and pharmacological actions associated with increasing doses. Phase 2 usually involves trials in a limited patient population to evaluate the efficacy of the potential product for specific, targeted indications, to determine dosage tolerance and optimum dosage, and to further identify possible adverse reactions and safety risks. If a compound appears to be effective and to have an acceptable safety profile in Phase 2 evaluations,
Phase 3 trials may be undertaken to evaluate further clinical efficacy in comparison to standard therapies, generally within a broader patient population at geographically dispersed clinical sites. Phase 3 protocols are reviewed with the FDA to establish endpoints and data handling parameters. Phase 1, Phase 2 or Phase 3 testing may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, an institutional review board, the FDA or other regulatory bodies may suspend a clinical trial at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable health risk.
The results of pharmaceutical development, nonclinical studies and clinical trials are submitted to the FDA in the form of a BLA or NDA for approval of the manufacture, marketing and commercial shipment of the biological product. A BLA or NDA contains extensive manufacturing information, and each manufacturing facility and quality system must be inspected and approved by the FDA before a BLA or NDA can be approved. The inspection and approval process is likely to require substantial time, effort and resources, and necessary approvals may not be granted on a timely basis, if at all. The FDA may deny a BLA or NDA if applicable regulatory criteria or clinical endpoints have not been met. The FDA may also require additional testing of the product or other information, or require post-market testing and surveillance to monitor the safety or efficacy of the product. In addition, after marketing approval is granted, the FDA may require post-marketing clinical trials, which typically entail extensive patient monitoring and may result in restricted marketing of an approved product for an extended period of time.
Some of our product candidates may qualify as orphan drugs under the Orphan Drug Act of 1983. This act generally provides incentives to manufacturers who undertake development and marketing of products to treat relatively rare diseases, defined as those diseases that affect fewer than 200,000 persons in the United States. Orphan drug status is granted for a product within a specific indication; therefore, it is possible for more than one product to receive orphan drug designation for the same indication. A product that receives orphan drug designation by the FDA is entitled to various advantages, including a seven-year exclusive marketing period in the United States for that product claim and certain tax credits. In 2005, the FDA granted IL-21 orphan drug status for the treatment of melanoma patients with advanced or aggressive disease. However, it is possible that in the future none of our product candidates will be designated as an orphan drug by the FDA. Orphan drug designation may or may not have a positive effect on our revenues.
The FDA has very broad enforcement authority under the Federal Food, Drug and Cosmetic Act and the Public Health Services Act. This authority extends to compliance with product manufacturing requirements, including current GMP regulations. Prior to approval of a BLA or NDA, all third parties, domestic or foreign, that are involved in manufacturing, testing or release of our products must pass an FDA inspection of their facility and quality systems. The facilities are inspected for compliance with applicable requirements, including current GMP guidelines, and must submit to continued periodic inspection by the FDA. Failure to comply with these requirements can result in civil and criminal penalties, including the issuance of a warning letter directing us to correct deviations from FDA standards. In addition, the FDA imposes a number of complex regulations on entities that advertise and promote biologics, including, among others, standards and regulations for direct-to-consumer advertising, off-label promotions, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. Failure to abide by these regulations can result in civil and criminal penalties, as well as a requirement that future advertising and promotional materials be pre-cleared by the FDA.
FDA marketing approval is only applicable in the United States. Marketing approval in foreign countries is subject to the regulations of those countries. The approval procedures vary among countries and can involve additional testing. The time required to obtain approval outside of the United States may differ from that required for FDA approval. There are centralized procedures for filings in the European Union (EU) countries, which allow submission of a single marketing authorization application to obtain approval in the approximately 25 countries of the EU. Outside of the EU, most countries generally have their own procedures and requirements, and compliance with these procedures and requirements may be expensive and time-consuming. Accordingly, there may be substantial delays in obtaining required approvals from foreign regulatory authorities after the relevant applications are filed, if approvals are ultimately received at all.
We are also subject to various federal, state and local laws, regulations, industry guidelines and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals, and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our work. Government regulations that might result from future legislation or administrative action, including additions or changes to environmental laws, may materially affect our business operations and revenues.
Competition
We currently face competition from a range of biotechnology and pharmaceutical companies as well as academic and research institutions. We compete with these entities to discover and obtain proprietary rights to new genes and their corresponding proteins and to commercialize the products we develop from these genes and proteins. Some of our competitors have greater resources and experience than we have in discovering, developing, manufacturing and selling protein-based products. We expect that competition in our field will continue to be intense.
rhThrombin, which is currently under regulatory review in the United States, is expected to face substantial competition upon its entrance into the topical hemostat market. Thrombin-JMI, a bovine plasma-derived thrombin from King Pharmaceuticals, Inc., is currently the only stand-alone thrombin product sold in the United States. In November 2006, Omrix Biopharmaceuticals, Inc. filed a biologics license application with the FDA for its pooled human plasma-derived thrombin, which it is developing in collaboration with Ethicon, Inc. In addition, a number of other hemostatic agents are currently available on the market, including topical hemostats and fibrin sealants from Johnson & Johnson Wound Management, a division of Ethicon, Inc., and the BioSurgery business unit of Baxter BioScience. Furthermore, new products and technologies could be developed in the future to limit or control bleeding during surgeries.
We anticipate that our other product candidates currently in research or development will face intense competition in their respective therapeutic areas from gene- or protein-based products as well as other therapies. In our efforts to research and develop new therapeutic proteins we will compete with other entities that are involved in the research and development of therapeutic proteins, including Genentech, Inc., Human Genome Sciences, Inc., Medarex, Inc. and Biogen Idec Inc., among others. We also will face competition from large pharmaceutical and other companies that develop other types of products related to particular diseases.
Although we believe that we are well positioned to compete effectively with respect to our existing and potential competitors, our ability to compete successfully in the future will depend on many factors, including our ability to:
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establish commercial infrastructure for rhThrombin and other product candidates;
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leverage our established collaborations and enter into new collaborations to support the development of our products;
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develop products that are safer, more efficacious or more convenient to administer than other products in the marketplace;
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obtain timely regulatory approvals;
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manufacture our products in a cost-effective manner in quantities sufficient to meet market demands;
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obtain adequate reimbursement from government health administration authorities, private health insurers and health maintenance organizations;
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identify new product candidates through our internal discovery efforts or through in-licensing; and
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obtain and enforce adequate patent protection for our genes, proteins and technologies. Employees
As of December 31, 2006, we had 498 full-time employees, approximately 381 of whom are dedicated to research and development. Each of our employees has signed confidentiality and intellectual property agreements, and no employees are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.
Website Access to Our SEC Reports
Our Internet address is www.zymogenetics.com. We make our periodic SEC reports (Form 10-Q and Form 10-K), current reports (Form 8-K) and amendments to these reports available free of charge through our website as soon as reasonably practicable after they are filed electronically with the SEC. We may from time to time provide important disclosures to investors by posting them in the investor relations section of our website, as allowed by SEC rules.
Item 1A. Risk Factors
Risks Related to Our Business
We have limited experience in developing or commercializing products and may not be successful in developing or commercializing any products.
We have not yet fully developed or commercialized any products on our own. Our most advanced internal product candidate, rhThrombin, completed clinical testing and is currently under regulatory review in the United States. Our other product candidates, which we are developing on our own or in collaboration with partners, have not yet completed clinical testing. In addition, our contributions to the discovery or development of certain therapeutic proteins currently on the market do not imply that we will be able to successfully develop products alone. Our work relating to these marketed products generally did not include clinical trials or manufacturing, and we did not participate in marketing or other late-stage development or commercialization activities.
Our near-term success is highly dependent on the approval and commercialization of rhThrombin, our lead product candidate.
In December 2006, we filed a license application with FDA to market rhThrombin as a general aid to control bleeding during surgery. Our plan is to take rhThrombin directly to the market in the United States and we may begin generating revenue in late 2007. Our ability to successfully commercialize and generate revenues from rhThrombin may be materially harmed by many factors, including:
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delays or failure to obtain marketing approval from FDA;
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failure to establish our commercial infrastructure, including a sales force;
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failure to build sufficient commercial inventories to support initial product launch and meet future market demands, and
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failure to compete effectively against the current well-established players in the topical hemostat market as well as any future entrants into this market. As we progress from a primarily research and development company to a company involved in commercialization, we may encounter difficulties in managing our growth and expanding our operations, including our product supply chain.
As we continue to advance an increasing number of product candidates through clinical trials and on to commercialization, we will need to expand our development and commercial operations capabilities. If we are not able to grow these capabilities internally, we will need to rely on collaborative partners or contract third parties to provide these services for us. Expanded operations will add significant responsibilities to certain
members of our management and key personnel. We will need to manage relationships with an increasing number of collaborative partners, suppliers and third-party contractors.
Assuming the approval of rhThrombin, we will need to rely on third parties for our supply chain, from sourcing of critical raw materials and manufacturing to distribution to end customers. Given the extent and complexity of our supply chain, additional resources and skills will be required to manage it effectively on an ongoing basis to facilitate commercialization of the product. Failure to adequately manage our supply chain could result in inventory shortages or other supply interruptions that could negatively impact rhThrombin sales.
Because we currently have no sales capabilities and limited marketing capabilities, we may be unable to successfully commercialize rhThrombin or our other potential products.
We currently have no direct sales capabilities and limited marketing capabilities. We have stated our intention to market and sell rhThrombin directly in the United States. To do so, we will need to incur significant expenses and commit significant management resources to develop effective sales and marketing capabilities. We may not be able to establish these capabilities in a timely fashion, if at all, to be able to compete successfully in the marketplace and gain market acceptance of rhThrombin. We expect rhThrombin to face substantial competition from plasma-derived thrombin products currently marketed or presently under development. In the United States, the only stand-alone thrombin product on the market is Thrombin-JMI, a bovine plasma-derived thrombin sold by King Pharmaceuticals, Inc. A pooled human plasma-derived thrombin, which is being developed by Omrix Biopharmaceuticals, Inc. and Ethicon, Inc., is under regulatory review in the United States and might be available on the market in 2007. In addition, a number of companies, including Johnson & Johnson and Baxter International, Inc., currently market other hemostatic agents that may present additional competition to rhThrombin. Despite the potential advantages of rhThrombin, we may be unsuccessful in competing against these well established companies.
We also expect that we will rely on our strategic partners or collaborators to market and sell products that we may develop. These third parties may not be successful in marketing our potential products, and we might have limited or no control over their marketing efforts. In addition, co-promotion or other marketing arrangements with third parties to commercialize potential products could significantly limit the revenues we derive from these products.
We may be unable to satisfy the rigorous government regulations relating to the development and commercialization of rhThrombin or our other product candidates.
Any failure to receive the regulatory approvals necessary to commercialize rhThrombin or any of our other product candidates could severely harm our business. Our product candidates are subject to extensive and rigorous government regulation. The FDA regulates, among other things, the collection, testing, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. If our potential products are marketed abroad, they will also be subject to extensive regulation by foreign governments. None of our product candidates has been approved for sale in the United States or any foreign market, and our experience in filing and pursuing applications necessary to gain regulatory approvals is limited.
The regulatory review and approval process, which includes nonclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain. Securing FDA approval requires the submission of extensive nonclinical and clin