| TANOX INC ITEM 1A Risk Factors Some of the information in this Annual Report on Form 10-K contains forward-looking statements |
| We typically identify forward-looking statements by using terms such as “may,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “objective,” “intend” or similar words, although we express some forward-looking statements differently |
| Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties, including but not limited to the risk factors set forth below, and actual results could differ materially from those projected or assumed in the forward-looking statements due to a number of factors, including: • our ability to develop safe and effective drugs; • failure to achieve positive results in preclinical and toxicology studies in animals or clinical trials in humans; • failure to economically and timely manufacture sufficient amounts of our products with the requisite quality for clinical trials and commercialization activities; • failure to receive, or delay in receiving, marketing approval for our products; • failure to successfully finance and commercialize our products, including gaining market acceptance; • our ability to manage relationships with collaboration partners; • our ability to obtain, maintain and successfully enforce patent and other proprietary rights protection of our products; • variability of royalty, license and other revenues, and potential adjustments and changes in amounts paid to us and amounts we may be required to pay to third parties, including our former attorneys under an adverse arbitration award; • our ability to use our manufacturing capacity and facilities costs effectively and in accordance with regulatory requirements; • our ability to establish comparability of our bulk drug substances before and after manufacturing changes; • our ability to enter into future collaboration agreements to support our research and development activities; • drug withdrawal from the market due to serious adverse reactions caused by the marketed drug; • our ability to secure licenses from third parties holding patents that may affect the manufacture or marketing of our products; • competition and technological change; • existing and future regulations affecting our business, including the content, timing of submissions and decisions made by the FDA and other regulatory agencies; 17 ______________________________________________________________________ [48]Table of Contents • governmental changes affecting Medicare and the healthcare and pharmaceutical industries including policies that affect coverage and levels of reimbursement for sales of our products; and • our ability to hire and retain experienced managers and scientists |
| The following section discusses important risks and uncertainties that could materially and adversely affect our business, results of operations and financial condition, which in turn could materially and adversely affect the trading price of our common stock |
| Regulatory Risks Developing therapeutic monoclonal antibodies is expensive and highly uncertain |
| Successful development of therapeutic monoclonal antibodies is highly uncertain |
| First, we must discover or otherwise acquire drug candidates |
| Then we must demonstrate through preclinical studies and clinical trials that our products are safe and effective for use in a particular target indication before we can obtain regulatory approvals to sell our products commercially to that patient group |
| These studies and trials tend to be very costly and time consuming |
| Furthermore, the results of preclinical studies and initial clinical trials of our products do not necessarily predict the results from later-stage clinical trials, which must demonstrate the desired safety and efficacy traits |
| Products that appear promising in research or early phases of development may not reach later stages of development or be submitted for marketing approval for a number of reasons, including: • Preclinical tests indicate that the product is toxic or otherwise lacks efficacy in animals; • The product is found to be less effective than required or causes serious adverse reactions or side effects in patients participating in clinical trials; often these reactions may not be detectable in small, early stage trials and can only be identified when the product is administered to a larger patient base, as in Phase 3 trials or following market approval; • The commercial introduction of competitive drugs that may have greater efficacy or safety than our product or otherwise adversely impact the risk/benefit profile of our product; • We are unable to develop manufacturing methods that are efficient, cost-effective and capable of meeting stringent regulatory standards; and • Proprietary rights of third parties may cover our products, and we are not able to secure licenses on reasonable terms |
| Our products other than Xolair require significant additional laboratory development or clinical trials before they can be submitted for marketing approval |
| We have limited capacity to conduct and manage clinical trials, and we rely on third parties, potentially including collaborative partners and contract research organizations, to assist us in these efforts |
| Our reliance on third parties may result in delays in completing, or failing to complete, clinical trials if our collaborators or contractors fail to perform under our agreements with them |
| If our large-scale trials are not successful or we are otherwise unable to satisfy the BLA filing requirements, we would not be able to recover our substantial investment in developing the product |
| 18 ______________________________________________________________________ [49]Table of Contents We may be unable to enroll sufficient patients in a timely manner in order to complete our clinical trials |
| The speed with which we are able to enroll patients in clinical trials is an important factor in determining how quickly we may complete clinical trials and the cost of running those trials |
| Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the study, perceived risks and benefits of the drug under study, whether the drug will continue to be made available to the patient following completion of the trial, the success of our personnel in making the arrangements with potential clinical sites and other ongoing trials directed at the same indication |
| Any of these factors may make it difficult for us to enroll enough patients to complete trials |
| Delays in patient enrollment will result in increased costs and program delays, which could slow down our product development and approval process |
| Even if the trials are ultimately completed and the product is approved for sale, a program delay could compromise the commercial viability of our drug relative to competitive therapies, which could materially harm our business and results of operations |
| If we do not receive and maintain regulatory approvals, we will not be able to market our products |
| The biotechnology and pharmaceutical industries are subject to stringent regulation with respect to product safety and efficacy by various international, federal, state and local authorities |
| Of particular significance are the FDA’s requirements covering R&D, testing, manufacturing, quality control, labeling and promotion of drugs for human use |
| A biotherapeutic cannot be marketed in the US until it has been approved by the FDA, and then can only be marketed for the indications approved by the FDA As a result of these requirements, the length of time, the level of expenditures and the laboratory and clinical information required for approval of a Biologics License Application, are substantial and can require a number of years |
| Our collaboration partners have secured approval to market Xolair in 41 countries, including the US and the European Union |
| Tanox has not prepared or submitted any marketing approval applications to the FDA or any other regulatory agency for any of its products |
| The FDA can delay, limit or not grant marketing approval for our products for many reasons, including: • their belief that a product candidate is not safe and effective; • their interpretation of data from preclinical testing and clinical trials may be different than our interpretation; • failure of our manufacturing processes or facilities to meet cGMP standards; and • changes in approval policies and guidelines or adoption of new regulations |
| The process of obtaining approvals to manufacture and market our products in foreign countries is subject to delay and failure for similar reasons |
| Even if we or our collaboration partners secure marketing approval for a product, the approval may be conditioned, as is Xolair’s, on our successful completion of post-marketing clinical studies or may impose limitations on the indicated uses for which our products may be marketed |
| In addition, each marketed product and its manufacturer continue to be subject to strict conditions and regulation after approval |
| Any unforeseen problems with an approved product or any violation of regulations could result in restrictions on the product, including, for example, changes in its labeling, written notices to physicians or a product recall |
| An approval for a limited indication reduces the size of the potential market for the product |
| 19 ______________________________________________________________________ [50]Table of Contents Delays in receiving or failing to receive regulatory approvals, or losing previously received approvals to market Xolair, would delay or preclude product commercialization, which would adversely affect our business, financial condition and results of operations |
| We are subject to the uncertainty related to reimbursement policies and healthcare reform measures |
| In recent years, there has been legislation and numerous proposals to change the healthcare system in the US Some of these measures limit or eliminate payments for medical procedures and treatments or subject pharmaceutical product pricing to government control |
| In addition, as a result of marketplace pressures, third-party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new drug products |
| Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products |
| If we succeed in bringing one or more of our products to market, we cannot assure you that third-party payors will consider them cost effective or allow reimbursement to the consumer at price levels sufficient for us to realize an appropriate return on our investment in product development or to even realize a profit |
| Significant changes in the healthcare system in the US or elsewhere, including changes resulting from adverse trends in third-party reimbursement programs, could materially reduce our potential profitability and harm our ability to raise the capital we would need to continue our operations |
| Furthermore, any decreases in third-party reimbursement may negatively affect our collaborators’ commercialization of Xolair, which would also adversely affect our business, financial condition and results of operations |
| New accounting pronouncements or regulatory rulings may impact our future financial position or results of operations |
| There may be new accounting pronouncements or regulatory rulings which may have an impact on our future financial position or results of operations |
| In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision of Statement of Financial Accounting Standards (or “FAS”) Nodtta 123, “Accounting for Stock-Based Compensation |
| ” The revision is referred to as “FAS 123R — Share-Based Payment” (or “FAS 123R”), which supersedes APB Opinion Nodtta 25, “Accounting for Stock Issued to Employees,” (or “APB 25”) and will require companies to recognize compensation expense, using a fair-value based method, for costs related to share-based payments including stock options and stock issued under employee stock plans |
| Tanox will adopt FAS 123R using the modified prospective basis on January 1, 2006 |
| The adoption of FAS 123R is expected to result in compensation expense that will reduce diluted net income per share by approximately dlra0dtta13 to dlra0dtta16 per share for 2006 |
| The actual 2006 stock compensation expense will dependent on the number of options granted, employee turnover and the volatility of our stock price |
| Risks Relating to Our Industry, Business and Strategy Our ability to become a profitable fully integrated biopharmaceutical company will depend on the continued commercial success of Xolair and on the success of our products in clinical development or our success in securing, developing and commercializing new clinical candidates |
| We anticipate that, in the near term, our ability to become profitable will depend in large part on the success of our collaboration partners in generating significant levels of sales of Xolair |
| In the longer term, an important part of our strategy is to become a fully integrated biopharmaceutical company |
| Our ability to do so will depend on the successful development, approval and commercialization of TNX-355, of TNX-832, or of potential new clinical-stage drug candidates that we may develop or otherwise in-license or acquire |
| 20 ______________________________________________________________________ [51]Table of Contents All of our product candidates, other than TNX-355 and TNX-832, are in preclinical development or in research, and we do not expect to seek regulatory approval of these candidates for many years, if ever |
| A significant portion of the research that we are conducting involves new and unproven technologies |
| Research programs to identify new disease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates |
| Our research programs may show promise initially in identifying potential product candidates, yet fail to yield product candidates for clinical development |
| In addition, if we do not achieve the clinical endpoints in our clinical studies of TNX-355 or TNX-832, we may decide to terminate development of those products |
| Even if we reach our endpoints, the results of the trials may indicate that further development or commercialization of TNX-355 or TNX-832 would not be economically viable |
| In that event, we would need to in-license or acquire suitable product candidates or products from third parties, and we may not be able to so for a number of reasons |
| The licensing and acquisition of pharmaceutical products is highly competitive |
| A number of more established companies, including large pharmaceutical companies, are aggressively pursuing strategies to license or acquire products in the fields in which we are interested |
| These established companies have a competitive advantage over us due to their size, cash and other resources, and greater clinical development and commercialization capabilities and experience |
| Other factors that may prevent us from licensing or otherwise acquiring suitable product candidates include the following: • we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return from the product; • companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or • we may be unable to identify suitable products or product candidates within our areas of expertise |
| Even if we are successful in developing and securing marketing approval of TNX-355, TNX-832 or other in-licensed or acquired product candidates, we may be unable to successfully launch, market or otherwise commercialize the product |
| If we are unable to secure suitable potential product candidates through internal research programs or by acquiring drugs or drug candidates from third parties, or if we are unable to successfully develop, launch, market or commercialize the product(s), our goal of becoming a fully integrated biopharmaceutical company will not materialize, and our profit potential will be harmed |
| Failure to secure future collaboration partners for our products or failure by those partners to develop, manufacture, market or distribute those products, or pay the royalties and other payments we expect, may delay or significantly impair our ability to generate revenues or profit |
| We intend to rely on future collaboration partners to develop, manufacture, commercialize, market or distribute certain of our product candidates, both to allocate financial risk and to secure the expertise that those partners may have in one or more of the foregoing areas |
| Many of our competitors are similarly seeking to develop or expand their collaboration and license arrangements with pharmaceutical companies |
| The success of these efforts by our competitors could have an adverse impact on our ability to form future collaboration arrangements |
| Also, the pharmaceutical companies that we may target for one or more of our product candidates might require a profit return that is greater than what our product may be able to deliver |
| The process of establishing collaborative relationships is difficult and time consuming and involves significant uncertainty |
| We cannot assure you that we will be able to negotiate acceptable collaboration agreements in the future |
| To the extent that we are unable to enter into future collaboration agreements, we would encounter increased capital requirements to undertake research, development and marketing at our own expense, and, in some cases, may have to discontinue development of one or more products |
| Assuming we are able to continue to develop certain products on 21 ______________________________________________________________________ [52]Table of Contents our own, we may experience significant delays in introducing our product candidates or find that the absence of these collaboration agreements adversely affects our ability to manufacture or sell our product candidates, particularly outside the US Even if we enter into future collaborative agreements, we cannot assure you that efforts under these agreements will succeed because: • the contracts may fail to provide significant protection or may become unenforceable if the partners fail to perform; • our partners may not commit enough capital or other resources to successfully develop, market or distribute our products; • our partners may not continue to develop and commercialize products resulting from our collaborations; and • disputes with our partners may arise that could delay or terminate our product candidates’ research, development or commercialization or result in significant litigation or arbitration |
| If any of these contingencies occur, our revenues, results of operations, product development, productivity and business may suffer |
| We face intense competition and rapid technological change that could result in products superior to the products we are developing |
| The biotechnology and pharmaceutical industries are subject to rapid and significant technological change |
| We have numerous competitors in the US and abroad, including, among others, major pharmaceutical and chemical companies, specialized biotechnology firms, universities and other research institutions |
| These competitors may develop technologies and products that are more effective or less costly than, or otherwise preferable to, any of our current or future products, and that could render our technologies and products obsolete or noncompetitive |
| Many of these competitors have substantially more resources and product development, production and marketing capabilities than we do |
| We cannot be certain that one or more companies will not receive patent protection that dominates, blocks or otherwise adversely affects our product development or business |
| In addition, many of our competitors have significantly greater experience than we do in undertaking preclinical testing and clinical trials of pharmaceutical products and obtaining FDA and other regulatory approvals of products |
| If we succeed in achieving commercial sales of our products, we also will be competing in commercial manufacturing efficiency and marketing capability, areas in which we have no experience |
| Our competitors may obtain FDA approval for products sooner or be more successful in manufacturing and marketing their products than are we or our collaborators |
| Xolair competes, and our drug candidates that are successfully developed and approved for marketing will compete, with numerous existing therapies, as well as a significant number of drugs that are currently under development and will become available in the future for the treatment of allergic asthma, HIV and other diseases targeted by our product candidates |
| The introduction of new products or follow-on biologics or new information about existing products may result in lost market share or lower prices |
| Our collaborators’ abilities to successfully market Xolair or expand its usage and our ability to bring new products to the marketplace and successfully compete for market acceptance and market share among physicians, patients, healthcare payors and the medical community, will depend on many factors: • relative efficacy and safety of our products; • timing and scope of regulatory approval; 22 ______________________________________________________________________ [53]Table of Contents • product availability; • potential advantages over alternative treatment methods; • development, marketing, distribution and manufacturing capabilities and support of our collaborators, if any; • reimbursement coverage from Medicare/Medicaid, insurance companies and others; • price and cost-effectiveness of our products; • ability to produce drug candidates in commercial quantities at a reasonable cost; • scope of patent protection for our products; and • availability of licenses under third party technology and patent rights |
| For instance, in mid-October 2005, Critical Therapeutics, Inc |
| launched Zyflo for the prevention and chronic treatment of asthma in patients 12 years of age and older |
| While not a direct competitor to Xolair, we understand that Critical Therapeutics’ marketing efforts are directed at the use of Zyflo prior to Xolair |
| We are also aware of other asthma therapies that may compete with Xolair |
| If our products are not competitive based on the foregoing or other factors, our business, financial condition and results of operations will be materially harmed |
| We may be unable to attract and retain key personnel and principal members of our scientific and management staff |
| Our success depends greatly on our ability to attract and retain qualified scientific, manufacturing, clinical and other technical personnel, as well as to retain the services of our existing technical management staff |
| To pursue our research and development programs and product development plans, we will be required to hire additional qualified clinical, scientific, manufacturing, QA/QC and other technical personnel |
| There is intense competition for qualified staff, and we cannot assure you that we will be able to attract and retain the necessary qualified staff to develop our business |
| The failure to attract and retain these key personnel and management staff, or the loss of any of our current management team and our inability to replace him or her on a timely basis, could materially harm our business and financial condition |
| We may be subject to product liability and other claims, and our insurance coverage may not be adequate to cover these claims |
| Our business exposes us to potential product liability risks, which are inherent in testing, manufacturing, marketing and selling pharmaceutical products |
| We may be held liable if any product we develop, or any product that uses or incorporates any of our technologies, causes side effects, injury or is found otherwise unsuitable during clinical testing, manufacturing, marketing or sale |
| We cannot assure you that we will be able to avoid product liability exposure |
| Product liability insurance for the biopharmaceutical industry is generally expensive |
| Although we currently maintain product liability insurance covering our products in amounts we believe to be commercially reasonable, we cannot assure you that our coverage is adequate or that continued coverage will be available at acceptable costs |
| In addition, some of our license and collaboration agreements require us to obtain product liability insurance |
| Future license and collaboration agreements may also 23 ______________________________________________________________________ [54]Table of Contents include such a requirement |
| Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit us or our collaborators from commercializing our products |
| A successful claim in excess of our insurance coverage could materially harm our business, financial condition and results of operations |
| In addition, any such claim could materially reduce our future revenues from sales of those products |
| Our insurance coverage may not be adequate to cover other claims and losses resulting from operating, manufacturing and business hazards, including natural disasters |
| We deal with hazardous materials and must comply with environmental laws and regulations, which can be expensive and restrict how we do business |
| Our research and development work and manufacturing processes involve the controlled use of hazardous materials, including chemical, radioactive and biological materials |
| Our operations also produce hazardous waste products |
| We are subject to federal, state and local laws and regulations governing how we use, manufacture, store, handle and dispose of these materials |
| Although we believe that we comply in all material respects with applicable environmental laws and regulations, we cannot assure you that we will not incur significant costs to comply with environmental laws and regulations in the future |
| In addition, current or future environmental laws and regulations may impair our research, development or production efforts |
| We could be liable for damages, penalties or other forms of censure if we are involved in a hazardous waste spill or other accident |
| Despite precautionary procedures that we implement for handling and disposing of hazardous materials, we cannot eliminate the risk of accidental contamination or discharge or any resultant injury from these materials |
| If a hazardous waste spill or other accident occurs, and we are held liable for damages, the liability could exceed our financial resources |
| Risks Associated with Manufacturing and Marketing Our revenues are dependent on the continued market acceptance and successful commercialization of Xolair |
| Our results of operations and future prospects are highly dependent on increasing the sales of our only commercial product, Xolair |
| Our revenues in 2005 consisted largely of revenue relating to sales of Xolair, and we expect that revenues from sales of Xolair and from payments based on the quantity of Xolair manufactured will constitute a larger percentage of our revenue in the next several years |
| Even though initial insurance and Medicare/Medicaid coverage of Xolair is encouraging, we cannot be certain that physicians, patients and payors will continue to widely accept Xolair as a treatment for its approved indication in the US or in any foreign markets |
| A number of factors may affect the rate and level of Xolair’s ultimate market acceptance, including: • the effectiveness of Novartis’ and Genentech’s sales and marketing efforts; • the perception by physicians and other members of the healthcare community of Xolair’s safety, efficacy and benefits compared to those of competing products or therapies; • the willingness of additional physicians to adopt a new asthma treatment regimen; • Xolair’s price relative to other products or competing treatments; • the availability of third-party reimbursement; 24 ______________________________________________________________________ [55]Table of Contents • the ability to conduct the Xolair post marketing commitment studies and the impact of the study results on the labeling of Xolair; • the ability to secure marketing approval for Xolair in Asia; • regulatory developments related to manufacturing or using Xolair; • the results of clinical development efforts for potential new indications for Xolair, and the scope and timing of additional marketing approvals and favorable reimbursement programs for any such expanded use; • availability of sufficient quantities of Xolair for commercial and clinical purposes; • increased competition for Xolair from new or existing products, which may demonstrate better safety, efficacy, cost-effectiveness or ease of administration than Xolair; and • adverse side effects or unfavorable publicity concerning Xolair |
| If the level of Xolair sales declines or fails to increase, our financial condition, results of operations and future potential would be significantly harmed |
| We have limited experience in manufacturing, and manufacturing problems or delays could result in delayed clinical trials |
| Manufacturing biopharmaceuticals is difficult and complex, and requires facilities specifically designed and validated for this purpose |
| It can take years to design, construct, validate, and license a new biopharmaceutical manufacturing facility |
| To develop products, we require sufficient quantity and quality of manufactured product for clinical trials |
| Regulatory or technical manufacturing issues that we may encounter could delay clinical development of our products |
| Any failure to produce these clinical requirements, either as a result of our inability to produce in accordance with cGMP or due to inadequate manufacturing capacity, can delay the commencement or continuation of our clinical trials |
| We own a pilot manufacturing facility in Houston, Texas, and, in January 2005, we assumed the long-term lease on, and purchased manufacturing equipment with respect to, a manufacturing facility with two 2cmam750L bioreactors in San Diego, California |
| We secured the facility in San Diego with the intent of manufacturing clinical trial materials and potentially initial commercial launch products, and we have been working to re-commission the facility for the cGMP manufacture of Phase 3 supplies of TNX-355 |
| The facility was built in 1992 and had been idled by Biogen Idec for at least a year prior to our acquisition |
| While we believe that the majority of the issues associated with the re-commissioning have been resolved, we may have problems that may delay or prevent us from manufacturing the clinical supplies of TNX-355 we need for Phase 3 |
| If we are unable to manufacture the required supplies ourselves, we may have to pursue contract manufacturing, which would result in a significant delay and increase in cost of the development program |
| Our own ability to manufacture products on a commercial scale is uncertain |
| To commercialize our products successfully, we must manufacture our products in commercial quantities in compliance with regulatory requirements and at an acceptable cost |
| If the manufacturing facilities used to produce our products cannot pass pre-approval or periodic plant inspections, the FDA and other regulatory agencies may not approve our products for sale or may delay or bar their further sale |
| In order to obtain regulatory approvals and to create capacity to produce our products in sufficient quantities for commercial sale at an acceptable cost, we will have to develop or acquire additional technology for commercial scale manufacturing and build or otherwise obtain access to adequate facilities 25 ______________________________________________________________________ [56]Table of Contents such as contract manufacturing organizations, which will require substantial additional funds |
| Third-party manufacturers of biopharmaceutical products often encounter difficulties in scaling up production, including problems involving production yields, quality control and assurance, shortage of qualified personnel, compliance with FDA regulations, production costs, demonstration of the ability to manufacture the product using controlled, reproducible processes, and development of advanced manufacturing techniques and process controls |
| To the extent we utilize contract manufacturers, we must rely on them to perform in accordance with the contract terms |
| Furthermore, because of the size of the dose of TNX-355 that may be required to see a therapeutic benefit, it may be difficult for us to find one or more contractors who have the expertise and facilities to produce bulk drug substance of TNX-355 in commercial quantities |
| We cannot assure you that we, operating alone or with the assistance of others, can develop the necessary manufacturing technology or that we will be able to fund or build an adequate commercial manufacturing facility necessary to obtain regulatory approvals and to produce adequate commercial supplies of our potential products on a timely basis |
| We also must rely on third-party contract manufacturers to fill and finish and label and package our product for clinical trials |
| We cannot guarantee that we will be able to secure these services on a timely basis or that the services will be performed in a manner that passes our quality assurance standards |
| Any failure or delay by these third parties could delay our filing for an IND or impede the progress of a clinical trial and would increase our development costs |
| Manufacturing changes may result in delays in obtaining regulatory approval or marketing for our products |
| If we make any changes in the manufacturing process for our products and product candidates once we begin clinical development, we may be required to demonstrate to the FDA and corresponding foreign authorities that the changes have not caused the resulting drug material to differ significantly from the drug material previously produced |
| Any significant manufacturing changes for the production of our product candidates could result in delays in development or regulatory approval |
| Changing the manufacturing site is considered to be a change in the manufacturing process; therefore, moving TNX-355 production to our San Diego manufacturing facility from our Houston pilot plant entailed manufacturing changes |
| In addition, we made other changes to the TNX-355 manufacturing process to increase cell-line yield |
| Accordingly, we will need to show that the drug material we produce in the San Diego manufacturing facility for the Phase 3 studies is sufficiently similar to the product that was used for the Phase 2 study in order to avoid delays in development or regulatory approval for this antibody product |
| If we are unable to demonstrate comparability between the material we produce before and after manufacturing changes, we may not be able to rely on the results of prior preclinical studies and clinical trials performed using the previously produced drug material |
| Depending upon the type and degree of differences between the newer and older drug material, we may be required to conduct additional animal studies or human clinical trials to demonstrate that the newly produced drug material is sufficiently similar to the previously produced drug material |
| We may make manufacturing changes for the production of TNX-832, our other product currently in clinical development, as well as future product candidates |
| An inability to show comparability between the older material and the newer material after making manufacturing changes could result in significant delays in development or regulatory approvals of our product candidates |
| We lack sales and marketing experience, and we depend on third parties for their expertise in this area |
| Under the terms of our collaboration agreements, Novartis and Genentech have exclusive marketing rights to Xolair and other collaboration anti-IgE products, and the revenues we receive from Xolair will depend primarily on the marketing and sales efforts of our collaboration partners |
| However, commercialization rights may revert back to us if our collaborators terminate our relationship |
| Furthermore, we may retain marketing rights, particularly in the US and selected Asian countries, for 26 ______________________________________________________________________ [57]Table of Contents other potential products that we can develop and sell effectively with a small, targeted sales force |
| We have not yet commercialized any of our internal or in-licensed product candidates, and we currently have no sales, marketing or distribution capabilities |
| Our commercialization of products that may be approved for marketing is subject to several risks, including but not limited to: difficulties in manufacturing the product on a large scale; difficulties in planning, coordinating and executing the commercial launch of the product; difficulties in marketing, distribution or sale of the product; competition from superior products; or third party patents that may preclude us from marketing the product |
| If Xolair marketing rights revert to us or if we elect to market other products directly, we would require significant additional management expertise and have to make significant additional expenditures to develop an internal marketing function and a sales force |
| We cannot assure you that we would be able to establish a successful marketing and sales force should we choose to do so |
| If we are unsuccessful in hiring and retaining sales and marketing personnel with appropriate technical and sales expertise or in developing an adequate distributions capability to support them, our ability to generate product revenues will be adversely affected |
| To the extent we cannot or choose not to use internal resources for the marketing, sales or distribution of any potential products in the US or elsewhere, we intend to rely on collaboration partners or licensees |
| We may not be able to establish or maintain such relationships or, if we are able to establish them, we will depend upon their efforts, which may not be successful |
| Risks Related to Financial Results and Need for Financing We have a history of net losses; we expect to continue to incur net losses and we may never achieve or maintain profitability |
| We have incurred net losses since our inception |
| As of December 31, 2005, we had an accumulated deficit of approximately dlra113dtta3 million, including a net loss of dlra19dtta4 million for 2005 |
| Our losses primarily have been the result of costs incurred in our research and development programs and from our general and administrative costs |
| We have funded our operations to date principally from licensing fees, royalties, profit-sharing, milestone and manufacturing-rights payments under our current or former collaborations, as well as with proceeds from private placements and an initial public offering of our common stock |
| We expect to continue to incur substantial operating losses until such time, if ever, that we are able to generate sufficient revenue from royalties, profit sharing, and manufacturing rights from Xolair and, potentially, revenues from an additional product or products to cover our expenses |
| Our revenues may be reduced by adjustments and changes in amounts paid to us and amounts we may be required to pay to third parties |
| Our ability to achieve and maintain long-term profitability depends to a significant extent on the continued successful commercialization of Xolair |
| It will also depend on our successfully completing preclinical and clinical trials, obtaining required regulatory approvals and successfully manufacturing and marketing our other current and future product candidates |
| We cannot assure you that we will be able to achieve any of the foregoing or that we will be profitable even if we successfully commercialize our products |
| The market price of our common stock has been volatile |
| Like other stocks of biopharmaceutical companies, the market price for our common stock has been and may continue to be volatile |
| Since January 1, 2004, our stock price ranged from dlra9dtta39 to dlra19dtta75 |
| Factors that may have contributed to the volatility of our stock during this period included: • Reported sales volume of Xolair; • Results of clinical trials; and • General market conditions, including particularly the biotechnology company segment |
| 27 ______________________________________________________________________ [58]Table of Contents Other factors that may have a significant impact on the market price of our common Stock include: • Announcements of technological innovations by us or our competitors; • Publicity regarding actual or potential medical results relating to Xolair or products being developed by us; • Potential litigation or material contracts to which we may be a party; • Regulatory developments or delays concerning our products; and • Issues concerning the safety or commercial viability of our products |
| Failure by Novartis or Genentech to develop, manufacture, market or distribute Xolair would impair our ability to generate revenues |
| Under the terms of our collaboration agreements, Novartis and Genentech are generally responsible for conducting clinical trials on, obtaining regulatory approval for, and manufacturing, marketing and distributing Xolair |
| As a result, our ability to profit from Xolair and any other anti-IgE products covered by our collaboration agreements with Genentech and Novartis depends in large part on their performance |
| We cannot control the amount and timing of resources Novartis and Genentech will devote to any of our products |
| If Novartis or Genentech experiences manufacturing or distribution difficulties, does not actively market Xolair or other partnered anti-IgE products or does not otherwise perform under our collaboration agreements, our potential for revenue from these products will be dramatically reduced |
| Novartis and Genentech may terminate our collaboration agreements, and, in that event, we would experience increased capital requirements to undertake development and marketing at our expense |
| We cannot assure you that we would be able to manufacture, market and distribute Xolair on our own |
| We may need additional financing, but our access to capital funding is uncertain, and issuance of additional common stock could dilute existing stockholders |
| Our current and anticipated development projects require substantial additional capital |
| While we expect that our cash on hand, together with our revenue from Xolair, will fund our existing operations for the next four years, our future cash needs will depend on many factors, including the commercial success of Xolair, receiving royalty, profit-sharing, milestone and manufacturing-rights payments from our collaboration partners, making progress in our clinical development of TNX-355 and TNX-832 and in our preclinical efforts, other research and development activities, and entering into additional collaboration agreements |
| Our capital requirements may also depend on the progress and level of costs associated with preclinical studies and clinical trials, the costs associated with acquisitions of new product candidates by licensing or otherwise, the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in or terminations of existing collaboration and licensing arrangements and the cost of manufacturing scale-up and development of marketing activities, if undertaken by us |
| We do not have committed external sources of funding and we cannot assure you that we will be able to obtain additional funds on acceptable terms, if at all |
| If adequate funds are not available, we may be required to: • delay, reduce the scope of or eliminate one or more of our development programs; • obtain funds through arrangements with collaboration partners or others that may require us to relinquish rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves; or • license rights to technologies, product candidates or products on terms that are less favorable to us than might otherwise be available |
| 28 ______________________________________________________________________ [59]Table of Contents We may raise additional funds by issuing shares of our stock, which would cause dilution to our stockholders and may adversely affect the market price of our common stock |
| New investors could have rights superior to existing stockholders |
| If funding is insufficient at any time in the future, we may be unable to develop or commercialize our products, take advantage of business opportunities or respond to competitive pressures, and our business and financial condition may be harmed |
| Risks Relating to Intellectual Property The patentability, validity, enforceability and commercial value of our patents are highly uncertain |
| If our intellectual property positions are challenged, invalidated or circumvented and we fail to prevail in resulting intellectual property litigation, our business could be adversely affected |
| Our success depends in part on obtaining, maintaining and enforcing patents and maintaining trade secrets |
| While we file and prosecute patent applications to protect our inventions, our pending patent applications may not result in the issuance of valid patents and our issued patents may not provide competitive advantages |
| Also, our patents may not prevent others from developing competitive products using related or the same technology |
| We cannot assure you that pending patent applications developed by or licensed to us will result in patents being issued or that, if issued, the patents will give us an advantage over competitors with similar technology |
| We own or have licenses to certain issued patents |
| The patents we own that are most material to our business are five US patents and six foreign patents relating to anti-IgE antibodies |
| However, the patent position of biotechnology and pharmaceutical firms is highly uncertain and involves many complex legal and technical issues |
| There is no clear policy involving the breadth of claims allowed or the degree of protection afforded under such patents |
| Issued patents can be challenged in litigation in the courts and in proceedings in the United States Patent and Trademark Office and in courts and patent offices in foreign countries |
| Issuance of a patent is not conclusive as to its validity, enforceability or the scope of its claim |
| We cannot assure you that our patents will not be successfully challenged as to enforceability, invalidated or limited in the scope of their coverage |
| Moreover, litigation to uphold the validity of patents and to prevent infringement can be very costly and can result in diverting technical and management personnel’s time and attention, which may materially harm our business, financial condition and results of operations |
| If the outcome of litigation is adverse to us, third parties may be able to use our patented technology without paying us |
| Moreover, we cannot assure you that our patents will not be infringed or successfully avoided through design innovation |
| Any of these events may materially and adversely affect our business |
| In addition to the intellectual property rights described above, we also rely on unpatented technology, trade secrets and confidential information |
| We cannot assure you that others will not independently develop substantially equivalent information and techniques or otherwise gain access to our technology or disclose such technology, or that we can effectively protect our rights in unpatented technology, trade secrets and confidential information |
| We require each of our employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us |
| We cannot assure you, however, that these agreements will provide effective protection if an unauthorized use or disclosure of this confidential information occurs |
| If we fail to obtain any required patent license from third parties, our product development efforts could be limited |
| Our commercial success depends on our ability to operate without infringing the patents and other proprietary rights of third parties |
| Other companies, some of which may be our competitors, have filed applications for or have been issued patents, and may obtain additional patents and proprietary rights, relating to products or processes used in, necessary to, or otherwise related to our products and product candidates |
| 29 ______________________________________________________________________ [60]Table of Contents For example, we are aware of broad patents owned by others relating to the manufacture, use and sale of recombinant humanized antibodies |
| Many of our product candidates are genetically engineered recombinant humanized antibodies |
| If our antibody products or their commercial use or production meet all of the requirements of any of the claims of the aforementioned patents, or other third party patents or patent applications, then we may need a license to one or more of these patents |
| We expect to seek to obtain patent licenses when, in our judgment, such licenses are needed |
| Even if we determine that a license is not necessary, a patent holder could disagree and sue us for damages and seek to prevent us from manufacturing, selling or developing our products |
| If any patent holder successfully challenges our judgment that our products do not infringe their patents or that their patents are invalid, we could be required to pay costly damages or to obtain a license to sell or develop our drugs |
| If we determine that a license is required, there can be no assurance that we will be able to obtain the license on commercially reasonable terms, if at all |
| If we are unable to secure a required license, we might be prevented from using certain of our technologies for the generation and manufacture of our recombinant antibody products or from pursuing product development, manufacturing or commercialization in a particular field, and this may materially harm our business and financial prospects |
| In addition to patents, we rely on trade secrets and proprietary know-how |
| We seek protection in part through confidentiality agreements |
| We cannot assure you, however, that these agreements will provide meaningful protection of our proprietary information or trade secrets in the event of an unauthorized use or disclosure or that our valuable trade secrets will not become known to, or independently developed, by our competitors |