| ZYMOGENETICS INC Item 1A Risk Factors Risks Related to Our Business We have limited experience in developing or commercializing products |
| We have not yet fully developed or commercialized any products on our own |
| Our contributions to the discovery or development of certain therapeutic proteins currently on the market do not indicate that we will be 24 ______________________________________________________________________ [51]Table of Contents 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 |
| We have limited experience with product development activities and may not be successful in developing or commercializing any products |
| Any failure or delay in commencing or completing clinical trials for product candidates could severely harm our business |
| The successful commercialization of any product candidates will depend on regulatory approval in each market in which our collaborators, our licensees or we intend to market the product candidates |
| Each of our product candidates must undergo extensive nonclinical studies and clinical trials as a condition to regulatory approval |
| Nonclinical studies and clinical trials are time-consuming and expensive and together take several years to complete, and to date we have not completed the clinical testing of any product candidate on our own |
| The commencement and completion of clinical trials for our product candidates may be delayed by many factors, including: • our inability or the inability of our collaborators or licensees to manufacture or obtain from third parties materials sufficient for use in nonclinical studies and clinical trials; • delays in enrollment of the number and types of patients required for clinical trials; • difficulty in maintaining contact with patients after treatment, resulting in incomplete data; • ineffectiveness of product candidates during the clinical trials; • unforeseen safety issues or side effects; and • governmental or regulatory delays |
| It is possible that none of our product candidates, whether developed on our own, with collaborators or by licensees, will complete clinical trials for any of the markets in which we, our collaborators or licensees intend to sell those product candidates |
| Accordingly, our collaborators, our licensees or we may not receive the regulatory approvals needed to market our product candidates in any markets |
| Any failure or delay in commencing or completing clinical trials or obtaining regulatory approvals for our product candidates could severely harm our business |
| Clinical trials may fail to demonstrate the safety and effectiveness of our product candidates, which could prevent or significantly delay their regulatory approval |
| Clinical trials involving our product candidates may reveal that those candidates are ineffective, have unacceptable toxicity or have other unacceptable side effects |
| In addition, data obtained from tests are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval |
| Likewise, the results of preliminary studies do not predict clinical success, and larger and later-stage clinical trials may not produce the same results as earlier-stage trials |
| Frequently, product candidates that have shown promising results in early clinical trials have subsequently suffered significant setbacks in later clinical trials |
| In addition, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts for these product candidates |
| We may be unable to satisfy the rigorous government regulations relating to the development and commercialization of our product candidates |
| Any failure to receive the regulatory approvals necessary to commercialize our 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 25 ______________________________________________________________________ [52]Table of Contents 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 we have only limited experience in filing and pursuing applications necessary to gain regulatory approvals |
| 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 clinical data and supporting information to the FDA for each indication to establish the product candidate’s safety and effectiveness |
| The approval process typically takes many years to complete and may involve ongoing requirements for post-marketing studies |
| In addition, we may not achieve FDA approval of a product candidate even if we have met our internal safety and efficacy criteria and completed clinical trials |
| Also, any FDA or other regulatory approval of our product candidates, once obtained, may be withdrawn |
| Government regulation may result in: • prohibitions or significant delays in the marketing of potential products; • discontinuation of marketing of potential products; and • limitations of the indicated uses for which potential products may be marketed |
| 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 |
| Because we currently have only limited capabilities to manufacture materials for clinical trials and no capability for commercial scale manufacturing, we will have to rely on third parties to manufacture our potential products, and we may be unable to obtain required quantities in a timely manner or on acceptable terms, if at all |
| We currently do not have the manufacturing facilities necessary to produce materials for commercial sale, and we have only limited capabilities to produce materials for clinical trials |
| We intend to rely on collaborators and third-party contract manufacturers and suppliers to produce or provide the quantities of drug materials needed for some of our clinical trials and commercialization of our potential products |
| For example, we have contracted with Abbott Laboratories to manufacture rhThrombin in bulk form for both supply of clinical trials and eventual commercial sale |
| In addition, there are several suppliers of important manufacturing process intermediates and a separate contract manufacturer for filling and finishing the bulk product |
| We will have to rely on these manufacturers and suppliers to deliver materials on a timely basis and to comply with regulatory requirements, including current GMP regulations enforced by the FDA through its facilities inspection program |
| These manufacturers and suppliers may not be able 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 manufacturing of these materials |
| In addition, agreements that we have entered into with third-party contract manufacturers in the past contain, and any contracts that we enter into with third-party contract manufacturers in the future may contain, limitations on the quantities of drug materials that such manufacturers will produce, and we may not be able to increase or decrease the supply of drug materials based on unanticipated changes in demand |
| If we are unable to contract for a sufficient supply of needed materials on acceptable terms, or if we encounter delays in the delivery of materials from, or difficulties in our relationships with, manufacturers, our IND-enabling nonclinical studies and clinical trials may be delayed |
| Delays in nonclinical studies could postpone the filing of IND applications or the initiation of clinical trials, and delays in clinical trials could postpone the subsequent submission of product candidates for regulatory approval and market introduction |
| Our manufacturing facility has limited capacity and may not continue to comply with applicable manufacturing regulations |
| Therapeutic proteins are often more difficult and expensive to manufacture than other classes of drugs, and their manufacture requires specialized facilities |
| We completed construction in 2004 of an expanded research and 26 ______________________________________________________________________ [53]Table of Contents development facility that includes dedicated pilot-scale GMP manufacturing suites for the production of therapeutic proteins for use in nonclinical and clinical testing |
| In October 2005, we began production of GMP material in this facility |
| These initial manufacturing suites will not provide us with the capability to produce drug materials for commercial sale |
| To develop this capability we would need to acquire larger manufacturing facilities, which are very expensive and require extended periods of time to build and validate |
| Also, we will be required to adhere to rigorous GMP regulations in the manufacture of therapeutic proteins |
| If any of our future facilities or quality systems cannot pass a pre-approval plant inspection, the FDA marketing approval of our product candidates may not be granted |
| In complying with these regulations and any applicable foreign regulatory requirements, we will be obligated to expend time, money and effort in production, record keeping and quality assurance to assure that our potential products meet applicable specifications and other requirements |
| Any failure to comply with these requirements may subject us to regulatory sanctions and delay or interrupt our development and commercialization efforts |
| In addition, 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, our licensees or we 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 |
| We have not attempted to secure any such waivers from the government, and do not know if they would be available if sought |
| If we are not able to obtain such waivers on a timely basis, we might be forced to seek manufacturing arrangements at higher prices, or on otherwise less favorable terms, than might be available to us in the absence of this domestic manufacturing requirement |
| Because we will depend on third parties to conduct certain laboratory tests and clinical trials, we may encounter delays in or lose some control over our efforts to develop product candidates |
| In certain instances, we will rely on third parties to design and conduct laboratory tests and clinical trials for us |
| If we are unable to obtain these services on acceptable terms, we may not be able to complete our product development efforts in a timely manner |
| Also, because we will rely on third parties for laboratory tests and clinical trials, we may lose some control over these activities or be unable to manage them appropriately, or may become too dependent on these parties |
| These third parties may not complete the tests or trials on schedule or when we request, and the tests or trials may be methodologically flawed or otherwise defective |
| Any delays or difficulties associated with third-party laboratory tests or clinical trials may delay the development of our product candidates |
| Because we currently have no sales capabilities and limited marketing capabilities, we may be unable to successfully commercialize our potential products |
| We currently have no direct sales capabilities and limited marketing capabilities |
| We have stated our intention to market and sell rhThrombin directly |
| To do so, we will need to incur significant additional expenses and commit significant additional management resources to develop effective sales and marketing capabilities |
| We may not be able to establish these capabilities despite these additional expenditures |
| We also expect that in the future we will rely on collaborators or other third parties to market products that we may develop |
| These third parties may not be successful in marketing our potential products, and we will have little or no control over their marketing efforts |
| In addition, we may co-promote our potential products or retain marketing rights in North America to these products |
| Co-promotion or other marketing arrangements with third parties to commercialize potential products could significantly limit the revenues we derive from these products |
| Our bioinformatics-based discovery strategy is unproven, and genes or proteins we have discovered may have no commercial value |
| We do not know whether our bioinformatics-based therapeutic protein discovery strategy will yield commercially valuable products because our bioinformatics-derived product candidates are in the early stages of 27 ______________________________________________________________________ [54]Table of Contents development |
| For most of our corporate existence, we relied on exploratory biology to study particular diseases and medical conditions and to find potential treatments |
| We shifted our emphasis to bioinformatics-based discovery in the mid 1990s |
| Bioinformatics is the use of high-powered computers, software and analytical tools to interpret DNA sequence data and to assist in identifying those genes and proteins that are likely to play a meaningful role in human health |
| We have used bioinformatics to discover genes and their corresponding proteins in genomic databases, with the goal of developing therapeutic protein-based products based on these discoveries |
| We have focused our efforts on certain key protein categories, some of which have yielded successful products in the past |
| Prior successes of other companies in commercializing protein-based products derived from these categories provide no indication that we will be able to establish the medical utility of any therapeutic proteins within these categories beyond those that have already been identified |
| Also, by focusing on specific categories of proteins, we may have overlooked other therapeutic proteins not contained in these categories that ultimately will be successfully commercialized by others |
| Our bioinformatics-based strategy may not result in the successful development or commercialization of any products |
| The lack of novel genomic data has required us to pursue novel approaches to discovering proteins that may not yield new product candidates |
| Since the mid-1990s we have relied on the flow of genomic data for the discovery of novel genes and proteins |
| With limited new genomic information, we have shifted our discovery efforts to focus on new approaches to analyzing existing information and to entirely new discovery approaches |
| These new approaches are unproven and they may not result in the discovery of any new product candidates |
| Our patent applications may not result in issued patents, and our competitors may commercialize the discoveries we attempt to patent |
| Our pending patent applications covering genes and their corresponding proteins may not result in the issuance of any patents |
| 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 therapeutic protein-based product candidates we may want to commercialize |
| In addition, other parties have filed or may file patent applications that cover genes, proteins or related discoveries or technologies similar or identical to those covered in our patent applications |
| Because patent applications in the United States until recently have been maintained in secrecy until a patent issues, 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 |
| Any patent applications filed by third parties may prevail over our patent applications or may result in patents that issue alongside patents issued to us, leading to uncertainty over the scope of the patents or the freedom to practice with respect to the claimed inventions |
| Third parties may infringe our patents or challenge their validity or enforceability |
| Third parties may infringe our patents or may initiate proceedings challenging the scope, 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 or described in our patents without paying licensing fees or royalties to us, which could significantly diminish the value of our intellectual property |
| In addition, enforcing our patents against third parties may require significant expenditures regardless of the outcome of such efforts |
| Furthermore, 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 28 ______________________________________________________________________ [55]Table of Contents Patent and Trademark Office to determine priority of discovery or invention |
| Interference proceedings could result in the loss of or significant limitations on patent protection for our discoveries or technologies |
| 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 |
| We may be subject to patent infringement claims, which could result in substantial costs and liability and prevent us from commercializing our potential products |
| Third parties may claim that our potential products processes 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 the industry continues to expand and as other companies obtain more patents and increase their efforts to discover genes and to develop proteins |
| Any patent infringement claims or similar legal impediments 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 that are claimed 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 non-exclusive, and therefore our competitors may be able to obtain 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 claims, which could severely harm our business |
| Issued patents may not provide us with any competitive advantage or provide meaningful protection against competitors |
| Issued patents may not provide us with any competitive advantage |
| Although we have a number of issued patents, the discoveries or technologies covered by these patents may not have any value |
| In addition, issued 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 product candidates |
| Some companies are currently attempting to develop therapeutic protein-based products substantially equivalent to products patented by other parties by altering the amino acid sequence within the therapeutic protein-based product and declaring the altered product a new product |
| It may be easier to develop substantially equivalent versions of 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 has 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 or manufacture of a gene or protein, then even if we hold the patent covering the composition of matter of the gene or protein itself, that other party could prevent us from selling any product directed to such use or using the manufacturing method covered by the other party’s patent |
| 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 thrombin |
| Accordingly, we may not be able to prevent other parties from commercializing competing forms of recombinant human thrombin or thrombin made through different manufacturing methods |
| 29 ______________________________________________________________________ [56]Table of Contents The patent field relating to therapeutic protein-based products is subject to a great deal of uncertainty, and if patent laws or the interpretation of patent laws change, our competitors may be able to develop and commercialize products based on proteins that we discovered |
| The patent protection available for genes, proteins and therapeutic protein-based products is highly uncertain and involves complex legal and factual questions that determine who has the right to develop a particular product |
| No consistent case law has emerged regarding the breadth of patents in this area |
| There have been, and continue to be, policy discussions concerning the scope of patent protection that should be awarded to genes and their corresponding proteins |
| There also continues to be policy concerns regarding the enforceability of patents covering research tools, which we may use during preclinical or clinical testing |
| Social and political opposition to patents on genes may lead to narrower patent protection for genes and their corresponding proteins |
| Patent protection relating to genes and therapeutic protein-based products is also subject to a great deal of uncertainty outside the United States, and patent laws are evolving and undergoing revision 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 patent protection for genes or proteins we discover or to enforce patents that have been issued to us, and may allow others to use our discoveries to develop and commercialize therapeutic protein-based products |
| We expect to incur significant expenses in applying for patent protection and prosecuting our patent applications |
| We may fail to secure meaningful patent protection relating to any of our existing or future product candidates, discoveries or technologies despite the expenditure of considerable resources |
| Our success depends significantly on the establishment of patent protection for the genes, proteins and related technologies we discover or invent |
| Consequently, we intend to continue our substantial efforts in applying for patent protection and prosecuting pending and future patent applications and maintaining patents |
| These efforts have historically required the expenditure of considerable time and money, and we expect that they will continue to require significant expenditures |
| If future changes in United States or foreign patent laws complicate or hinder our efforts to obtain patent protection, the costs associated with patent prosecution may increase significantly |
| We may be unable to protect our unpatented proprietary technology and information |
| In addition to our patented intellectual property, we also rely on unpatented technology, trade secrets and confidential information |
| We may not be able to effectively protect our rights to this technology or information |
| Other parties may independently develop equivalent technologies or independently gain access to and disclose substantially equivalent information |
| Disputes may arise about inventorship and corresponding rights to know-how and inventions resulting from the joint creation or use of intellectual property by us and our corporate partners, licensees, scientific and academic collaborators and consultants |
| In addition, confidentiality agreements and material transfer agreements we have entered into with these parties and with employees and advisors may not provide effective protection of our technology or information or, in the event of unauthorized use or disclosure, may not provide adequate remedies |
| Our plan to use collaborations to leverage our capabilities may not be successful |
| As part of our business strategy, we have entered into collaboration arrangements with strategic partners to co-develop product candidates and will continue to evaluate similar opportunities |
| For our collaboration efforts to be successful, we must identify partners whose competencies complement ours |
| We must also successfully enter into collaboration agreements with them on terms attractive to us and integrate and coordinate their resources and capabilities with our own |
| We may be unsuccessful in entering into collaboration agreements with acceptable partners or negotiating favorable terms in these agreements |
| Also, we may be unsuccessful in integrating the resources or capabilities of these collaborators |
| In addition, our collaborators may prove difficult to work with or less skilled than we originally expected |
| If we are unsuccessful in our collaborative efforts, our ability to develop and market product candidates could be severely limited |
| 30 ______________________________________________________________________ [57]Table of Contents We may not be able to generate any revenue from product candidates developed by collaborators or licensees if they are unable to successfully develop those candidates |
| We may be unable to derive any value from product candidates developed by collaborators or licensees |
| Our ability to generate revenues from existing or future collaborations and license arrangements is subject to numerous risks, including: • the possibility that our collaborators or licensees lack sufficient financial, technical or other capabilities to develop these product candidates; • the length of time that it takes for our collaborators or licensees to achieve various clinical development and regulatory approval milestones; • the inability of collaborators or licensees to successfully address any regulatory or technical challenges they may encounter; and • the possibility that these product candidates may not be effective or may prove to have undesirable side effects, unacceptable toxicities or other characteristics that preclude regulatory approval or prevent or limit commercial use |
| In addition, our collaborators or licensees may merge or be acquired and a new company may not be willing to continue the collaboration |
| For example, Serono announced in November 2005 that it had retained an investment bank to explore various strategic alternatives for the company |
| Although we are not aware of the outcome of this strategic review, if Serono were to merge with or be acquired by another company, the successor company may choose to scale back or discontinue its co-development activities under the strategic alliance agreement or the development and marketing agreement for TACI-Ig that we have entered into with Serono, which could harm our business |
| Novo Nordisk and Serono have substantial rights to license proteins we discover, which may limit our ability to pursue other collaboration or licensing arrangements or maximize the benefit from our discoveries |
| As part of our separation from Novo Nordisk, we granted Novo Nordisk options to license certain rights to several of our potential therapeutic proteins under an option agreement |
| Although we generally retain North American rights to the proteins licensed by Novo Nordisk pursuant to this agreement, Novo Nordisk has rights to these proteins in the rest of the world |
| In addition, under this agreement Novo Nordisk has worldwide rights, including rights in North America, to any licensed proteins that act to generate, expand or prevent the death of insulin-producing beta cells |
| Novo Nordisk has already licensed five proteins, and it may license other proteins in the future pursuant to this agreement |
| In 2004 we entered into a strategic alliance agreement with Serono, pursuant to which we granted Serono options to license certain rights to proteins in our research pipeline |
| Although we retained the rights to co-develop and co-commercialize the licensed proteins in the United States, Serono has at least half interest in the United States rights and full rights to these proteins outside the United States, subject to the rights of Novo Nordisk under the above described option agreement |
| Serono has already licensed three proteins as part of the strategic alliance, for one of which we elected to pursue co-development, and it may license other proteins in the future pursuant to this agreement |
| Our agreements with Novo Nordisk and Serono may: • preclude or delay opportunities to seek other collaborators for our product candidates, due to the fact that we cannot explore other collaboration opportunities relating to proteins subject to the agreements until after Novo Nordisk and/or Serono has decided not to exercise an option with respect to the protein; • limit the financial benefits we may derive from product candidates by allowing Novo Nordisk and/or Serono to license proteins in exchange for predetermined payments and royalties and with predetermined cost-sharing arrangements, which payments and royalty rates may be less than, and 31 ______________________________________________________________________ [58]Table of Contents which cost-sharing arrangements may be less favorable to us than, terms we might otherwise obtain in collaborative or licensing arrangements with other parties; • result in Novo Nordisk and/or Serono licensing proteins with the most therapeutic and commercial potential, leaving us with fewer or less desirable product candidates to develop on our own or with other potential collaborators; and • prevent us from collaborating with or licensing a product candidate to another company that, by virtue of its particular skills and capabilities, may be a more desirable collaborator or licensing partner for that particular product candidate than Novo Nordisk or SeroNodtta Environmental and health and safety laws may result in liabilities, expenses and restrictions on our operations |
| State and federal laws regarding environmental protection, hazardous substances and human health and safety may adversely affect our business |
| The use of hazardous substances in our operations exposes us to the risk of accidental releases |
| If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and fines |
| Future changes to environmental and health and safety laws could cause us to incur additional expenses or restrict our operations |
| In addition, the site where our principal headquarters and facilities are located has been listed as a contaminated property by the State of Washington due to its previous use by the City of Seattle as an electricity generating plant |
| The City of Seattle has agreed to defend us against and indemnify us for any claims that arise from this pre-existing contamination, except to the extent that we caused the claim through our negligence or intentional fault, or to the extent that we contributed to the contamination that is the subject of the claim, caused an increase in the clean-up costs or failed to comply with our obligations under our agreement with the City of Seattle |
| This indemnity may be insufficient and we may be subject to environmental liabilities or be prohibited from using or occupying some or all of the property as a result of environmental claims |
| Natural or man-made disasters may impair our ability to conduct our business |
| Our company operates from a single location in Seattle, Washington, which may be subject to natural or man-made disasters |
| These disasters could cause damage to our facility, personnel or equipment, which in turn, could cause us to cease or curtail operations |
| Our business and financial position may also be affected by disasters affecting the operations of one of our partners, manufacturers or suppliers |
| Disasters may include, but are not limited to earthquakes, tsunamis, fires, floods, power loss, communication failures and other similar events, including the effects of war or acts of terrorism |
| If any disaster were to occur, our ability to operate our business could be seriously or completely impaired |
| Although we maintain insurance coverage for many of these types of risks, it may not be adequate to cover our losses resulting from disasters or other business interruptions |
| Financial and Market Risks We anticipate incurring additional losses and may not achieve profitability |
| As of December 31, 2005, we had an accumulated deficit of dlra367dtta8 million |
| We expect to continue to incur increasing losses over the next several years, and we may never become profitable |
| It will be a number of years before we generate revenues from sales of other potential products, if ever |
| Our revenues from existing collaborative and licensing arrangements are insufficient to cover our operating expenses, and we may never generate revenues from these or any future arrangements sufficient to cover these expenses |
| In addition, we will continue to incur substantial expenses relating to our research and development efforts |
| We anticipate that these expenses will increase as we focus on the laboratory tests and clinical trials required to obtain the regulatory approvals necessary for the sale of any products |
| The development of our product candidates will require significant further research, development, testing and regulatory approvals |
| We may not be able to complete such development or succeed in developing products that will generate revenues that will justify the costs of development |
| 32 ______________________________________________________________________ [59]Table of Contents If we do not obtain substantial additional funding on acceptable terms, we may not be able to continue to grow our business or generate enough revenue to recover our investment in research and development |
| Our business does not currently generate the cash needed to finance our operations |
| We anticipate that we will continue to expend substantial funds on our research and development programs |
| We expect that these expenditures will increase significantly over the next several years as we continue to hire additional employees and expand our clinical development activities |
| We will need to seek additional funding through public or private financings, including equity financings, and through other arrangements, including collaborative and licensing arrangements |
| Poor financial results, unanticipated expenses or unanticipated opportunities that require financial commitments could give rise to additional financing requirements sooner than we expect |
| However, financing may be unavailable when we need it or may not be available on acceptable terms |
| If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders will be diluted, and these securities may have rights superior to those of our common stock |
| If we are unable to raise additional funds when we need them, we may be required to delay, scale back or eliminate expenditures for some of our research or development programs |
| We may also be required to grant rights to third parties to develop and market product candidates that we would prefer to develop and market internally, and such rights may be granted on terms that are not favorable to us |
| If we were required to grant such rights, the ultimate value of these product candidates to us would be reduced |
| Our operating results are subject to fluctuations that may cause our stock price to decline |
| Our revenues are unpredictable and may fluctuate due to the timing of licensing fees or the achievement of milestones under new or existing licensing and collaborative arrangements |
| In addition, our expenses may fluctuate from quarter to quarter due to the timing of expenses, particularly with respect to contract manufacturing and clinical and nonclinical testing |
| We believe that period-to-period comparisons of our past operating results are not good indicators of our future performance and should not be relied on to predict our future operating results |
| 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 |
| Risks Related to Our Industry Many of our competitors have substantially greater capabilities and resources than we do and may be able to develop and commercialize products before we do |
| We may be unable to compete successfully against our current or future competitors |
| We expect that competition in our field will continue to be intense |
| We face competition from other entities involved in the research and development of therapeutic proteins, including Genentech, Inc, Human Genome Sciences, Inc, Curagen, Inc |
| We also face competition from entities developing other types of products related to particular diseases, including other biotechnology and pharmaceutical companies |
| Furthermore, our potential products, if approved and commercialized, may compete against well-established existing therapeutic protein-based products, many of which may be currently reimbursed by government health administration authorities, private health insurers and health maintenance organizations |
| Assuming we are successful in obtaining marketing approval for rhThrombin in the United States, we expect it to face substantial competition both from currently marketed plasma-derived thrombin products and from those presently under development |
| In the United States, the only stand-alone thrombin product on the market is Thrombin-JMI, which is sold by King Pharmaceuticals, Inc |
| rhThrombin’s market potential may be limited if, in clinical studies, we are unable to demonstrate any safety advantages over Thrombin-JMI Other plasma-derived products that would compete with rhThrombin are presently in development, including bovine thrombin developed by Vascular Solutions, Inc |
| and human thrombin developed by Johnson & Johnson and OMRIX Biopharmaceuticals, Inc |
| Furthermore, a number of companies, including Johnson & Johnson and Baxter, currently market other hemostatic agents that may present additional competition to rhThrombin |
| 33 ______________________________________________________________________ [60]Table of Contents Many of our existing and potential competitors have substantially greater research and product development capabilities and financial, scientific, marketing and human resources than we do |
| As a result, these competitors may: • succeed in identifying genes or proteins, or developing therapeutic protein-based products, earlier than we do; • obtain approvals for products from the FDA or other regulatory agencies more rapidly than we do; • obtain patents that block or otherwise inhibit our ability to develop and commercialize our product candidates; • develop treatments or cures that are safer or more effective than those we propose to develop; • devote greater resources to marketing or selling their products; • introduce or adapt more quickly to new technologies or scientific advances, which could render our discovery technologies obsolete; • introduce products that make the continued development of our potential products uneconomical; • withstand price competition more successfully than we can; • more effectively negotiate third-party collaborative or licensing arrangements; and • take advantage of acquisition or other opportunities more readily than we can |
| Our product candidates, even if approved by the FDA or foreign regulatory agencies, may not achieve market acceptance among hospitals, insurers or patients |
| Our product candidates, even if approved by the FDA or foreign regulatory agencies, may fail to achieve market acceptance, which would impair our ability to become profitable |
| We believe that market acceptance of our potential products will depend on our ability to provide acceptable evidence of safety, efficacy and limited side effects, our ability to provide these potential products at reasonable prices and the availability of third-party reimbursement for these potential products |
| In addition, market acceptance depends on the effectiveness of our sales and marketing capabilities |
| To date, we have no direct sales capabilities and limited marketing capabilities |
| If the health care system, reimbursement policies or any other health care related regulations change, the prices of our potential products may fall or our potential sales may decline |
| In recent years, officials have made numerous proposals to change the health care system in the United States |
| These proposals include measures that would limit or prohibit payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control |
| Government and other third-party payors increasingly have attempted to control health care costs by limiting both coverage and the level of reimbursement of newly approved health care products |
| Increasingly, third-party payors have been challenging the prices charged for products |
| They may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted marketing approval |
| The government may adopt future legislative proposals, such as price controls on prescription drugs, and federal, state or private payors for health care goods and services may take further action to limit payments for health care products and services |
| In addition, in certain foreign countries, particularly the countries of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control |
| Any of these factors could limit our ability to successfully commercialize our potential products |
| We may face increased competition from lower priced products re-imported into the United States from Canada and other countries |
| The current law, enacted in December 2003, allows the importation of drugs from Canada, but only if the Secretary of Health and Human Services certifies that importation will pose no additional risk to the public’s health and safety |
| To date, no such certifications have been given |
| Legislative proposals have 34 ______________________________________________________________________ [61]Table of Contents been made to change the law to allow importation without any certification |
| If this or other new legislation or regulations were passed allowing the reimportation of drugs, it could adversely affect the prices of our potential products |
| Negative public opinion and increased regulatory scrutiny of genetic and clinical research may limit our ability to conduct our business |
| Ethical, social and legal concerns about genetic and clinical research could result in additional regulations restricting or prohibiting some of our activities or the activities of our suppliers and collaborators |
| In recent years, federal and state agencies, congressional committees and foreign governments have expressed interest in further regulating the biotechnology industry |
| More restrictive regulations could delay nonclinical studies or future clinical trials, or prevent us from obtaining regulatory approvals or commercializing any products |
| In addition, animal rights activists may protest our use of animals in research and development and may attempt to disrupt our operations, which could cause us to incur significant expenses and distract our management’s attention from other business concerns |
| The failure to attract or retain key management or other personnel could decrease our ability to discover, develop and commercialize potential products |
| We depend on our senior executive officers as well as key scientific, management and other personnel |
| Only a few of our key personnel are bound by employment agreements, and those with employment agreements are bound only for a limited period of time |
| Further, we have not purchased key-person life insurance policies for any of our executive officers or key personnel |
| Competition for scientists and other qualified employees is intense among pharmaceutical and biotechnology companies, and the loss of qualified employees, or an inability to attract, retain and motivate the additional highly skilled employees required for the expansion of our activities, could hinder our ability to discover, develop and commercialize potential products |
| We may be required to defend lawsuits or pay damages in connection with alleged or actual harm caused by our product candidates |
| We face an inherent business risk of exposure to product liability claims in the event that the use of our product candidates is alleged to have resulted in harm to others |
| This risk exists in clinical trials as well as in commercial distribution |
| We may incur significant expenses if product liability lawsuits against us are successful |
| Although we maintain product liability insurance, our coverage may not be adequate to cover such claims |
| Risks Related to Ownership of Our Stock Our stock price may be volatile |
| The market price of our common stock may fluctuate significantly in response to many factors beyond our control, including: • changes in the recommendations of securities analysts or changes in their financial estimates of our operating results; • failures in meeting performance expectations of securities analysts or investors; • fluctuations in the valuations of companies perceived by securities analysts or investors to be comparable to us; and • share price and volume fluctuations attributable to inconsistent trading volume levels of our shares |
| Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies |
| In particular, there have been high levels of volatility in the market prices of securities of biotechnology companies |
| These fluctuations often have been unrelated or disproportionate to the operating performance of those companies |
| These market and 35 ______________________________________________________________________ [62]Table of Contents industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock |
| In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation |
| We may be the target of this type of litigation in the future |
| Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business |
| Certain of our shareholders have significant control of our management and affairs, which they could exercise against other shareholders’ best interests |
| Novo Nordisk, together with Warburg Pincus Equity Partners, LP, beneficially owned an aggregate of approximately 44prca of our outstanding common stock as of December 31, 2005 |
| Representatives of these shareholders hold four out of nine seats on our board of directors pursuant to contractual obligations |
| These shareholders, acting together, have the ability to significantly influence our management and affairs and matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets |
| Consequently, these shareholders, acting together, may be able to cause a change in control, as well as delay or prevent a change in control |
| They may also discourage a potential acquirer from making a tender offer or otherwise attempting to effect a change in control, even if such a change in control would benefit our other shareholders |
| Provisions in our charter documents could prevent or frustrate any attempts to replace our current board of directors or management by shareholders |
| Our articles of incorporation and bylaws contain provisions, such as undesignated preferred stock and prohibitions on cumulative voting in the election of directors, which could make it more difficult for a third party to acquire us without the consent of our board of directors |
| Also, our articles of incorporation provide for a staggered board, removal of directors only for cause and certain requirements for calling special shareholder meetings |
| In addition, our bylaws require advance notice of shareholder proposals and nominations and impose restrictions on the persons who may call special shareholder meetings |
| These provisions may have the effect of preventing or hindering any attempts by our shareholders to replace our current board of directors or management |