| ICOS CORP Item 1A Risk Factors ICOS operates in an environment that involves a number of risks and uncertainties |
| The risks and uncertainties described below are not the only risks and uncertainties we face |
| Additional risks and uncertainties not presently known to us or that are not considered material, and therefore not mentioned herein, may impair our business operations |
| If any of the following risks actually occur, our business, operating results and financial position could be harmed |
| Risks Related to Our Business We have a history of losses and may be unable to sustain profitability |
| We have incurred significant operating losses since we began operations in 1990 |
| As of December 31, 2005, we had an accumulated deficit of dlra862dtta6 million |
| We cannot assure you that we will be able to achieve or increase profitability |
| We anticipate that operating expenses will increase in the future as we continue development of our potential products, seek to obtain necessary regulatory approvals and manufacture and market these product candidates |
| Directly, and through Lilly ICOS, we expect to continue to incur substantial marketing and other expenses related to commercializing Cialis in the United States, Europe, Mexico and Canada |
| Furthermore, Lilly ICOS may incur significant expenses in demonstrating safety and efficacy in order to provide a basis for seeking regulatory approvals to market tadalafil in new indications |
| Lilly ICOS and/or ICOS may be unable to generate sufficient revenues from Cialis and other products to achieve and maintain profitability |
| Overall changes in market demand for erectile dysfunction drugs, and Lilly ICOS’ ability to capture and retain market share, will significantly affect revenues and expected profitability from Cialis and, in turn, our results of operations and cash flows |
| For example, in 2005, the overall US market of PDE5 inhibitor prescriptions, for the treatment of erectile dysfunction, is estimated to have declined by approximately 3dtta2prca, compared to 2004 |
| 13 ______________________________________________________________________ [33]Table of Contents Our operating results are subject to fluctuations that may cause our stock price to decline |
| Our revenue and other income are unpredictable and may fluctuate due to many factors, some of which we cannot control |
| For example, factors affecting our revenue and other income, as well as Lilly ICOS’ revenue, presently or in the future, could include: • level of demand for our products, including changes in physician prescribing habits, and unfavorable publicity concerning our products or similar products; • changes in wholesaler buying patterns; • changes in reimbursement rates or policies; • timing of non-recurring license fees and the achievement of milestones under license and collaborative agreements; • government regulation, including regulations related to the marketing of our products; • increased competition for new or existing products; • timing and success of product launches; • level of our contract manufacturing for third parties; • fluctuations in foreign currency exchange rates; • changes in our product marketing, selling and pricing strategies and programs; and • inability to provide adequate supply of our products |
| In addition, our expenses, including payments owed by us under licensing or collaborative arrangements, are unpredictable and may fluctuate from quarter to quarter |
| We believe that quarter to quarter comparisons of our operating results are not a good indicator of our future performance and should not be relied upon to predict our future performance |
| It is possible that, in the future, our operating results in a particular quarter or quarters will not meet the expectations of securities analysts or investors, causing the market price of our common stock to decline |
| Even though Cialis has been approved for commercial sale, if we or others identify additional side effects, approval could be withdrawn or sales of Cialis could be significantly reduced |
| If we or others identify additional or potential side effects, or if manufacturing problems occur: • we may take Cialis off the market; • regulatory approval may be withdrawn or other regulatory sanctions may be imposed; • reformulation of the product, additional clinical studies, and/or changes in labeling of the product may be required; • changes to or re-approvals of our or our partner’s manufacturing facilities may be required; • our reputation in the marketplace may suffer; and • lawsuits, including class action suits, may be brought against us |
| 14 ______________________________________________________________________ [34]Table of Contents The identification of additional or potential side effects, and subsequent consequences, could harm or prevent sales of Cialis or could increase the costs and expenses of commercializing and marketing Cialis |
| General post-marketing surveillance of our product is ongoing, as well as specific studies that are required as part of our marketing approvals in various jurisdictions |
| Either of these sources could result in the identification of new or potential side effects |
| For example, in May 2005, Lilly ICOS added certain vision-related adverse events to the label for Cialis, based on reports from post-marketing surveillance |
| Subsequently, there was substantial media attention regarding a possible connection between use of Viagra^® (sildenafil citrate), another PDE5 inhibitor for the treatment of erectile dysfunction, and the development of non-arteritic anterior ischemic optic neuropathy (NAION), a condition that may lead to permanent visual impairment or blindness |
| In July 2005, the FDA issued a statement indicating that information regarding reports of NAION in patients using PDE5 inhibitors had been added to the labels of all products in the PDE5 inhibitor class, including Cialis |
| The FDA statement and the relevant label language state that a causal relationship between the development of NAION and use of these drugs has not been established |
| Such a causal relationship could be established in the future |
| Adverse media attention and concerns related to side effects may reduce sales of Cialis |
| The success of Cialis depends, in large part, on the promotion, sales and marketing activities of our partner, Lilly |
| Similarly, the success of our potential products in development could depend on our ability to arrange assistance from third parties |
| Through Lilly ICOS, we and Lilly have joint responsibility for the promotion and sale of Cialis in North America and Europe |
| Lilly has rights to Cialis for the other parts of the world, with royalties to be paid to Lilly ICOS We believe that the efforts of a sizeable pharmaceutical sales force and experienced marketing staff are important to the continued success of the product |
| We have relied, and expect to continue to rely, heavily on Lilly for promotion, sales and marketing of Cialis, even with respect to our joint responsibilities |
| We have limited staff and experience in these areas, and we may or may not be capable of independently fulfilling our responsibilities |
| We and Lilly may also rely on contract sales organizations to perform sales activities for Cialis |
| If Lilly fails to devote appropriate resources to promotion and sales activities, sales of Cialis could be reduced or could fail to reach their full potential |
| In addition, if Lilly breaches or terminates its agreement with us, or otherwise fails to conduct its activities related to Cialis in an effective or timely manner, sales of Cialis could be delayed, reduced or become substantially more costly for us to achieve |
| We will face similar risks with respect to new product candidates that we commercialize (ie, without the assistance of a third party, we may be unable to establish marketing, sales and distribution capabilities necessary to successfully commercialize new products) |
| Co-promotion or other marketing arrangements with others may be needed to commercialize our potential products |
| However, these arrangements could significantly limit the revenues we derive from these potential products and increase associated operating expenses |
| Additionally, these parties may fail to commercialize our potential products successfully |
| We may be unable to compete successfully in the markets for pharmaceutical and biotechnological products |
| The markets in which we compete are well established and intensely competitive |
| We may be unable to compete successfully against our current and future competitors |
| Our failure to compete successfully may result in pricing reductions, reduced gross margins, failure to achieve market acceptance for our products, and an inability to achieve or grow profitability |
| Cialis and our potential products, if approved and commercialized, compete or will compete against well established existing therapeutic products or treatments |
| successfully commercialized Viagra^® (sildenafil citrate), a PDE5 inhibitor that competes with our product, Cialis |
| GlaxoSmithKline and Bayer AG, outside the United States, and GlaxoSmithKline and Schering-Plough Corporation, in the United States, are marketing Levitra^® (vardenafil HCl), a third PDE5 inhibitor |
| Pfizer, Bayer AG, GlaxoSmithKline and Schering-Plough have invested substantial resources in marketing their PDE5 inhibitor products, and we would anticipate 15 ______________________________________________________________________ [35]Table of Contents that they would continue efforts to aggressively compete in this market |
| In addition, a number of pharmaceutical and biotechnology companies are currently developing new products targeting the same diseases and medical conditions that we target |
| Another PDE5 inhibitor, Zydena, was approved for marketing in Korea in November 2005, and an investigational new drug application related to this product has been filed with the FDA Other erectile dysfunction treatments are in development, and any other products or technologies that are directly or indirectly successful in treating erectile dysfunction could negatively impact the market for Cialis |
| If a PDE5 inhibitor with a time of effectiveness comparable to or longer than that of Cialis or a generic PDE5 inhibitor is successfully commercialized, it might have a significant adverse effect on the market for Cialis |
| Our competitors include pharmaceutical companies, biotechnology companies, academic and research institutions and government agencies |
| Many of these organizations, including those who market PDE5 inhibitors that compete with Cialis, have substantially more experience and more capital, research and development, regulatory, manufacturing, sales, marketing, human and other resources than we do |
| As a result, our competitors may: • develop products that are safer, more effective or less costly than any of our current or future products or that render our products obsolete; • obtain FDA and other regulatory approvals or reach the market with their products more rapidly than we can or with labeling claims more favorable than ours, which would reduce the potential sales of our product candidates; • obtain intellectual property rights that could increase our costs or prevent development or commercialization of our product candidates; • devote greater resources to market or sell their products; • adapt more quickly to new technologies and scientific advances; • initiate or withstand substantial price competition more successfully than we can; • have greater success in recruiting skilled workers from the limited pool of available talent; • more effectively negotiate third-party licensing and collaborative arrangements; and • take advantage of acquisition or other opportunities more readily than we can |
| We face, and will continue to face, intense competition from other companies for collaborative arrangements with pharmaceutical and biotechnology companies, for relationships with academic and research institutions, and for licenses to products and proprietary technology |
| In addition, we anticipate that we will face increased competition in the future as new companies enter our markets and as scientific developments surrounding protein-based and small molecule therapeutics continue to accelerate |
| The successful development of new therapeutic products is complex and takes a long time, and our efforts may not result in commercial products |
| Successful development of pharmaceutical and biotechnology products is highly uncertain, and very few research and development projects produce a commercial product |
| Any failure or substantial delay in completing clinical trials for our product candidates may severely harm our business |
| We must subject our potential product candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy for humans before obtaining regulatory approval for the sale of any of such products |
| Clinical studies are expensive, time-consuming and may take years to complete |
| We may not complete preclinical tests and clinical studies of product 16 ______________________________________________________________________ [36]Table of Contents candidates under development, and the results of the tests and studies may fail to demonstrate the safety or efficacy of such product candidates to the extent necessary to obtain regulatory approvals or to make commercialization of the product candidates worthwhile |
| At any time during these clinical studies, factors such as ineffectiveness of the product candidate, discovery of unacceptable toxicities or side effects, development of disease resistance or other physiological factors, or delays in patient enrollment, could cause us to interrupt, limit, delay or abort the development of these product candidates |
| In addition, success in preclinical and early clinical studies does not ensure that late-stage or large-scale studies will succeed |
| Many companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in clinical studies, even after promising results had been obtained in earlier studies |
| We have stopped two late-stage, Phase 3 clinical studies of product candidates following interim analyses: a Phase 3 study of Pafase^® (rPAF-AH) for the treatment of severe sepsis was stopped in 2002; and a study of LeukArrest^™ (rovelizumab) for the treatment of ischemic stroke was stopped in 2000 |
| We anticipate that only some of our product candidates will show safety and efficacy in clinical studies and many may encounter difficulties or delays during clinical development |
| Our efforts to obtain approval for additional indications for tadalafil are subject to many of the same risks associated with new products |
| Government regulatory authorities may not approve our product candidates or may delay their approval |
| Any failure to receive the regulatory approvals necessary to commercialize our product candidates could severely harm our business |
| Human therapeutic products are subject to extensive and rigorous government regulation |
| For example, the FDA regulates, among other things, the development, testing, manufacture, safety, efficacy, record keeping, labeling, storage, approval, advertising, promotion, sale and distribution of pharmaceutical products |
| Products marketed abroad are also subject to extensive regulation by foreign governments |
| Except for Cialis, we have not had any product candidate approved for sale in any country |
| In addition, we have only limited experience in filing and pursuing applications necessary to gain regulatory approvals, which may impede our ability to obtain such approvals |
| The regulatory review and approval process is lengthy, expensive and uncertain |
| To secure FDA approval, we must submit extensive manufacturing, preclinical and clinical data and supporting information to the FDA, for each indication for which we are seeking approval, to establish the product candidate’s safety and efficacy |
| The approval process may take years to complete and may involve ongoing requirements for post-marketing studies |
| Any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn |
| The effect of government regulation may be to: • delay marketing potential products for a considerable period of time; • limit the indicated uses for which potential products may be marketed; • specify contraindications or other risk management requirements that may limit the use of our products; • impose costly requirements on us as a condition of approval or continued use of our products; and • provide competitive advantage to other pharmaceutical and biotechnology companies |
| In addition, regulatory compliance may prevent us from introducing new or improved products or may require us to stop marketing products |
| If we fail to comply with the laws and regulations pertaining to our business, we may be subject to sanctions, including the temporary or permanent suspension of operations, product recalls, marketing restrictions and civil and criminal penalties |
| 17 ______________________________________________________________________ [37]Table of Contents We may be unable to establish or maintain the manufacturing capabilities necessary to develop and commercialize our potential products |
| We do not currently have facilities to manufacture Cialis or our product candidates in quantities necessary for commercial sale |
| In addition, our manufacturing capacity may be inadequate to complete all clinical studies contemplated by us over time |
| We intend to rely significantly on contract manufacturers, including collaboration partners, to produce large quantities of drug material needed for clinical studies and commercialization of Cialis and our potential products |
| Cialis is currently manufactured by Lilly |
| We will have to depend on contract manufacturers to deliver materials on a timely basis and to comply with regulatory requirements, including Good Manufacturing Practices, or GMP, regulations enforced by the FDA through its facilities inspection program |
| Contract manufacturers may be unable to meet our needs with respect to timing, quantity or quality of materials, and may fail to satisfy applicable regulatory requirements with respect to the manufacture of these materials |
| If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we should encounter delays or difficulties in our relationships with manufacturers, our revenues and potential profitability may be lower |
| Our business may be harmed if we cannot obtain sufficient quantities of raw materials and process them reliably and timely |
| We depend on others for the timely supply of raw materials used to manufacture Cialis and to conduct preclinical testing and clinical studies of product candidates |
| Once a supplier’s materials have been selected for use in our manufacturing process, the supplier in effect becomes a sole or limited source of that raw material due to regulatory compliance procedures |
| Presently, Lilly is the sole authorized provider of the active pharmaceutical ingredient (API) utilized in the manufacture of Cialis, and all API production for Cialis is conducted at a single Lilly facility |
| Lilly relies on a third-party vendor which has the exclusive rights to mill the API to conform the drug substance to specifications used in the manufacturing process |
| Once milled, the refined API is shipped to various Lilly locations, where the drug substance is manufactured into tablets, packaged and made ready for sale |
| At each of these stages in the manufacturing process, Lilly ICOS depends on an exclusive provider (ie, Lilly or another vendor) for the timely supply and processing of raw materials |
| If any of these suppliers or processing facilities were to cease production or otherwise fail to supply Lilly ICOS with raw materials or manufacturing services in a timely manner, Lilly ICOS and ICOS could be materially adversely affected |
| Similar risks exist with respect to raw materials used in testing and developing our other product candidates |
| If we are unable to adequately protect our intellectual property rights, the value of Cialis or of our potential products could be diminished |
| Our success depends to a significant extent on our ability and the ability of our collaboration partners to obtain, maintain and enforce patents and other proprietary rights |
| Patent law relating to the scope of claims in the pharmaceutical and biotechnology fields in which we operate is still evolving and subject to a substantial degree of uncertainty |
| Accordingly, there may be third-party patents or patent applications relevant to Cialis or our potential products that might block or compete with the technologies and products covered by our patents or patent applications |
| We also cannot be certain that our pending patent applications will result in issued patents or that others have not filed patent applications for technology covered by our pending applications or that we were the first to invent the technology |
| A third party has filed a claim seeking to add three individuals as co-inventors on two ICOS patents |