-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EV4sNNQlQk7/6Hiwv2TJZ1tTFCDCTjqvbbqzpGxRaFl4u9w5Yfl/WB+tix5/l1T6 aamWESXRiI66T2S9a5WobA== /in/edgar/work/20000829/0000891618-00-004488/0000891618-00-004488.txt : 20000922 0000891618-00-004488.hdr.sgml : 20000922 ACCESSION NUMBER: 0000891618-00-004488 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20000829 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTEIN DESIGN LABS INC/DE CENTRAL INDEX KEY: 0000882104 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 943023969 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-44754 FILM NUMBER: 712939 BUSINESS ADDRESS: STREET 1: 34801 CAMPUS DR CITY: FREMONT STATE: CA ZIP: 94555 BUSINESS PHONE: 4159033700 MAIL ADDRESS: STREET 1: 2375 GARCIA AVENUE CITY: MOUNTAIN VIEW STATE: CA ZIP: 94043 S-3 1 s-3.txt FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 29, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PROTEIN DESIGN LABS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 94-3023969 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
34801 CAMPUS DRIVE FREMONT, CALIFORNIA 94555 (510) 574-1400 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DOUGLAS O. EBERSOLE 34801 CAMPUS DRIVE FREMONT, CALIFORNIA 94555 (510) 574-1400 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: GREGORY M. GALLO ROD GUERRA, JR. DOUGLAS J. REIN GREGORY C. SMITH GRAY CARY WARE & FREIDENRICH LLP SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 400 HAMILTON AVENUE 525 UNIVERSITY AVE., SUITE 220 PALO ALTO, CALIFORNIA 94301 (650) 833-2000 PALO ALTO, CALIFORNIA 94301
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] - --------------- If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- TITLE OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TO BE REGISTERED REGISTERED AGGREGATE PRICE PER SHARE AGGREGATE OFFERING PRICE REGISTRATION FEE - ----------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value.................. 2,875,000 shares(1) $78.31(2) $225,141,250 $59,438 - ----------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------
(1) Includes 375,000 shares which the Underwriters have the option to purchase to cover over allotments, if any. (2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(c) and based on the average of the high and low sales prices on August 23, 2000 as reported on The Nasdaq Stock Market's National Market. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED AUGUST 29, 2000 2,500,000 Shares Protein Design Labs, Inc. Logo PROTEIN DESIGN LABS, INC. Common Stock ------------------ Our common stock is listed on The Nasdaq Stock Market's National Market under the symbol "PDLI". The last reported sale price of our common stock on The Nasdaq Stock Market's National Market on August 25, 2000 was $92.75 per share. The underwriters have an option to purchase a maximum of 375,000 additional shares to cover overallotments of shares. INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 6.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS PROTEIN DESIGN LABS -------- ------------- ------------------- Per Share............................................ $ $ $ Total................................................ $ $ $
Delivery of the shares of common stock will be made on or about , 2000. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. CREDIT SUISSE FIRST BOSTON CIBC WORLD MARKETS SG COWEN The date of this prospectus is , 2000. 3 PRODUCTS IN DEVELOPMENT The following table summarizes the potential therapeutic indications, development status and commercial rights for our approved product and clinical product candidates and is qualified in its entirety by the more detailed information appearing elsewhere in this prospectus. Not all clinical trials being conducted are listed. The development and commercialization of our product candidates is subject to numerous risks and uncertainties. See "Risk Factors."
ANTIBODY PRODUCT INDICATION(S) STATUS - ---------------- ------------- ------ Zenapax(R)(1) Kidney transplant rejection Marketed Heart transplant rejection Phase III Psoriasis Phase II Uveitis Phase I/II Multiple sclerosis Phase I/II SMART(TM) M195 Acute myeloid leukemia Phase III Nuvion(TM) Psoriasis Phase I/II Transplantation Phase II Graft-versus-host disease Phase I Cutaneous T-cell lymphoma Phase I SMART Anti-L-Selectin(2) Trauma Phase IIa SMART 1D10 Non-Hodgkins B-cell lymphoma Phase I Humanized Anti-IL-4(3) Asthma Phase I SMART Anti-Gamma Interferon Autoimmune diseases Phase I SMART Anti-VEGF(4) Cancer Phase I SMART Anti-E/P-Selectin Stroke, asthma Phase I in healthy volunteers complete
- --------------- (1) Hoffmann-La Roche Inc. and its affiliates (Roche) have marketing rights to Zenapax for transplantation. We share marketing rights with Roche for Zenapax's autoimmune indications. (2) Scil Biomedicals GmbH has European development and marketing rights to the SMART Anti-L-Selectin Antibody and is conducting the Phase IIa trial. (3) We licensed the humanized anti-IL-4 antibody from SmithKline Beecham Corporation, which has the option to acquire marketing rights after a specified Phase II trial and share development costs and profits from product sales. (4) We are developing the SMART Anti-VEGF Antibody with Toagosei Co., Ltd. Toagosei has marketing rights in Japan. We have marketing rights in North America and the option to market in the rest of the world outside of Japan. Protein Design Labs, our logo and SMART are registered U.S. trademarks and Nuvion is a trademark of Protein Design Labs, Inc. Zenapax is a registered U.S. trademark of Roche. All other company names and trademarks included in this prospectus are trademarks, registered trademarks or trade names of their respective owners. 4 ------------------ TABLE OF CONTENTS
PAGE ---- SUMMARY............................... 1 RISK FACTORS.......................... 6 USE OF PROCEEDS....................... 17 PRICE RANGE OF COMMON STOCK........... 17 DIVIDEND POLICY....................... 17 CAPITALIZATION........................ 18 DILUTION.............................. 19 SELECTED FINANCIAL DATA............... 20 BUSINESS.............................. 22
PAGE ---- MANAGEMENT............................ 34 DESCRIPTION OF CAPITAL STOCK.......... 37 UNDERWRITING.......................... 38 NOTICE TO CANADIAN RESIDENTS.......... 40 LEGAL MATTERS......................... 41 EXPERTS............................... 41 WHERE YOU CAN FIND MORE INFORMATION... 42
------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT. i 5 We were incorporated in Delaware in 1986. Our principal executive offices are located at 34801 Campus Drive, Fremont, California 94555 and our phone number is (510) 574-1400. Our home page is www.pdl.com. Information contained on our web site does not constitute part of this prospectus. FORWARD-LOOKING STATEMENTS This prospectus and the material incorporated by reference into this prospectus include "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. All statements other than statements of historical facts are "forward-looking statements" for purposes of these provisions. These forward-looking statements include statements of the plans and objectives of management for future operations, statements concerning product development programs and clinical trials, statements regarding anticipated future economic conditions or performance, and statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements are identified by the use of terminology such as "may", "will", "expects", "plans", "anticipates", "estimates", "potential", or "continue" or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot assure you that those expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. 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 for the reasons described elsewhere in this prospectus. All forward-looking statements and reasons why results may differ included in this prospectus are made as of the date hereof, and we assume no obligation to update these forward-looking statements or reasons why actual results might differ. ii 6 SUMMARY This summary highlights information contained in other parts of this prospectus. Because it is a summary, it does not contain all of the information that you should consider before investing in the common stock. You should read the entire prospectus carefully. PROTEIN DESIGN LABS, INC. We are a leader in the development of humanized monoclonal antibodies for the prevention and treatment of disease. We have licensed rights to our first humanized antibody product, Zenapax, to Roche, which markets it for the prevention of kidney transplant rejection. We are also testing Zenapax for the treatment of autoimmune disease. In addition, we have eight other humanized antibodies in clinical development for autoimmune and inflammatory conditions, asthma and cancer. We have fundamental patents in the U.S., Europe and Japan, which we believe cover most humanized antibodies. Eleven companies have licenses under these patents for humanized antibodies that they have developed. We receive or expect to receive royalties on sales of the three humanized antibodies developed by other companies that are currently being marketed. THE OPPORTUNITY During the past several years, there has been a resurgence of interest in the medical and commercial potential of monoclonal antibodies. The FDA has approved nine therapeutic antibodies, seven of them in the last three years, with total sales in 1999 in excess of $1.0 billion. This resurgence has been made possible by the use of genetic engineering to create improved forms of antibodies. In particular, we developed and patented computer-aided technology to make humanized antibodies, which are antibodies that capture the benefits of traditional mouse-derived monoclonal antibodies while avoiding their limitations in treating humans. Four of the nine therapeutic antibodies approved for marketing by the FDA are humanized antibodies, and at least 40 other humanized antibodies are currently in clinical trials. These humanized antibodies address many large markets, including cancer, stroke, heart disease, asthma, and autoimmune diseases such as psoriasis, multiple sclerosis and rheumatoid arthritis. A number of these antibodies have entered or completed the later phases of clinical development and, depending on satisfactory clinical results, may reach the marketplace in the next few years. As discussed further below, many of these antibodies are licensed under our patents, or are being developed by us. In addition, with the sequencing of the human genome nearly complete, large numbers of new, potentially important therapeutic targets are being identified. Humanized antibodies can be routinely and reliably developed against almost any cell surface or extracellular target. Hence, we believe that humanized antibodies will be a key part of the next generation of pharmaceutical products. STRATEGY Our objective is to leverage our product pipeline and patent portfolio in the field of antibodies to become a fully-integrated, profitable, research-based biopharmaceutical company. We derive revenues, and expect to derive revenues in the future, from three major sources: - Sales of products that we have developed. We receive royalties on sales of Zenapax by our licensee, Roche. We have eight other humanized antibodies in clinical development. We plan to market some of our products, once approved, in North America, especially for specialty markets such as cancer that we believe can be effectively serviced with a relatively small sales force. We may license marketing rights for some antibodies or some geographic areas to other pharmaceutical companies. - Royalties from the sale of humanized antibodies developed by other companies. We license our patents covering humanized antibodies in return for license fees, annual maintenance payments and 1 7 royalties on product sales. The three humanized antibodies currently approved by the FDA in addition to Zenapax are licensed under our patents. Two of these antibodies are Genentech's Herceptin and MedImmune's Synagis, which had reported sales totaling approximately $480 million in 1999 and on which we are currently receiving royalties. The third is American Home Products' Mylotarg, which it began marketing in May 2000. We have license agreements with eight other companies for humanized antibodies they are developing. - Research and development contracts with other companies. We humanize antibodies for other companies in return for upfront fees, milestone payments and royalties on any product sales. In some cases we also receive the right to co-promote these products in designated territories. We also sometimes license out marketing rights to a humanized antibody that we are developing, and then typically receive upfront fees and milestone payments and/or research funding, in addition to royalties on any product sales by our licensee. PRODUCTS IN DEVELOPMENT We have the following products under clinical development. We usually refer to the humanized antibodies that we have made as SMART antibodies. - Zenapax. The FDA approved Zenapax in December 1997 for the prevention of kidney transplant rejection. Zenapax was the first humanized antibody to be approved anywhere in the world. Our licensee Roche sells this product in the U.S., Europe and other territories for the transplant indication. Zenapax works by blocking the activation of T cells, which play a key role in both transplant rejection and autoimmune disease. Zenapax is the first effective immunosuppressive drug without significant side effects. As a result, we believe Zenapax may be useful for the long-term treatment of autoimmune diseases such as psoriasis and multiple sclerosis. In 1999, we reacquired from Roche specific development and marketing rights to Zenapax for autoimmune diseases. Zenapax is currently in two Phase II trials in psoriasis, a common autoimmune disease of the skin, and in early stage trials for uveitis, multiple sclerosis, aplastic anemia, and the ocular manifestations of Bechet's disease. We plan to conduct additional trials for psoriasis and other autoimmune diseases. In the early stage clinical trial for uveitis, an autoimmune disease of the eye, Zenapax was safely administered to patients for one year and was effective in controlling the disease in most patients, some of whom have continued to receive Zenapax for up to three years. - SMART M195 Antibody. This antibody has completed a Phase II trial and is now in a Phase III trial for the treatment of acute myeloid leukemia, a disease that has approximately 10,000 new cases in the U.S. each year and has a high mortality rate. An interim review of the trial results by an independent data safety monitoring board is expected in the fourth quarter of 2000. The monitoring board could recommend or require that the trial be terminated if the interim data do not show a sufficient probability of the trial being successful or if specified safety criteria are not met. If the final results of the trial are positive, we expect to file for marketing approval. - Nuvion (SMART Anti-CD3 Antibody). We are developing this antibody for the treatment of autoimmune diseases. Although both Nuvion and Zenapax may target some of the same diseases, we believe they may have complementary roles in medical treatment. Nuvion may be more potent than Zenapax, but may not be suitable for chronic administration, so it may be most useful to treat acute episodes of autoimmune disease and to induce remissions. Zenapax may be useful to maintain the remissions for longer periods. Nuvion is currently in a Phase I/II clinical trial for psoriasis. It is also in clinical trials for transplant rejection, graft-versus-host disease, and cutaneous T-cell lymphoma, but we have no current plans to conduct Phase III trials in these indications. - SMART Anti-L-Selectin Antibody. This antibody may be useful for preventing the multiple organ failure and mortality that often follows severe trauma. In 1999, we licensed European marketing rights for this antibody to Scil Biomedicals. Scil paid us a licensing fee and agreed to conduct and pay for clinical trials in Europe and to provide us with the data; in return, we are making milestone 2 8 payments to Scil on the achievement of defined clinical and regulatory goals. Scil has completed a Phase I trial of SMART Anti-L-Selectin and is now conducting a Phase IIa trial for treatment of trauma. If the results from that Phase IIa trial are encouraging, we may initiate clinical development in the U.S. - SMART 1D10 Antibody. The National Cancer Institute is sponsoring a Phase I trial of this antibody for non-Hodgkins B-cell lymphoma. Clinical responses were observed in three of the patients in this trial, and we plan to initiate a Phase II trial. SMART 1D10 is directed to a different target on B cells than Rituxan, the antibody currently marketed for non-Hodgkins lymphoma, and thus may provide an alternative therapy. In the U.S. and Europe, approximately 560,000 patients have this disease and 100,000 new cases occur annually. - Humanized Anti-IL-4 Antibody. We licensed this antibody, for the potential treatment of asthma and allergy, from SmithKline in 1999. The humanized anti-IL-4 antibody blocks the effects of interleukin 4, which is believed to play a key role in initiating the series of biological processes that lead to allergy and asthma. SmithKline began a Phase I trial of the humanized anti-IL-4 antibody, which we have now completed. We plan to initiate a Phase I/II multiple dose study, followed by a Phase II trial in moderate to severe asthma patients. - SMART Anti-Gamma Interferon Antibody. This antibody targets gamma interferon, a protein that stimulates several types of white blood cells and that may be involved in some autoimmune diseases. We have completed a Phase I trial of SMART Anti-Gamma Interferon in normal volunteers, which showed the antibody is well-tolerated and has biological activity. We plan to initiate a Phase I/II trial in patients with Crohn's disease, a form of inflammatory bowel disease. In the future, we may initiate clinical trials in other autoimmune diseases. - SMART Anti-VEGF Antibody. This antibody blocks the action of vascular endothelial growth factor (VEGF), which is believed to play an important role in the formation of blood vessels in tumors, a process that allows the tumors to grow. We humanized the antibody for Toagosei, a Japanese chemical company, and subsequently entered into an agreement with Toagosei under which the two companies will share development costs, marketing rights, and profits from potential sales of the antibody in markets outside of Japan. We are currently conducting a Phase I trial of the antibody in collaboration with the European Organization for Research and Treatment of Cancer. - SMART Anti-E/P-Selectin Antibody. This antibody targets adhesion molecules on the inside of blood vessels that may be involved in inflammation. We have completed a Phase I trial of SMART Anti-E/P-Selectin in healthy volunteers, which showed that the antibody is well-tolerated in a range of doses. We have retained worldwide rights to SMART Anti-E/P-Selectin and are seeking a partner for its further development. RECENT DEVELOPMENTS Our patents for humanized antibodies are being opposed in patent office proceedings in Europe and Japan, and a successful challenge could limit our future revenues from licensing these patents. At an oral hearing on March 20, 2000, the Opposition Division of the European Patent Office decided to revoke the broad claims in our first European patent pertaining generally to antibody humanization. We plan to appeal this decision to the Technical Board of Appeals of the European Patent Office. On March 28, 2000, we granted a license under our humanization patents to Merck KGaA, an international pharmaceutical company based in Germany, for an antibody they are developing. We received a signing and licensing fee and are entitled to royalties on any product sales. On May 8, 2000, we granted multiple licenses under our humanization patents to Chugai Pharmaceutical Company. We received a signing and licensing fee of $6.0 million and are entitled to royalties on any product sales. 3 9 THE OFFERING Common stock offered.......... 2,500,000 shares Common stock outstanding after the offering.................. 42,349,124 shares Use of proceeds............... To fund clinical trials, to expand manufacturing capabilities, to expand our marketing and sales capabilities, and for working capital and other general corporate purposes. Nasdaq National Market symbol........................ PDLI The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of June 30, 2000 and excludes as of that date: - 5,227,090 shares issuable upon exercise of outstanding stock options with a weighted average exercise price of $21.98 per share, of which options to purchase 1,463,383 were then exercisable - 2,539,348 shares available for future option grants under our stock option plan - 730,608 shares available for sale under our employee stock purchase plan, and - 1,986,755 shares issuable on conversion of our outstanding convertible notes. All information in this prospectus has been adjusted to give effect to the increase in our authorized shares of common stock effected in July 2000 and the two-for-one split of our common stock effected on August 23, 2000. 4 10 SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, ------------------------------- ------------------ 1997 1998 1999 1999 2000 -------- ------- -------- ------- ------- (UNAUDITED) SUMMARY OF OPERATIONS DATA: Total revenues......................... $ 20,255 $30,828 $ 35,754 $17,124 $35,864 Net income (loss)...................... (23,875) (9,502) (10,333) (4,564) 5,791 Net income (loss) per share: Basic................................ $ (0.68) $ (0.26) $ (0.28) $ (0.12) $ 0.15 Diluted.............................. $ (0.68) $ (0.26) $ (0.28) $ (0.12) $ 0.13 Weighted average number of shares: Basic................................ 35,298 37,050 37,396 37,244 39,218 Diluted.............................. 35,298 37,050 37,396 37,244 43,186
AS OF JUNE 30, 2000 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and investments...................... $309,881 $529,762 Working capital............................................. 194,468 414,349 Total assets................................................ 354,658 574,539 Long-term debt, excluding current maturities................ 9,527 9,527 Convertible debt............................................ 150,000 150,000 Total stockholders' equity.................................. 185,670 405,551
The as adjusted column reflects our receipt of the estimated net proceeds from the sale of the 2,500,000 shares of common stock offered in this offering at an assumed public price of $92.75 per share, and after deducting the estimated discount and estimated offering expenses payable by us. 5 11 RISK FACTORS An investment in our common stock is very risky. You should carefully consider the factors described below in addition to the other information in this prospectus before purchasing our shares. Additional risks and uncertainties not presently known to us or that we currently see as immaterial may also impair our business. If any of these risks actually occurs, it could materially harm our business, financial condition or operating results. In that case, the price of our common stock could decline and you may lose part or all of your investment. RISKS RELATING TO OUR COMPANY WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NOT ACHIEVE SUSTAINED PROFITABILITY. Our expenses have generally exceeded revenues. As of June 30, 2000, we had an accumulated deficit of approximately $73.4 million. We believe that our losses may increase because of the extensive resource commitments required to achieve regulatory approval and commercial success for any individual product. For example, over the next several years, we will incur substantial additional expenses as we continue to develop and manufacture our potential products, invest in new research areas and improve and expand our manufacturing, marketing and sales capabilities. Since we or our collaborative partners or licensees may not be able to successfully develop additional products, obtain required regulatory approvals, manufacture products at an acceptable cost and with appropriate quality, or successfully market such products with desired margins, we may never achieve sustained profitable operations. The amount of net losses and the time required to reach sustained profitability are highly uncertain. We may be unable to achieve or sustain profitability. Our commitment of resources to the continued development of our products will require significant additional funds for development. Our operating expenses may also increase as: - some of our earlier stage potential products move into later stage clinical development - additional potential products are selected as clinical candidates for further development - we invest in additional manufacturing capacity - we defend or prosecute our patents and patent applications, and - we invest in research or acquire additional technologies, product candidates or businesses. In the absence of substantial revenues from new corporate collaborations or patent licensing or humanization agreements, significant royalties on sales of products licensed under our intellectual property rights, product sales or other uncertain sources of revenue, we will incur substantial operating losses. OUR REVENUES, EXPENSES AND OPERATING RESULTS WILL LIKELY FLUCTUATE IN FUTURE PERIODS. Our revenues have varied in the past and will likely continue to fluctuate considerably from quarter to quarter and from year to year. As a result, our revenues in any period may not be predictive of revenues in any subsequent period. Our royalty revenues may be unpredictable and may fluctuate since they depend upon: - the seasonality of sales of licensed products - the existence of competing products - the marketing efforts of our licensees - potential reductions in royalties payable to us due to credits for prior payments to us - the timing of royalty reports, some of which are required quarterly and others semi-annually 6 12 - our method of accounting for royalty revenues from our licensees, and - our ability to successfully defend and enforce our patents. Other revenue may also be unpredictable and may fluctuate due to the timing of payments of non-recurring licensing and signing fees and payments for manufacturing services and achievement of milestones under new and existing collaborative, humanization, and patent licensing agreements. Revenue historically recognized under our prior agreements may not be an indicator of non-royalty revenue from any future collaborations. In addition, our expenses may be unpredictable and may fluctuate from quarter to quarter due to the timing of expenses, which may include payments owed by us under licensing arrangements and due to our policy of recording expenses under certain collaborative agreements during the quarter in which such expenses are reported to us. In the second quarter of 2000, we received $20.4 million in revenue. This included $6.5 million in non-recurring revenue from our multiple patent licenses with Chugai and from expansion of a patent license with American Home Products. To date in the third quarter of 2000, we have not granted any new patent licenses, and we cannot predict the amount of revenue, if any, that will be derived from new patent licenses in the quarter. We also received significant royalty revenues on sales of the product Synagis in the second quarter. This product has higher sales in the fall and winter, which to date have resulted in much higher royalties paid to us in our first and second quarters than other quarters. We expect to receive approximately $5 million less in revenue from Synagis royalties in the third quarter than in the second quarter of 2000 and aggregate royalties from sales of other products to be roughly comparable to those in the second quarter. As a result of these factors, we expect both royalty and non-royalty revenues in both the third and fourth quarters of 2000 to be significantly below their levels for the second quarter. In addition, we expect to incur losses in the third and fourth quarters that will exceed in the aggregate the income we earned for the first half of 2000. OUR HUMANIZATION PATENTS ARE BEING OPPOSED AND A SUCCESSFUL CHALLENGE COULD LIMIT OUR FUTURE REVENUES. Substantially all of our current revenues are related to our humanization patents. At an oral hearing in March 2000, the Opposition Division of the European Patent Office decided to revoke the broad claims of our first European humanization patent. We plan to appeal this decision and until our appeal is resolved, we may be limited in our ability to collect royalties or to negotiate future licensing or collaborative research and development arrangements based on this and our other humanization patents. Moreover, if our appeal is unsuccessful, our ability to collect royalties on European sales of antibodies humanized by others would depend on the scope and validity of our second European patent, whether the antibodies are manufactured in a country outside of Europe where they are covered by one of our patents, and in that case the terms of our license agreements with respect to that situation. Also, the Opposition Division's decision could encourage challenges of our related patents in other jurisdictions, including the U.S. This decision may lead some of our licensees to stop making royalty payments or lead potential licensees not to take a license, either of which might result in us initiating formal legal actions to enforce our rights under our humanization patents. In such a situation, a likely defensive strategy to our action would be to challenge our patents in that jurisdiction. During the appeals process with respect to our first European patent, if we were to commence an infringement action to enforce that patent, such an action would likely be stayed until the appeal is decided by the European Patent Office. As a result, we may not be able to successfully enforce our rights under our European or related U.S. and Japanese patents. We have been advised that eight notices of opposition have been filed with respect to our second European antibody humanization patent. Also, three opposition statements have been filed with the Japanese Patent Office with respect to our humanization patent issued in Japan in late 1998. We intend to vigorously defend the European patents and the Japanese patent in these proceedings; however, we may not prevail in the opposition proceedings or any litigation contesting the validity of these patents. If our appeal with respect to our first European patent is unsuccessful or if the outcome of the other European or Japanese opposition proceedings or any litigation involving our antibody humanization 7 13 patents were to be unfavorable, our ability to collect royalties on existing licensed products and to license our patents relating to humanized antibodies may be materially harmed. In addition, these proceedings or any other litigation to protect our intellectual property rights or defend against infringement claims by others, could result in substantial costs and diversion of management's time and attention, which could harm our business and financial condition. IF WE ARE UNABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY. Our pending patent applications may not result in the issuance of valid patents or our issued patents may not provide competitive advantages. Also, our patent protection may not prevent others from developing competitive products using related or other technology. A number of companies, universities and research institutions have filed patent applications or received patents in the areas of antibodies and other fields relating to our programs. Some of these applications or patents may be competitive with our applications or contain material that could prevent the issuance of patents to us or result in a significant reduction in the scope of our issued patents. The scope, enforceability and effective term of patents can be highly uncertain and often involve complex legal and factual questions. No consistent policy has emerged regarding the breadth of claims in biotechnology patents, so that even issued patents may later be modified or revoked by the relevant patent authorities or courts. Moreover, the issuance of a patent in one country does not assure the issuance of a patent with similar claims in another country, and claim interpretation and infringement laws vary among countries, so we are unable to predict the extent of patent protection in any country. In addition to seeking the protection of patents and licenses, we also rely upon trade secrets, know-how and continuing technological innovation which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees. If these agreements are not honored, we might not have adequate remedies for any breach. Additionally, our trade secrets might otherwise become known or patented by our competitors. WE MAY REQUIRE ADDITIONAL PATENT LICENSES IN ORDER TO MANUFACTURE OR SELL OUR POTENTIAL PRODUCTS. Other companies, universities and research institutions may obtain patents that could limit our ability to use, import, manufacture, market or sell our products or impair our competitive position. As a result, we might be required to obtain licenses from others before we could continue using, importing, manufacturing, marketing, or selling our products. We may not be able to obtain required licenses on terms acceptable to us, if at all. If we do not obtain required licenses, we may encounter significant delays in product development while we redesign potentially infringing products or methods or may not be able to market our products at all. Celltech Chiroscience plc has been granted a European patent covering humanized antibodies, which we have opposed. Celltech has also been issued a corresponding U.S. patent that contains claims that may be broader in scope than their European patent. We have entered into an agreement with Celltech providing each company with the right to obtain nonexclusive licenses for up to three antibody targets under the other company's humanization patents. Nevertheless, if our SMART antibodies were covered by Celltech's European or U.S. patents and if we were to need more than the three licenses under those patents currently available to us under the agreement, we would be required to negotiate additional licenses under those patents or to significantly alter our processes or products. We might not be able to successfully alter our processes or products to avoid conflict with these patents or to obtain the required additional licenses on commercially reasonable terms, if at all. In addition, if the Celltech U.S. patent or any related patent applications conflict with our U.S. patents or patent applications, we may become involved in proceedings to determine which company was the first to invent the products or processes contained in the conflicting patents. These proceedings could be expensive, last several years and either prevent issuance of additional patents to us relating to 8 14 humanization of antibodies or result in a significant reduction in the scope or invalidation of our patents. Any limitation would reduce our ability to negotiate or collect royalties or to negotiate future collaborative research and development agreements based on these patents. Lonza Biologics, Inc. has a patent issued in Europe to which we do not have a license that may cover a process that we use to produce our potential products. In addition, we do not have a license to an issued U.S. patent assigned to Stanford University and Columbia University, which may cover a process we use to produce our potential products. We have been advised that an exclusive license has been previously granted to a third party under this patent. If our processes were covered by either of these patents, we might be required to obtain licenses or to significantly alter our processes or products. We might not be able to successfully alter our processes or products to avoid conflicts with these patents or to obtain licenses on acceptable terms. IF WE CANNOT SUCCESSFULLY COMPLETE OUR CLINICAL TRIALS, WE WILL BE UNABLE TO OBTAIN REGULATORY APPROVALS REQUIRED TO MARKET OUR PRODUCTS. To obtain regulatory approval for the commercial sale of any of our potential products or to promote these products for expanded indications, we must demonstrate through preclinical testing and clinical trials that each product is safe and effective for use in indications for which approval is requested. We have conducted only a limited number of clinical trials to date. We may not be able to successfully commence and complete all of our planned clinical trials without significant additional resources and expertise. Our potential inability to commence or continue clinical trials, to complete the clinical trials on a timely basis or to demonstrate the safety and efficacy of our potential products, further adds to the uncertainty of regulatory approval for our potential products. Larger and later stage clinical trials may not produce the same results as early stage trials. Many companies in the pharmaceutical and biotechnology industries, including our company, have suffered significant setbacks in clinical trials, including advanced clinical trials, even after promising results had been obtained in earlier trials. Even when a drug candidate shows indications of efficacy in a clinical trial, it may be impossible to further develop or receive regulatory approval for the drug if it causes an unacceptable incidence or severity of side effects, or further development may be slowed down by the need to find dosing regimens that do not cause such side effects. For example, while Nuvion has shown biological activity in some patients in the Phase I/II trial for psoriasis, it has also at some dose levels caused a level of side effects that would be unacceptable in this patient population. Hence, we plan to conduct a Phase II trial of Nuvion in psoriasis in an attempt to find a dosing regimen that is both well-tolerated and effective. However, we may not be able to find such a regimen, and inability to do so would prevent further development of Nuvion for the psoriasis indication. As a second example, the SMART 1D10 Antibody produced partial clinical responses in some B-cell lymphoma patients but at some dose levels there were significant side effects. Hence, we plan to conduct a Phase II trial of SMART 1D10 to determine the optimum dosing regimen. OUR CLINICAL TRIAL STRATEGY MAY INCREASE THE RISK OF CLINICAL TRIAL DIFFICULTIES. Research, preclinical testing and clinical trials may take many years to complete and the time required can vary depending on the indication being addressed and the nature of the product. We may at times elect to use aggressive clinical strategies in order to advance potential products through clinical development as rapidly as possible. For example, we may commence clinical trials without conducting preclinical animal efficacy testing, where an appropriate animal efficacy testing model does not exist, or we may conduct later stage trials based on limited early stage data. As a result, we anticipate that only some of our potential products may show safety and efficacy in clinical trials and some may encounter difficulties or delays during clinical development. For example, we have entered the SMART M195 Antibody into a Phase III clinical trial in acute myelogenous leukemia with a clinical regimen that has not been tested previously with this antibody in 9 15 combination with chemotherapy. Results from our prior Phase II and Phase II/III studies showed only a limited number of complete and partial remissions using the antibody without concomitant chemotherapy. In addition, based in part on the nature and severity of the disease, we initiated a Phase III study without a meeting with the FDA or European regulatory authorities to discuss the protocol and its adequacy to support approval of the SMART M195 Antibody. This study may not be successful, or the FDA or European regulatory authorities may not agree that the study will be adequate to obtain regulatory approval, even if the study is successful. In addition, the protocol for our Phase III trial includes an interim review by an independent data safety monitoring board, which we expect to take place in the fourth quarter of 2000. The monitoring board could recommend or require that the trial be terminated if the interim data do not show a sufficient probability of the trial being successful or if specified safety criteria are not met. WE MAY BE UNABLE TO ENROLL SUFFICIENT PATIENTS TO COMPLETE OUR CLINICAL TRIALS. The rate of completion of our clinical trials, and those of our collaborators, is significantly dependent upon the rate of patient enrollment. Patient enrollment is a function of many factors, including: - the size of the patient population - perceived risks and benefits of the drug under study - availability of competing therapies - availability of clinical drug supply - availability of clinical trial sites - design of the protocol - proximity of and access by patients to clinical sites - patient referral practices of physicians - eligibility criteria for the study in question, and - efforts of the sponsor of and clinical sites involved in the trial to facilitate timely enrollment. We may have difficulty obtaining sufficient patient enrollment or clinician support to conduct our clinical trials as planned, and we may need to expend substantial additional funds to obtain access to resources or delay or modify our plans significantly. These considerations may lead us to consider the termination of ongoing clinical trials or development of a product for a particular indication. OUR REVENUES FROM LICENSED TECHNOLOGIES DEPEND ON THE EFFORTS AND SUCCESSES OF OUR LICENSEES. In those instances where we have licensed rights to our technologies, the product development and marketing efforts and successes of our licensees will determine the amount and timing of royalties we may receive, if any. We have no assurance that any licensee will successfully complete the product development, regulatory and marketing efforts required to sell products. The success of products sold by licensees will be affected by competitive products, including potential competing therapies that are marketed by the licensee or others. IF OUR COLLABORATIONS ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE TO EFFECTIVELY DEVELOP AND MARKET SOME OF OUR PRODUCTS. We have collaborative agreements with several pharmaceutical and other companies to develop, manufacture and market Zenapax and some of our potential products. In some cases, we are relying on our collaborative partners to manufacture such products, to conduct clinical trials, to compile and analyze the data received from these trials, to obtain regulatory approvals and, if approved, to market these licensed products. As a result, we may have little or no control over the manufacturing, development and 10 16 marketing of these potential products and little or no opportunity to review clinical data prior to or following public announcement. Our collaborative agreements can generally be terminated by our partners on short notice. A collaborator may terminate its agreement with us or separately pursue alternative products, therapeutic approaches or technologies as a means of developing treatments for the diseases targeted by us or our collaborative effort. Even if a collaborator continues its contributions to the arrangement, it may nevertheless determine not to actively pursue the development or commercialization of any resulting products. In these circumstances, our ability to pursue potential products could be severely limited. Continued funding and participation by collaborative partners will depend on the timely achievement of our research and development objectives, the retention of key personnel performing work under those agreements and on each collaborative partner's own financial, competitive, marketing and strategic considerations. Such considerations include: - the commitment of management of the collaborative partners to the continued development of the licensed products or technology - the relationships among the individuals responsible for the implementation and maintenance of the collaborative efforts, and - the relative advantages of alternative products or technology being marketed or developed by the collaborators or by others, including their relative patent and proprietary technology positions, and their ability to manufacture potential products successfully. Our ability to enter into new collaborations and the willingness of our existing collaborators to continue development of our potential products depends upon, among other things, our patent position with respect to such products. If we are unable to successfully maintain our patents we may be unable to collect royalties on existing licensed products or enter into additional collaborations and agreements. IMPLEMENTATION OF STAFF ACCOUNTING BULLETIN NO. 101 MAY REQUIRE US TO REVISE OUR FINANCIAL STATEMENTS OR OUR REVENUE RECOGNITION PRACTICES. In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). We are evaluating the effects, if any, that the adoption of SAB 101 in the fourth quarter of 2000, effective January 1, 2000, may have on the results of our operations or our financial position. We have been advised that the SEC intends to provide additional guidance during the third quarter of 2000 with respect to the implementation of SAB 101. We do not know whether this guidance and implementation of SAB 101 will require us to revise our revenue recognition practices or to restate revenues for the first and second quarters of 2000. OUR LACK OF EXPERIENCE IN SALES, MARKETING AND DISTRIBUTION MAY HAMPER MARKET INTRODUCTION AND ACCEPTANCE OF OUR PRODUCTS. We intend to market and sell a number of our products either directly or through sales and marketing partnership arrangements with collaborative partners. To market products directly, we must either establish a marketing group and direct sales force or obtain the assistance of another company. We may not be able to establish marketing, sales and distribution capabilities or succeed in gaining market acceptance for our products. If we were to enter into co-promotion or other marketing arrangements with pharmaceutical or biotechnology companies, our revenues would be subject to the payment provisions of these arrangements and dependent on the efforts of third parties. MANUFACTURING DIFFICULTIES COULD DELAY COMMERCIALIZATION OF OUR PRODUCTS. Of the products that we currently have in clinical development, Roche is responsible for manufacturing Zenapax, SmithKline is responsible for manufacturing the humanized anti-IL-4 antibody and Scil Biomedicals is responsible for manufacturing the SMART Anti-L-Selectin Antibody. We are 11 17 responsible for manufacturing our other products for our own development. We intend to continue to manufacture potential products for use in preclinical and clinical trials using our manufacturing facility in accordance with standard procedures that comply with appropriate regulatory standards. The manufacture of sufficient quantities of antibody products that comply with these standards is an expensive, time-consuming and complex process and is subject to a number of risks that could result in delays. We and our collaborative partners have experienced some manufacturing difficulties. Product supply interruptions could significantly delay clinical development of our potential products, reduce third party or clinical researcher interest and support of proposed clinical trials, and possibly delay commercialization and sales of these products. Manufacturing difficulties can even interrupt the supply of marketed products, thereby reducing revenues and risking loss of market share. For example, Roche has received a warning letter from the FDA regarding deficiencies in the manufacture of various products. Although the letter primarily related to products other than Zenapax, Roche has also experienced difficulties in the manufacture of Zenapax leading to interruptions in supply. If future manufacturing difficulties arise and are not corrected in a timely manner, Zenapax supplies could be interrupted, which could cause a delay or termination of our clinical trials of Zenapax in autoimmune disease and could force Roche to withdraw Zenapax from the market temporarily or permanently, resulting in loss of revenue to us. These occurrences could impair our competitive position. We do not have experience in manufacturing commercial quantities of our potential products, nor do we currently have sufficient capacity to manufacture our potential products on a commercial scale. To obtain regulatory approvals and to create capacity to produce our products for commercial sale at an acceptable cost, we will need to improve and expand our existing manufacturing capabilities. We are reviewing plans to expand our manufacturing capacity, including possible acquisition and conversion of an existing building into a manufacturing plant or construction of an entirely new manufacturing plant. If we implement these plans we will incur substantial costs. Any construction delays could impair our ability to produce adequate supplies of our potential products for clinical use or commercial sale on a timely basis. Further, we may be unable to improve and expand our manufacturing capability sufficiently to obtain necessary regulatory approvals and to produce adequate commercial supplies of our potential products on a timely basis. Failure to do so could delay commercialization of these products and could impair our competitive position. We are also investigating the use of contract manufacturing to produce commercial supplies of at least the SMART M195 Antibody in the event that the Phase III trial of that antibody is successful. We may be unable to secure such manufacturing capacity and to successfully produce commercial supplies on a timely basis. Failure to do so could delay commercialization of this product and could impair our competitive position. WE MAY REQUIRE ADDITIONAL FUNDS THAT MAY BE DIFFICULT TO OBTAIN IN ORDER TO CONTINUE OUR BUSINESS ACTIVITIES AS PLANNED. Our operations to date have consumed substantial amounts of cash. We will be required to spend substantial funds in conducting clinical trials, to expand our marketing capabilities and efforts, to expand existing research and development programs, to develop and expand our development and manufacturing capabilities and to defend or prosecute our patents and patent applications. To develop and commercialize our products we may need to raise substantial additional funds through equity or debt financings, collaborative arrangements, the use of sponsored research efforts or other means. Additional financing may not be available on acceptable terms, if at all, and may only be available on terms dilutive to existing stockholders or that would increase the amount of our indebtedness. Our inability to secure adequate funds on a timely basis could result in the delay or cancellation of programs that we might otherwise pursue. OUR REVENUE MAY BE ADVERSELY AFFECTED BY COMPETITION AND RAPID TECHNOLOGICAL CHANGE. Potential competitors have developed and are developing human and humanized antibodies or other compounds for treating autoimmune and inflammatory diseases, transplantation, asthma and cancers. In addition, a number of academic and commercial organizations are actively pursuing similar technologies, 12 18 and several companies have developed or may develop technologies that may compete with our SMART antibody technology. Competitors may succeed in more rapidly developing and marketing technologies and products that are more effective than our products or that would render our products or technology obsolete or noncompetitive. Our collaborative partners may also independently develop products that are competitive with products that we have licensed to them. This could reduce our revenues under our agreements with these partners. Any product that we or our collaborative partners succeed in developing and for which regulatory approval is obtained must then compete for market acceptance and market share. The relative speed with which we and our collaborative partners can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market compared to competitive companies will affect market success. For example, Novartis, which has a significant marketing and sales force directed to the transplantation market, has received approval to market Simulect, a product competitive with Zenapax, in the U.S. and Europe. Since Novartis launched Simulect in the European Union earlier than Roche, Zenapax may have a smaller market share than Simulect and other available products. RISKS RELATING TO OUR INDUSTRY WE MAY BE UNABLE TO OBTAIN OR MAINTAIN REGULATORY APPROVAL FOR OUR PRODUCTS. The manufacturing, testing and marketing of our products are subject to regulation by numerous governmental authorities in the U.S. and other countries. In the U.S., pharmaceutical products are subject to rigorous FDA regulation. Additionally, other federal, state and local regulations govern the manufacture, testing, clinical and nonclinical studies to assess safety and efficacy, approval, advertising and promotion of pharmaceutical products. The process of obtaining approval for a new pharmaceutical product or for additional therapeutic indications within this regulatory framework requires a number of years and the expenditure of substantial resources. Companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in various stages of clinical trials, even in advanced clinical trials after promising results had been obtained in earlier trials. In addition to the requirement for FDA approval of each pharmaceutical product, each pharmaceutical product manufacturing facility must be registered with, and approved by, the FDA. The manufacturing and quality control procedures must conform to rigorous guidelines in order to receive FDA approval. Pharmaceutical product manufacturing establishments are subject to inspections by the FDA and local authorities as well as inspections by authorities of other countries. To supply pharmaceutical products for use in the U.S., foreign manufacturing establishments must comply with these FDA approved guidelines. These foreign manufacturing establishments are subject to periodic inspection by the FDA or by corresponding regulatory agencies in these countries under reciprocal agreements with the FDA. Moreover, pharmaceutical product manufacturing facilities may also be regulated by state, local and other authorities. For the marketing of pharmaceutical products outside the U.S., we and our collaborative partners are subject to foreign regulatory requirements and, if the particular product is manufactured in the U.S., FDA and other U.S. export provisions. Requirements relating to the manufacturing, conduct of clinical trials, product licensing, promotion, pricing and reimbursement vary widely in different countries. Difficulties or unanticipated costs or price controls may be encountered by us or our licensees or marketing partners in our respective efforts to secure necessary governmental approvals. This could delay or prevent us, our licensees or our marketing partners from marketing potential pharmaceutical products. Both before and after approval is obtained, a pharmaceutical product, its manufacturer and the holder of the Biologics License Application (BLA) for the pharmaceutical product are subject to comprehensive regulatory oversight. The FDA may deny a BLA if applicable regulatory criteria are not satisfied. Moreover, even if regulatory approval is granted, such approval may be subject to limitations on the indicated uses for which the pharmaceutical product may be marketed. Further, marketing approvals may 13 19 be withdrawn if compliance with regulatory standards is not maintained or if problems with the pharmaceutical product occur following approval. In addition, under a BLA, the manufacturer continues to be subject to facility inspection and the applicant must assume responsibility for compliance with applicable pharmaceutical product and establishment standards. Violations of regulatory requirements at any stage may result in various adverse consequences, which may include, among other adverse actions, withdrawal of the previously approved pharmaceutical product or marketing approvals and/or the imposition of criminal penalties against the manufacturer and/or BLA holder. MANUFACTURING CHANGES MAY RESULT IN DELAYS IN OBTAINING REGULATORY APPROVAL OR MARKETING FOR OUR PRODUCTS. Manufacturing of antibodies for use as therapeutics in compliance with regulatory requirements is complex, time-consuming and expensive. If we make changes in the manufacturing process, 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. This is particularly important if we want to rely on 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 have made manufacturing changes and are likely to make additional manufacturing changes for the production of our products currently in clinical development. These manufacturing changes could result in delays in development or regulatory approvals or in reduction or interruption of commercial sales and could impair our competitive position. OUR BUSINESS MAY BE HARMED IF WE CANNOT OBTAIN SUFFICIENT QUANTITIES OF RAW MATERIALS. We depend on outside vendors for the supply of raw materials used to produce our product candidates. Once a supplier's materials have been selected for use in our manufacturing process, the supplier in effect becomes a sole or limited source of that raw material due to regulatory compliance procedures. If the third party suppliers were to cease production or otherwise fail to supply us with quality raw materials and we were unable to contract on acceptable terms for these services with alternative suppliers, our ability to produce our products and to conduct preclinical testing and clinical trials of product candidates would be adversely affected. This could impair our competitive position. IF WE DO NOT ATTRACT AND RETAIN KEY EMPLOYEES, OUR BUSINESS COULD BE IMPAIRED. To be successful we must retain our qualified clinical, manufacturing, scientific and management personnel. Because we are located in a high technology area, we face competition for personnel from other companies, academic institutions, government entities and other organizations. We are currently conducting a search for a chief financial officer, as well as other senior management personnel. If we are unsuccessful in filling these positions or retaining qualified personnel, our business could be impaired. WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS, AND OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE TO COVER THESE CLAIMS. We face an inherent business risk of exposure to product liability claims in the event that the use of products during research and development efforts or after commercialization results in adverse effects. This risk will exist even with respect to any products that receive regulatory approval for commercial sale. While we have obtained liability insurance for our products, it may not be sufficient to satisfy any liability that may arise. Also, adequate insurance coverage may not be available in the future at acceptable cost, if at all. 14 20 WE MAY INCUR SIGNIFICANT COSTS IN ORDER TO COMPLY WITH ENVIRONMENTAL REGULATIONS OR TO DEFEND CLAIMS ARISING FROM ACCIDENTS INVOLVING THE USE OF HAZARDOUS MATERIALS. We are subject to federal, state and local laws and regulations governing the use, discharge, handling and disposal of materials and wastes used in our operations. As a result, we may be required to incur significant costs to comply with these laws and regulations. We cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any resulting damages and incur liabilities which exceed our resources. In addition, we cannot predict the extent of the adverse effect on our business or the financial and other costs that might result from any new government requirements arising out of future legislative, administrative or judicial actions. CHANGES IN THE U.S. AND INTERNATIONAL HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT OUR REVENUES. The U.S. and international health care industry is subject to changing political, economic and regulatory influences that may significantly affect the purchasing practices and pricing of pharmaceuticals. Cost containment measures, whether instituted by health care providers or imposed by government health administration regulators or new regulations, could result in greater selectivity in the purchase of drugs. As a result, third-party payors may challenge the price and cost effectiveness of our products. In addition, in many major markets outside the U.S., pricing approval is required before sales can commence. As a result, significant uncertainty exists as to the reimbursement status of approved health care products. We may not be able to obtain or maintain our desired price for our products. Our products may not be considered cost effective relative to alternative therapies. As a result, adequate third-party reimbursement may not be available to enable us to maintain prices sufficient to realize an appropriate return on our investment in product development. Also, the trend towards managed health care in the U.S. and the concurrent growth of organizations such as health maintenance organizations, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices, reduced reimbursement levels and diminished markets for our products. These factors will also affect the products that are marketed by our collaborative partners. RISKS RELATING TO THIS OFFERING AS A RESULT OF OUR SALE OF CONVERTIBLE NOTES, WE HAVE A SIGNIFICANT AMOUNT OF DEBT AND MAY HAVE INSUFFICIENT CASH TO SATISFY OUR DEBT SERVICE OBLIGATIONS. IN ADDITION, THE AMOUNT OF OUR DEBT COULD IMPEDE OUR OPERATIONS AND FLEXIBILITY. As a result of our sale of convertible notes with an aggregate principal amount of $150 million in February 2000, we have a significant amount of debt and debt service obligations. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the notes, including from cash and cash equivalents on hand, we will be in default under the terms of the indenture which could, in turn, cause defaults under our other existing and future debt obligations. Our operations have not produced income sufficient to cover our fixed charges and we do not expect they will do so for at least the near future. Even if we are able to meet our debt service obligations, the amount of debt we have could adversely affect us in a number of ways, including by: - limiting our ability to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements or other purposes - limiting our flexibility in planning for, or reacting to, changes in our business - placing us at a competitive disadvantage relative to our competitors who have lower levels of debt - making us more vulnerable to a downturn in our business or the economy generally, and 15 21 - requiring us to use a substantial portion of our cash to pay principal and interest on our debt, instead of applying those funds to other purposes such as working capital and capital expenditures. OUR COMMON STOCK PRICE IS VOLATILE AND AN INVESTMENT IN OUR COMPANY COULD DECLINE IN VALUE. Market prices for securities of biotechnology companies, including ourselves, have been highly volatile so that investment in our securities involves substantial risk. Additionally, the stock market from time to time has experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The following are some of the factors that may have a significant effect on the market price of our common stock: - developments or disputes as to patent or other proprietary rights - disappointing sales of approved products - approval or introduction of competing products and technologies - results of clinical trials - failures or unexpected delays in obtaining regulatory approvals or FDA advisory panel recommendations - delays in manufacturing or clinical trial plans - fluctuations in our operating results - disputes or disagreements with collaborative partners - market reaction to announcements by other biotechnology or pharmaceutical companies - announcements of technological innovations or new commercial therapeutic products by us or our competitors - initiation, termination or modification of agreements with our collaborative partners - loss of key personnel - litigation or the threat of litigation - public concern as to the safety of drugs developed by us - sales of our common stock held by collaborative partners or insiders - comments and expectations of results made by securities analysts, and - general market conditions. If any of these factors causes us to fail to meet the expectations of securities analysts or investors, or if adverse conditions prevail or are perceived to prevail with respect to our business, the price of the common stock would likely drop significantly. A significant drop in the price of a company's common stock often leads to the filing of securities class action litigation against the company. This type of litigation against us could result in substantial costs and a diversion of management's attention and resources. 16 22 USE OF PROCEEDS We estimate the net proceeds to us from the sale of the common stock offered hereby will be approximately $219.9 million (or $252.9 million if the over-allotment option is exercised in full) after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. We expect to use the net proceeds to fund clinical trials, to expand manufacturing capabilities, to expand marketing and sales capabilities, and for working capital and other general corporate purposes. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in interest-bearing, investment-grade securities. PRICE RANGE OF COMMON STOCK Our common stock trades on The Nasdaq National Market under the symbol "PDLI." The following table sets forth for the periods indicated the high and low closing bid prices for our common stock as quoted on The Nasdaq National Market.
HIGH LOW ---- --- 1998 First Quarter............................................. $ 23 1/8 $17 5/16 Second Quarter............................................ 19 3/4 10 1/16 Third Quarter............................................. 13 1/8 8 3/8 Fourth Quarter............................................ 13 5/8 8 1/4 1999 First Quarter............................................. $ 13 1/4 $ 6 5/8 Second Quarter............................................ 11 7 3/16 Third Quarter............................................. 18 1/16 11 1/16 Fourth Quarter............................................ 36 5/16 16 1/8 2000 First Quarter............................................. $163 5/8 $29 49/64 Second Quarter............................................ 92 29 25/32 Third Quarter (through August 25, 2000)................... 93 3/8 60 19/32
On August 25, 2000, the closing bid price quoted on The Nasdaq National Market for the common stock was $92.75 per share. As of August 25, 2000 there were approximately 125 holders of record of our common stock. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results and current and anticipated cash needs. 17 23 CAPITALIZATION The following table presents our actual unaudited capitalization as of June 30, 2000 and our adjusted capitalization reflecting the estimated net proceeds of $219.9 million from the sale of the 2,500,000 shares of common stock offered in this offering. This table should be read with the financial statements and related notes incorporated by reference into this prospectus.
JUNE 30, 2000 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term debt, excluding current maturities................ $ 9,527 $ 9,527 Convertible debt............................................ 150,000 150,000 -------- -------- Stockholders' equity: Preferred stock, par value $0.01 per share, 10,000,000 shares authorized; no shares issued and outstanding.... -- -- Common stock, par value $0.01 per share, 90,000,000 shares authorized; 39,849,124 issued and outstanding actual, 42,349,124 shares outstanding as adjusted.............. 398 423 Additional paid-in capital................................ 260,919 480,775 Accumulated deficit....................................... (73,426) (73,426) Accumulated other comprehensive income (loss)............. (2,221) (2,221) -------- -------- Total stockholders' equity............................. 185,670 405,551 -------- -------- Total capitalization.............................. $345,197 $565,078 ======== ========
This table excludes (a) options outstanding under our stock option plans at June 30, 2000 to purchase 5,227,090 shares of common stock at a weighted average exercise price of $21.98, of which options to purchase 1,463,383 shares were then exercisable, (b) 730,608 shares authorized for issuance under our employee stock purchase plan, and (c) 1,986,755 shares issuable upon conversion of our convertible notes. 18 24 DILUTION The net tangible book value of our common stock as of June 30, 2000 was $180,887,600 or $4.54 per share. Net tangible book value per share represents the amount of our total tangible assets less our total liabilities divided by the number of shares of common stock outstanding. After giving effect to the sale of 2,500,000 shares of common stock, less underwriting discounts and commissions and our estimated offering expenses, our pro forma net tangible book value as of June 30, 2000 would have been $400,768,850, or $9.46 per share. This represents an immediate increase in pro forma net tangible book value of $4.92 per share to existing investors and an immediate dilution per share of $83.29 to new investors purchasing shares of common stock in this offering. Dilution per share to new investors represents the difference between the price per share of common stock in this offering and the pro forma net tangible book value per share immediately afterwards. Assumed public offering price per share..................... $92.75 Net tangible book value per share as of June 30, 2000..... $4.54 Increase per share attributable to new investors.......... 4.92 ----- Pro forma net tangible book value per share after this offering.................................................. 9.46 ------ Dilution per share to new investors......................... $83.29 ======
If the underwriters' over-allotment option is exercised in full, the pro forma net tangible book value per share will be $10.15, resulting in immediate dilution to new investors of $82.60 per share. This table excludes all options and warrants that will remain outstanding upon completion of this offering. At June 30, 2000, a total of 5,227,090 shares of common stock were subject to outstanding options, at a weighted average exercise price of $21.98 per share. The exercise of outstanding options and warrants having an exercise price less than the offering price would increase the dilutive effect to new investors. 19 25 SELECTED FINANCIAL DATA The following selected financial data for each of the three years in the period ended December 31, 1999, and as of December 31, 1998 and 1999 has been taken from, or is derived from, and should be read with our financial statements, including the notes thereto, that have been audited by Ernst & Young LLP, independent auditors, and are incorporated by reference herein and included in our Annual Report on Form 10-K for the year ended December 31, 1999. The selected financial data for each of the years ended December 31, 1995 and 1996, and as of December 31, 1995, 1996 and 1997, has been taken from or is derived from our audited financial statements that have not been included or incorporated by reference in this prospectus. The selected financial data for the six-month periods ended June 30, 1999 and 2000, and as of June 30, 2000 is unaudited and has been taken from or is derived from, and should be read with our unaudited financial statements incorporated by reference herein and included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. The unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting only of normal, recurring adjustments, that in the opinion of management are necessary for a fair presentation of the information set forth therein. Historical results are not necessarily indicative of future results for any period. This financial data is qualified by reference to, and should be read in conjunction with, the financial statements incorporated by reference into this prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------- -------- -------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues: Revenue under agreements with third parties...... $11,408 $ 16,500 $ 11,137 $21,325 $ 26,811 $12,501 $28,343 Interest and other income.................. 6,205 6,100 9,118 9,503 8,943 4,623 7,521 ------- -------- -------- ------- -------- ------- ------- Total revenues............. 17,613 22,600 20,255 30,828 35,754 17,124 35,864 Costs and expenses: Research and development... 20,803 28,795 25,614 31,645 36,090 16,793 21,284 General and administrative.......... 5,163 5,601 6,629 8,685 9,842 4,895 5,329 Special charge............. -- -- 11,887 -- -- -- -- Interest expense........... 1 -- -- -- 155 -- 3,460 ------- -------- -------- ------- -------- ------- ------- Total costs and expenses... 25,967 34,396 44,130 40,330 46,087 21,688 30,073 ------- -------- -------- ------- -------- ------- ------- Net income (loss)............ $(8,354) $(11,796) $(23,875) $(9,502) $(10,333) $(4,564) $ 5,791 ======= ======== ======== ======= ======== ======= ======= Net income (loss) per share Basic...................... $ (0.27) $ (0.38) $ (0.68) $ (0.26) $ (0.28) $ (0.12) $ 0.15 ======= ======== ======== ======= ======== ======= ======= Diluted.................... $ (0.27) $ (0.38) $ (0.68) $ (0.26) $ (0.28) $ (0.12) $ 0.13 ======= ======== ======== ======= ======== ======= ======= Shares used in computation of net income (loss) per share Basic...................... 30,686 31,208 35,298 37,050 37,396 37,244 39,218 Diluted.................... 30,686 31,208 35,298 37,050 37,396 37,244 43,186
20 26
DECEMBER 31, ---------------------------------------------------- JUNE 30, 1995 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and investments...................... $107,065 $ 99,667 $163,655 $143,439 $137,237 $309,881 Working capital.................... 43,522 74,221 66,490 82,394 22,669 194,468 Total assets....................... 116,412 110,331 175,026 171,850 182,551 354,658 Accumulated deficit................ (23,711) (35,507) (59,382) (68,884) (79,217) (73,426) Long-term obligations, exclusive of current portion.................. -- -- -- -- 9,724 159,527 Total stockholders' equity......... 112,856 105,112 168,468 162,496 164,743 185,670
- --------------- The non-cash special charge of approximately $11.9 million in 1997 related to the extensions of the term of all outstanding stock options held by our employees, officers, directors and consultants that were granted prior to February 1995, with the single exception of stock options granted to one non-employee director. The extension conforms the term of previously granted stock options, which was six years, to those granted since February 1995, ten years. 21 27 BUSINESS OVERVIEW We are a leader in the development of humanized monoclonal antibodies for the prevention and treatment of disease. We have licensed rights to our first humanized antibody product, Zenapax, to Roche, which markets it for the prevention of kidney transplant rejection. We are also testing Zenapax for the treatment of autoimmune disease. In addition, we have eight other humanized antibodies in clinical development for autoimmune and inflammatory conditions, asthma and cancer. We have fundamental patents in the U.S., Europe and Japan, which we believe cover most humanized antibodies. Eleven companies have licenses under these patents for humanized antibodies that they have developed. We receive or expect to receive royalties on sales of the three humanized antibodies developed by other companies that are currently being marketed. PRODUCTS IN DEVELOPMENT The following table summarizes the potential therapeutic applications and development status for our approved product and clinical product candidates. Not all clinical trials being conducted are listed. The development and commercialization of our product candidates is subject to numerous risks and uncertainties.
ANTIBODY PRODUCT INDICATION(S) STATUS - ---------------- ------------- ------ Zenapax Kidney transplant rejection Marketed Heart transplant rejection Phase III Psoriasis Phase II Uveitis Phase I/II Multiple sclerosis Phase I/II SMART M195 Acute myeloid leukemia Phase III Nuvion Psoriasis Phase I/II Transplantation Phase II Graft-versus-host disease Phase I Cutaneous T-cell lymphoma Phase I SMART Anti-L-Selectin Trauma Phase IIa SMART 1D10 Non-Hodgkins B-cell lymphoma Phase I Humanized Anti-IL-4 Asthma Phase I SMART Anti-Gamma Interferon Autoimmune diseases Phase I SMART Anti-VEGF Cancer Phase I SMART Anti-E/P-Selectin Stroke, asthma Phase I in healthy volunteers complete
ZENAPAX. The FDA approved Zenapax in December 1997 for the prevention of kidney transplant rejection. It has since been approved in Europe and other countries. Zenapax was the first humanized antibody to be approved anywhere in the world. The Zenapax approvals are based on two Phase III clinical trials, both of which demonstrated that Zenapax-treated patients had a statistically significant reduction in acute rejection episodes compared to patients who did not receive Zenapax. Also, Zenapax treatment was not associated with any observed side effects in addition to those typically seen in the transplant setting. Our licensee Roche sells Zenapax in the U.S., Europe and other territories for the transplant indication and we receive royalties on Zenapax sales. Roche has sponsored or authorized several additional Zenapax clinical trials in other transplant settings, including liver transplants, pediatric kidney transplants, in combination with Roche's drug CellCept with and without certain other immunosuppressive drugs in kidney transplants, and for the treatment of graft-versus-host disease in donor bone marrow transplants. Roche is currently conducting a Phase III trial in heart transplant patients. In addition, we are aware of numerous independent clinical 22 28 studies using Zenapax in settings including heart, lung, pancreas and combined intestinal and liver transplants. Zenapax binds to the interleukin-2 (IL-2) receptor on immune system cells known as T cells. IL-2 is a lymphokine, one of the substances released by cells as part of the immune response that occurs in autoimmune diseases and often following organ transplants. IL-2 stimulates T cells to divide and participate in an immune response. Zenapax blocks the binding of IL-2 to its receptor on T cells, suppressing an immune response by inhibiting the proliferation of activated T cells. Zenapax is the first effective immunosuppressive drug without significant side effects. For example, Zenapax is more specific and less toxic than other immunosuppressive drugs such as cyclosporine or ORTHOCLONE OKT3 which suppress essentially all T cells and possibly other cells. As a result, we believe Zenapax may be useful for the long-term treatment of autoimmune diseases such as psoriasis and multiple sclerosis. In 1999, we reacquired from Roche specific development and marketing rights to Zenapax for autoimmune diseases. We will fund costs of clinical trials for Zenapax in autoimmune diseases. In return, we have the right to market Zenapax for approved autoimmune indications in the U.S. and Canada, and will receive a major portion of the revenues from sales for these diseases. Roche will continue to manufacture Zenapax and pay for the cost of goods from its share of the revenues. In Europe and other countries, Roche can elect to market Zenapax for approved autoimmune indications or to allow us to market it, and revenues will be shared. Zenapax is currently in two Phase II trials in psoriasis, a common autoimmune disease of the skin, and in early stage trials for uveitis, multiple sclerosis, aplastic anemia, and the ocular manifestations of Bechet's disease. We plan to conduct additional trials for psoriasis and other autoimmune diseases. In the early stage clinical trial for uveitis, an autoimmune disease of the eye, Zenapax was safely administered to patients for one year and was effective in controlling the disease in most patients, some of whom have continued to receive Zenapax for up to three years. SMART M195 ANTIBODY. SMART M195 binds to the cancer cells of most patients with myeloid leukemias. Myeloid leukemia is the major form of adult leukemia. It is classified into two types: acute myeloid leukemia, or AML, and chronic myelogenous leukemia. At least 14,000 new cases of myeloid leukemia occur each year in the U.S. and 10,000 or more of these cases are AML. The current survival rate from myeloid leukemia is very low, despite aggressive chemotherapy and multiple, expensive hospitalizations. Several clinical trials using the SMART M195 Antibody have been conducted, including: - a multicenter Phase II/III trial designed to evaluate the antibody for prolonging remission in AML patients - a Phase II trial to evaluate whether the antibody could induce remission in patients whose AML had relapsed - a physician-sponsored Phase II trial of the antibody in patients with newly diagnosed acute promyelocytic leukemia, a subtype of AML, and - physician-sponsored trials using the antibody linked to the radioisotopes 90-Yttrium or 213-Bismuth. In general, these trials have demonstrated that SMART M195 has some biological activity and potential for efficacy. In November 1999, we began a randomized, multicenter, international Phase III study of the antibody in patients with refractory or first-relapsed AML. Patients receive a regimen of either SMART M195 plus standard chemotherapy or standard chemotherapy alone. Up to 200 patients may be enrolled in the trial, which is designed to evaluate the frequency of complete remission and other endpoints. An interim review of the trial results by an independent data safety monitoring board is expected in the fourth quarter of 2000. The monitoring board could recommend or require that the trial be 23 29 terminated if the interim data do not show a sufficient probability of the trial being successful or if specified safety criteria are not met. If the final results of the trial are positive, we expect to file for marketing approval. In addition to the Phase III trial, in 1999 a Phase II trial began to test the safety and efficacy of SMART M195 in patients with high risk myelodysplastic syndrome, a precancerous condition. The study is being conducted by the European Organization for the Research and Treatment of Cancer. NUVION (SMART ANTI-CD3 ANTIBODY). We are developing this antibody for the treatment of autoimmune diseases. It binds to the CD3 antigen, a key receptor for stimulating T cells. A mouse anti-CD3 antibody, ORTHOCLONE OKT3, from Johnson & Johnson, is marketed as an immunosuppressive drug for the treatment of acute kidney, liver and heart transplantation rejection. While highly effective, OKT3 use is often limited by serious toxicity as well as formation of anti-OKT3 antibodies because it is a mouse antibody. In contrast, Nuvion is humanized and also has been specifically engineered to reduce certain immune system interactions that we believe contribute to the toxicity of OKT3. Although both Nuvion and Zenapax may target some of the same diseases, we believe they may have complementary roles in medical treatment. Nuvion may be more potent than Zenapax, but may not be suitable for chronic administration, so it may be most useful to treat acute episodes of autoimmune disease and to induce remissions. Zenapax may be useful to maintain the remissions for longer periods. Nuvion is currently in a Phase I/II clinical trial for psoriasis. It is also in clinical trials for transplant rejection, graft-versus-host disease, and cutaneous T-cell lymphoma, but we have no current plans to conduct Phase III trials in these indications. We have retained worldwide rights to Nuvion. SMART ANTI-L-SELECTIN ANTIBODY. This antibody inhibits the process of neutrophil binding to the lining of blood vessels. It may be useful for preventing multiple organ failure and mortality that often follows severe trauma. In primate studies carried out by independent investigators, SMART Anti-L-Selectin treatment resulted in a statistically significant improvement in survival in a model that simulates severe trauma. We believe this antibody also may be useful to treat adult respiratory distress syndrome and reperfusion injury due to heart attacks. In May 1999, we licensed European marketing rights for this antibody to Scil, a European biotechnology company. Scil paid us a licensing fee and agreed to conduct and pay for clinical trials in Europe and to provide us with the data; in return, we are making milestone payments to Scil, at our election, on the achievement of defined clinical and regulatory goals. Scil has completed a Phase I trial of SMART Anti-L-Selectin and is now conducting a Phase IIa trial for treatment of trauma. If the results from that Phase IIa trial are encouraging, we may initiate clinical development in the U.S. SMART 1D10 ANTIBODY. The National Cancer Institute is sponsoring a Phase I trial of this antibody for non-Hodgkins B-cell lymphoma. Clinical responses were observed in three of the patients in this trial, and we plan to initiate a Phase II trial. SMART 1D10 is directed to a different target on B cells than Rituxan, the antibody currently marketed for non-Hodgkins lymphoma, and thus may provide an alternative therapy. In the U.S., approximately 290,000 patients have this disease and 55,000 new cases occur annually. We have retained worldwide rights to SMART 1D10. HUMANIZED ANTI-IL-4 ANTIBODY. We licensed this antibody, for the potential treatment of asthma and allergy, from SmithKline in 1999. The humanized anti-IL-4 antibody blocks the effects of interleukin 4, which is believed to play a key role in initiating the series of biological processes that lead to allergy and asthma. SmithKline began a Phase I trial of the humanized anti-IL-4 antibody, which we have now completed. We plan to initiate a Phase I/II multiple dose study, followed by a Phase II trial in moderate to severe asthma patients. We will conduct and pay for initial clinical trials of the humanized anti-IL-4 antibody and pay SmithKline to manufacture the antibody. SmithKline has agreed to make a milestone payment to us upon the achievement of a specified clinical goal. At the completion of a specified Phase II trial, SmithKline may choose to pay us a fee to acquire marketing rights. In that case, we and SmithKline will share future 24 30 development costs and profits from any product sales. If SmithKline elects not to pay this fee, we will have the right to develop and market the antibody. Concurrently, we granted SmithKline an exclusive license under our humanization patents for a humanized anti-IL-5 antibody that they are developing, for which SmithKline paid us a licensing fee. We also granted SmithKline options to obtain non-exclusive licenses under these patents for up to three additional antibodies. These arrangements with SmithKline illustrate our ability to leverage our patent portfolio to obtain rights to a potentially important product. SMART ANTI-GAMMA INTERFERON ANTIBODY. This antibody targets gamma interferon, a protein that stimulates several types of white blood cells and that may be involved in some autoimmune diseases. We have completed a Phase I trial of SMART Anti-Gamma Interferon in normal volunteers, which showed the antibody is well-tolerated and has biological activity. We plan to initiate a Phase I/II trial in patients with Crohn's disease, a form of inflammatory bowel disease. In the future, we may initiate clinical trials in other autoimmune diseases. We have retained worldwide rights to SMART Anti-Gamma Interferon. SMART ANTI-VEGF ANTIBODY. This antibody blocks the action of vascular endothelial growth factor (VEGF), which is believed to play an important role in the formation of blood vessels in tumors, a process that allows the tumors to grow. We humanized the antibody for Toagosei, a Japanese chemical company, and subsequently entered into an agreement with Toagosei under which the two companies will share development costs, marketing rights, and profits from potential sales of the antibody in markets outside of Japan. Toagosei has exclusive rights to market the antibody in Japan. We have exclusive marketing rights in North America and the option to obtain marketing rights in the rest of the world outside of Japan. We are conducting a Phase I trial of the antibody in collaboration with the European Organization for Research and Treatment of Cancer. SMART ANTI-E/P-SELECTIN ANTIBODY. This antibody targets adhesion molecules on the inside of blood vessels that may be involved in inflammation. We have completed a Phase I trial of SMART Anti-E/P-Selectin in healthy volunteers which showed that the antibody is well-tolerated in a range of doses. We have retained worldwide rights to SMART Anti-E/P-Selectin and are seeking a partner for its further development. OUR TECHNOLOGIES Antibody Background Information Antibodies are protective proteins released by the immune system's B cells, a type of white blood cell, in response to the presence of a foreign substance in the body, such as a virus, or due to an aberrant autoimmune response. B cells produce millions of different kinds of antibodies, which have slightly different shapes that enable them to bind and, as a result, inactivate different targets. Antibodies that have identical molecular structure that bind to a specific target are called monoclonal antibodies. Typically, mice have been used to produce monoclonal antibodies to a wide range of targets, including targets to which the human body does not normally produce antibodies. Specifically, many mouse, or murine, antibodies have been developed as potential therapeutics to inhibit immune function, destroy cancer cells or neutralize viruses. Although murine monoclonal antibodies are relatively easy to generate, they have significant drawbacks as therapeutics. Murine antibodies have a relatively short half-life in human patients, requiring them to be administered frequently. In addition, murine antibodies are not adapted to work effectively with the human immune system and therefore often have limited ability to destroy the target, such as cancer cells. Most importantly, when injected into humans, a murine antibody is usually recognized by the body's immune system as foreign. The immune system therefore responds with a human anti-mouse antibody, or HAMA, response, which rapidly neutralizes the murine antibody and renders it ineffective for further therapy. These problems have largely prevented murine antibodies from fulfilling their promise as therapeutics. 25 31 More recently, improved forms of antibodies, such as humanized, human and chimeric antibodies, have been developed using recombinant DNA and other technologies. These new antibodies can minimize or avoid many of the problems associated with murine antibodies and have led to a resurgence of interest in antibody therapeutics by the pharmaceutical and biotechnology industries. As a result of these advances, many monoclonal antibodies are now progressing into clinical trials. In a list of biotechnology medicines under clinical development in the U.S. published in 1999 by the Pharmaceutical Research and Manufacturers of America, antibodies comprised the single largest category (excluding vaccines), representing 22% of the products listed. In particular, we are aware of at least 40 humanized antibodies in clinical trials, including several antibodies addressing large markets that are being developed by major pharmaceutical companies. Eight humanized or chimeric antibodies have already been approved for marketing by the FDA, and generated more than $1.0 billion in revenues in 1999. Our SMART Antibody Technology Our patented SMART antibody technology has positioned us as a leader in the development of therapeutic antibodies that overcome the problems associated with murine antibodies. Our SMART antibodies are human-like antibodies designed using structural information from promising murine antibodies to capture the benefits of such antibodies while overcoming many of their limitations in treating humans. Clinical trials and preclinical studies have shown that our SMART antibodies generally avoid a HAMA response and have a longer half-life than murine antibodies. Every antibody contains two regions: a variable domain that binds to the target antigen and a constant domain that interacts with other portions of the immune system. The variable domain is composed of the complementarity determining regions (CDRs) that directly bind to the target antigen and the framework region that holds the CDRs in position and helps maintain their required shape. Researchers have used genetic engineering to construct humanized antibodies that consist of the CDRs from a murine antibody with the framework region and constant domain from a human antibody. However, when the CDRs from the murine antibody are combined with the framework of the human antibody, the human framework often distorts the shape of the CDRs so they no longer bind well to the target. Therefore, it is usually necessary to substitute one or more amino acids from the murine antibody into the framework of the humanized antibody for it to maintain the binding ability of the murine antibody. A SMART antibody is a humanized antibody designed by using our proprietary computer technology to guide the choice of substitutions of amino acids from the murine antibody into the human antibody framework, based on structural information derived from the murine antibody. The construction of a SMART antibody starts with the identification of a murine antibody that has demonstrated favorable results in laboratory, animal or human studies. A model of the murine antibody is generated using proprietary computer modeling software that predicts the shapes of antibodies and eliminates the need for more time-consuming laboratory techniques. The resulting model is carefully analyzed to identify the few key amino acids in the framework most responsible for maintaining the shape of the CDRs. Software we developed as well as the experience of our computational chemists is important in this analysis. These few key murine amino acids are substituted into the human framework of the SMART antibody along with the murine CDRs in order to maintain their ability to bind well to the target. The resulting SMART antibody retains most or all of the binding ability of the murine antibody, but is about 90% human. Our Other Technologies In addition to our SMART antibody technology, we use additional antibody-based drug development technologies to overcome shortcomings of murine antibodies. We are also pursuing a program to discover novel antibiotics and a rational drug design program that leverages our computer expertise to potentially develop new drug candidates. NOVEL ANTIBIOTICS. We have a research program to discover and develop new antibiotics for the treatment of certain microbial infections, including infections caused by microbes that have developed resistance to available antibiotics. This program uses technology to identify microbial genes that are 26 32 differentially expressed when microbes infect a host. These microbial genes and their products may become potential targets for novel antibiotics, which may be identified by high throughput screening and medicinal chemistry. We anticipate that aspects of this work will be conducted by our corporate partners. We have entered into a collaborative agreement with Eli Lilly & Company, under which Lilly will receive rights to products generated under this research program involving seven specific genera of bacteria. RATIONAL DRUG DESIGN. We are pursuing a rational drug design program focusing on small molecules by extending our computer modeling tools originally developed for our SMART antibody program. Rational drug design uses computer models of proteins and their interactions with smaller molecules to accelerate discovery and optimization of new drug compounds. Although our technology is at an early stage, we believe that this application of our modeling algorithms may ultimately be used to develop non-antibody, small-molecule drug candidates. For that purpose, we have initiated a program in medicinal and combinatorial chemistry. BUSINESS STRATEGY Our objective is to leverage our product pipeline and patent portfolio in the field of antibodies to become a fully-integrated, profitable, research-based biopharmaceutical company. We derive revenues, and expect to derive revenues in the future, from three major sources: - SALES OF PRODUCTS THAT WE HAVE DEVELOPED. We receive royalties on sales of Zenapax by our licensee, Roche. We have eight other humanized antibodies in clinical development. We plan to market some of our products, once approved, in North America, especially for specialty markets such as cancer that we believe can be effectively serviced with a relatively small sales force. We may license marketing rights for some antibodies or some geographic areas to other pharmaceutical companies. - ROYALTIES FROM THE SALE OF HUMANIZED ANTIBODIES DEVELOPED BY OTHER COMPANIES. We license our patents covering humanized antibodies in return for license fees, annual maintenance payments and royalties on product sales. The three humanized antibodies currently approved by the FDA in addition to Zenapax are licensed under our patents. Two of these antibodies are Genentech's Herceptin and MedImmune's Synagis, which had reported sales totaling approximately $480 million in 1999 and on which we are currently receiving royalties. The third is American Home Products' Mylotarg, which it began marketing in May 2000. We have license agreements with eight other companies for humanized antibodies they are developing. - RESEARCH AND DEVELOPMENT CONTRACTS WITH OTHER COMPANIES. We humanize antibodies for other companies in return for upfront fees, milestone payments and royalties on any product sales. In some cases we also receive the right to co-promote these products in designated territories. We also sometimes license out marketing rights to a humanized antibody that we are developing, and then typically receive upfront fees and milestone payments and/or research funding, in addition to royalties on any product sales by our licensee. COLLABORATIVE, HUMANIZATION AND PATENT LICENSING ARRANGEMENTS Collaborative Arrangements ROCHE. In 1989, we entered into agreements with Roche to collaborate on the research and development of antibodies which bind to the IL-2 receptor, including Zenapax. Under these agreements, Roche has exclusive, worldwide rights to manufacture, market and sell Zenapax. We began receiving royalties on sales of Zenapax in 1998. Our royalties are subject to offsets for milestones, third party license fees and royalties, and patent expenses paid by Roche. In October 1999, we agreed with Roche to replace the 1989 agreements with new agreements under which we assumed worldwide responsibility for the clinical development of Zenapax for the potential treatment of autoimmune diseases. Roche retained exclusive worldwide rights to Zenapax for non- 27 33 autoimmune diseases and is continuing to market Zenapax for the prevention of kidney transplant rejection. In return for undertaking clinical development in autoimmune indications, we will receive a significant share of Zenapax revenues from sales for autoimmune indications, either from our own marketing efforts or from revenue sharing with Roche. In the U.S. and Canada, we will have the right to market Zenapax in autoimmune indications and will pay for these activities from our share of revenues. Outside the U.S. and Canada, Roche may choose to market Zenapax in autoimmune indications. In this case, we will receive a substantial portion of Zenapax revenue from these indications. For countries and indications for which Roche elects not to market, we will receive an exclusive license to market Zenapax and pay Roche a small royalty. SCIL. In March 1999, we entered into an agreement with Scil for rights to develop and market SMART Anti-L-Selectin in Europe. Scil paid us a $3.0 million signing and licensing fee for these rights, and we will be entitled to royalties on any product sales. We agreed to make milestone payments to Scil, at our election, upon the achievement of specified clinical and regulatory goals. SMITHKLINE. In September 1999, we signed agreements with SmithKline involving two humanized antibodies for the possible treatment of asthma. We obtained a license to SmithKline's humanized anti-IL-4 antibody and granted an exclusive license under our antibody humanization patents to SmithKline for its humanized anti-IL-5 antibody. We have completed the Phase I clinical program for the humanized anti-IL-4 antibody and plan to conduct Phase I/II and Phase II trials in asthma patients. We will be entitled to exclusive, worldwide development, marketing and sales rights to the anti-IL-4 antibody unless SmithKline pays a fee to acquire marketing rights at the end of a specified Phase II trial. If SmithKline decides to participate in the further development of the antibody, we will share future development costs and profits at a pre-agreed ratio. We also may receive co-promotion rights in the U.S. TOAGOSEI. In July 1999, we signed a licensing and joint development agreement with Toagosei for an antibody developed by Toagosei and humanized by us. The antibody, SMART Anti-VEGF, binds to vascular endothelial growth factor, a protein that regulates new blood vessel formation in certain tissues and in tumors. We plan to develop the antibody with Toagosei for potential uses in the treatment of cancer. Under the agreement, we obtained exclusive development and marketing rights to SMART Anti-VEGF in North America and the option to obtain exclusive rights to market the antibody in Europe and other markets, except Japan. Toagosei has exclusive rights to market SMART Anti-VEGF in Japan. We will direct the clinical development program, and the two companies will share development costs and profits from sales of the antibody, if any, in markets outside Japan. LILLY. In December 1997, we signed a collaborative agreement with Lilly to discover and develop new small molecule drugs for the treatment of some types of infections, including those caused by organisms that are resistant to available antibiotics. The agreement involves a program to identify microbial genes that are differentially expressed when an infectious agent, such as a bacteria, infects a host. We received an initial $3.0 million payment under the agreement and are receiving research funding which could total up to $9.6 million over five years. We also may receive milestone payments for identification of gene targets and for each compound selected for development by Lilly. Lilly will receive exclusive worldwide rights to gene targets and human pharmaceutical and related diagnostic products generated under the research program directed to seven specific types of bacteria. We are entitled to royalties on any product sales, and have agreed to negotiate co-promotion rights in the U.S. and Canada. In addition, under specified conditions, we will have an option to develop compounds identified through the collaboration. The agreement has an initial term of three years and may be renewed for two additional one year terms. 28 34 Humanization and Patent Licensing Arrangements. YAMANOUCHI PHARMACEUTICAL CO., LTD. In February 1991, we entered into an agreement with Yamanouchi to humanize a mouse anti-platelet (anti-gpIIb/IIIa) antibody developed by Yamanouchi for cardiovascular disorders. Yamanouchi is conducting a Phase II clinical trial with the antibody we humanized for them. Yamanouchi has exclusive, worldwide rights to the antibody and is responsible for all development activities. We have received milestone payments and will be entitled to royalties on any sales of the antibody. MOCHIDA PHARMACEUTICAL CO., LTD. In December 1995, we entered into an agreement with Mochida to humanize a mouse antibody for use in infectious disease. We received a licensing and signing fee and milestone payments and can earn royalties on any product sales. In addition, we have an option to co- promote the antibody in North America. TOAGOSEI CO., LTD. In September 1996, we entered into an agreement with Toagosei to humanize a mouse antibody for treating cancer. We received a licensing and signing fee and milestone payments and can earn royalties on any product sales. In 1997, Toagosei made a $2.0 million private equity investment in our company. GENETICS INSTITUTE, INC. In December 1996, we entered into an agreement with Genetics Institute, now a wholly-owned subsidiary of American Home Products, to initially humanize three mouse antibodies that regulate an immune system pathway. To date, we have received a $2.5 million licensing and signing fee and three milestone payments. We are entitled to royalties on any product sales. We also received an option to co-promote the products in North America under certain conditions. TEIJIN LIMITED. In March 1997, we entered into an agreement with Teijin to humanize a mouse antibody to a toxin produced by the E. coli O157 bacteria that can cause serious illness or death from the consumption of contaminated food. We have received a licensing and signing fee and milestone payment and are entitled to royalties on any product sales. AJINOMOTO CO., INC. In July 1997, we entered into an agreement with Ajinomoto to humanize a mouse antibody directed at cardiovascular conditions. We have received a licensing and signing fee and milestone payments and are entitled to royalties on any product sales. In addition, we received the right to obtain co-promotion rights to the antibody in North America. GENENTECH, INC. In September 1998, we entered into an agreement covering patent rights under our humanization patents and under Genentech patents relating to antibody engineering. Genentech paid us a $6.0 million fee, and we paid Genentech a $1.0 million fee. Each company can obtain up to six licenses for humanized antibodies upon payment of an additional fee of at least $1.0 million per antibody, as well as royalties on any product sales. The number of licensed antibodies may be increased and the term of the agreement extended upon payment of additional fees. In November 1998, Genentech exercised certain of its rights under the agreement and obtained a nonexclusive license for Herceptin. Genentech paid us a $1.0 million licensing and signing fee and we currently receive royalties on Herceptin sales. PROGENICS PHARMACEUTICALS, INC. In April 1999, we entered into an agreement to humanize PRO 140, Progenic's novel anti-CCR5 monoclonal antibody that inhibits HIV replication in the laboratory. Progenics paid us a licensing and signing fee and has agreed to make additional payments upon the achievement of specified milestones and to pay royalties on any sales of the antibody. FUJISAWA PHARMACEUTICALS CO. In June 1999, we entered into a research agreement with Fujisawa to engineer certain antibodies targeted to the treatment of inflammatory and immunologically-based disorders. The engineering included the use of our patented modification of the constant region of certain types of antibodies. In February 2000, we entered into an agreement to humanize one of these antibodies. Fujisawa paid us a $1.5 million licensing and signing fee. We are entitled to receive milestone payments, annual maintenance fees and royalties on any product sales. CELLTECH CHIROSCIENCE PLC. In December 1999, we entered into a patent rights agreement with Celltech covering specified patents relating to humanized monoclonal antibodies. Under the agreement, 29 35 Celltech paid us a $3.0 million fee for the right to obtain worldwide licenses under our antibody humanization patents for up to three Celltech antibodies. We paid Celltech an undisclosed fee for the right to obtain worldwide licenses under Celltech's antibody humanization patent for up to three of our antibodies. When a license is taken by either company, the other will be entitled to an additional license fee. Each company will pay royalties to the other on any sales of licensed antibodies. TANOX, INC. In March 2000, we entered into a patent rights agreement with Tanox under our humanization patents. Tanox paid us a $2.5 million fee, which reflected a $1.5 million credit for a fee Tanox previously paid to us for a patent license for an antibody which was incorporated into this agreement. Tanox can obtain up to four patent licenses for humanized antibodies upon payment of an additional fee of at least $1.0 million per antibody, as well as royalties on any product sales. OTHER PATENT LICENSE AGREEMENTS. We have entered into patent license agreements with a number of other companies that are independently developing humanized antibodies. In each license agreement, we granted a worldwide, exclusive or nonexclusive license under our patents to the other company for an antibody to a specific target antigen. In general, we received a licensing and signing fee and the right to receive annual maintenance fees and royalties on any product sales. Under some of these agreements, we also may receive milestone payments. In addition to Herceptin, we receive royalties on sales of Synagis, an antibody developed by MedImmune which is currently marketed in the U.S. and Europe, and expect to receive royalties on Mylotarg, an antibody developed by American Home Products which is currently marketed in the U.S. In addition to Genentech, MedImmune and American Home Products, we have patent license agreements with Sankyo, Biogen, IDEC Pharmaceuticals, Elan Pharmaceuticals, Medarex, SmithKline, Merck KGaA and Chugai. MANUFACTURING AND FACILITIES We own two buildings comprising approximately 92,000 square feet of research and development and general office space in Fremont, California. We relocated our California headquarters and research and development facilities to this space beginning in September 1998. We also lease an additional 43,000 square feet of laboratory and office space at the site of our former headquarters and research and development facilities in Mountain View, California. In 1998, we subleased all of that space to two other companies. The subleases are scheduled to terminate on December 31, 2000, the termination date of our lease with respect to that space. We lease approximately 47,000 square feet of manufacturing, laboratory and office space in Plymouth, Minnesota. Our lease will terminate on February 29, 2004, subject to our options to extend the lease for two additional five year terms. Although these facilities are sufficient for our present manufacturing operations, in order to obtain regulatory approvals and to create capacity to produce our products for commercial sale at an acceptable cost, we will need to expand and improve our manufacturing capabilities. We intend to acquire additional space and construct a commercial manufacturing facility. Of the products that we currently have in clinical development, Roche is responsible for manufacturing Zenapax, SmithKline is responsible for manufacturing the humanized anti-IL-4 antibody and Scil is responsible for manufacturing the SMART Anti-L-Selectin Antibody. We are responsible for manufacturing our other products for our own development. We intend to continue to manufacture potential products for use in preclinical and clinical trials in accordance with standard procedures that comply with appropriate regulatory standards. PATENTS AND PROPRIETARY TECHNOLOGY Our success depends significantly on our ability to obtain and maintain patent protection for our products and technologies, to preserve our trade secrets and to operate without infringing the proprietary rights of third parties. While we file and prosecute patent applications to protect our inventions, our pending patent applications may not result in the issuance of valid patents or our issued patents may not provide competitive advantages. Also, our patent protection may not prevent others from developing competitive products using related or other technology. 30 36 A number of companies, universities and research institutions have filed patent applications or received patents in the areas of antibodies and other fields relating to our programs. Some of these applications or patents may be competitive with our applications or contain material which could prevent the issuance of patents to us or result in a significant reduction in the scope of our issued patents. The scope, enforceability and effective term of patents issued to companies, universities and research institutions can be highly uncertain and often involve complex legal and factual questions. No consistent policy has emerged regarding the breadth of claims in biotechnology patents, so that even issued patents may later be modified or revoked by the relevant patent authorities or courts. Moreover, the issuance of a patent in one country does not assure the issuance of a patent with similar claims in another country, and claim interpretation and infringement laws vary among countries, so we are unable to predict the extent of patent protection in any country. We have been issued patents in the U.S., Europe and Japan which we believe cover many or most humanized antibodies. Some of these patents also cover other aspects of our SMART antibody technology. We have filed similar patent applications in other countries. Our two humanization patents issued by the European Patent Office apply in the United Kingdom, Germany, France, Italy and eight other European countries. The European Patent Office procedures provide for an opposition period in which other parties may submit arguments as to why a patent was incorrectly granted and should be withdrawn or limited. Eighteen notices of opposition to our first European patent were filed during the opposition period for the patent, including oppositions by major pharmaceutical and biotechnology companies. At an oral hearing in March 2000, the Opposition Division of the European Patent Office decided to revoke the broad claims in our first European patent based on formal matters of European patent law, specifically that there had been an impermissible addition of subject matter after the filing of the original European patent application, but did not provide the rationale behind its decision. The decision upheld claims that protect Zenapax. The Opposition Division did not otherwise announce a decision on the issue of whether the claims in our patent are inventive in light of the prior art or other issues of patentability. We plan to appeal the Opposition Division's decision to the Technical Board of Appeals at the European Patent Office. The Technical Board of Appeals will consider all issues anew. The appeal suspends the decision of the Opposition Division during the appeals process, which is likely to take several years. The nine month opposition period for our second European antibody humanization patent ended in May 2000, and we have been advised that eight notices of opposition have been filed with respect to this patent. Three opposition statements were filed with the Japanese Patent Office with respect to our humanization patent issued in Japan in late 1998. We intend to vigorously defend the European patents and the Japanese patent in these proceedings; however, we may not prevail in the opposition proceedings or any litigation contesting the validity of these patents. If our appeal with respect to our first European patent is unsuccessful or if the outcome of the other European or Japanese opposition proceedings or any litigation involving our antibody humanization patents were to be unfavorable, our ability to collect royalties on existing licensed products and to license our patents relating to humanized antibodies may be materially harmed. In addition to seeking the protection of patents and licenses, we also rely upon trade secrets, know-how and continuing technological innovation which we seek to protect, in part, by confidentiality agreements with employees, consultants, suppliers and licensees. If these agreements are not honored, we might not have adequate remedies for any breach. Additionally, our trade secrets might otherwise become known or patented by our competitors. GOVERNMENT REGULATION The manufacturing, testing and marketing of our products are subject to regulation by numerous governmental authorities in the U.S. and other countries. In the U.S., pharmaceutical products are subject to rigorous FDA regulation. Additionally, other federal, state and local regulations govern the manufacture, 31 37 testing, clinical and nonclinical studies to assess safety and efficacy, approval, advertising and promotion of pharmaceutical products. The process of obtaining approval for a new pharmaceutical product or for additional therapeutic indications within this regulatory framework requires a number of years and the expenditure of substantial resources. Companies in the pharmaceutical and biotechnology industries, including us, have suffered significant setbacks in various stages of clinical trials, even in advanced clinical trials after promising results had been obtained in earlier trials. In addition to the requirement for FDA approval of each pharmaceutical product, each pharmaceutical product manufacturing facility must be registered with, and approved by, the FDA. The manufacturing and quality control procedures must conform to rigorous guidelines in order to receive FDA approval. Pharmaceutical product manufacturing establishments are subject to inspections by the FDA and local authorities as well as inspections by authorities of other countries. To supply pharmaceutical products for use in the U.S., foreign manufacturing establishments must comply with these FDA approved guidelines. These foreign manufacturing establishments are subject to periodic inspection by the FDA or by corresponding regulatory agencies in these countries under reciprocal agreements with the FDA. Moreover, pharmaceutical product manufacturing facilities may also be regulated by state, local and other authorities. For marketing of pharmaceutical products outside the U.S., we and our collaborative partners are subject to foreign regulatory requirements and, if the particular product is manufactured in the U.S., FDA and other U.S. export provisions. Requirements relating to the manufacturing, conduct of clinical trials, product licensing, promotion, pricing and reimbursement vary widely in different countries. Difficulties or unanticipated costs or price controls may be encountered by us or our licensees or marketing partners in our respective efforts to secure necessary governmental approvals. This could delay or prevent us or our licensees or our marketing partners from marketing potential pharmaceutical products. Both before and after approval is obtained, a pharmaceutical product, its manufacturer and the holder of the Biologics License Application (BLA) for the pharmaceutical product are subject to comprehensive regulatory oversight. The FDA may deny a BLA if applicable regulatory criteria are not satisfied. Moreover, even if regulatory approval is granted, such approval may be subject to limitations on the indicated uses for which the pharmaceutical product may be marketed. Further, marketing approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems with the pharmaceutical product occur following approval. In addition, under a BLA, the manufacturer continues to be subject to facility inspection and the applicant must assume responsibility for compliance with applicable pharmaceutical product and establishment standards. Violations of regulatory requirements at any stage may result in various adverse consequences, which may include, among other adverse actions, withdrawal of the previously approved pharmaceutical product or marketing approvals and/or the imposition of criminal penalties against the manufacturer and/or BLA holders. COMPETITION Potential competitors have developed and are developing human and humanized antibodies or other compounds for treating autoimmune and inflammatory diseases, transplantation, asthma and cancers. In addition, a number of academic and commercial organizations are actively pursuing similar technologies, and several companies have developed or may develop technologies that may compete with our SMART antibody technology. Competitors may succeed in more rapidly developing and marketing technologies and products that are more effective than our products or that would render our products or technology obsolete or noncompetitive. Our collaborative partners may also independently develop products that are competitive with products that we have licensed to them. This could reduce our revenues under our agreements with these partners. Any product that we or our collaborative partners succeed in developing and for which regulatory approval is obtained must then compete for market acceptance and market share. The relative speed with which we and our collaborative partners can develop products, complete the clinical testing and approval processes, and supply commercial quantities of the products to the market compared to competitive 32 38 companies will affect market success. For example, Novartis, which has a significant marketing and sales force directed to the transplantation market, has received approval to market Simulect, a product competitive with Zenapax, in the U.S. and Europe. Since Novartis launched Simulect in the European Union earlier than Roche, Zenapax may have a smaller market share than Simulect and other available products. Other competitive factors include: - the capabilities of our collaborative partners - product efficacy and safety - timing and scope of regulatory approval - product availability, marketing and sales capabilities - reimbursement coverage - the amount of clinical benefit of our products relative to their cost - method of and frequency of administration of our products - price of our products, and - patent protection of our products. HUMAN RESOURCES As of June 30, 2000, we had 298 full-time employees. Of the total, 106 employees were engaged in research and development, 50 in quality assurance and compliance, 52 in preclinical, clinical and regulatory, 32 in manufacturing and 58 in general and administrative functions. Our scientific staff members have diversified experience and expertise in molecular and cell biology, chemistry, microbiology, immunology, protein chemistry, computational chemistry and computer modeling. Our success will depend in large part on our ability to attract and retain skilled and experienced employees. None of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good. 33 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and title of each of our executive officers and directors:
NAME AGE TITLE - ---- --- ----- Laurence Jay Korn, Ph.D. ............ 51 Chief Executive Officer, Chairperson of the Board Daniel J. Levitt, M.D., Ph.D. ....... 52 President, Research and Development Douglas O. Ebersole, Esq. ........... 44 Senior Vice President, Legal and Licensing, General Counsel and Secretary Cary L. Queen, Ph.D. ................ 50 Senior Vice President and Vice President, Research, Director William R. Benjamin, Ph.D. .......... 46 Vice President, Drug Discovery Christine C. Booker.................. 59 Vice President, Quality and Compliance Frances G. Charlson.................. 40 Vice President, Human Resources D. Scott Geyer....................... 46 Vice President, Technical Development Peter H. Grassam..................... 55 Vice President, Manufacturing and General Manager, Plymouth Facility Robert L. Kirkman, M.D. ............. 51 Vice President, Business Development and Corporate Communications Corine K. Klingbeil, Ph.D. .......... 45 Vice President, Preclinical Development Jaisim Shah.......................... 40 Vice President, Marketing Jurgen Drews, M.D. .................. 67 Director George M. Gould, Esq. ............... 63 Director Max Link, Ph.D. ..................... 59 Director Jon S. Saxe, Esq. ................... 64 Director
Laurence Jay Korn, Ph.D., has been a director and Chairperson of the Board since July 1986 and has served as Chief Executive Officer since January 1987. Previously, Dr. Korn headed a research laboratory and served on the faculty of the Department of Genetics at the Stanford University School of Medicine from March 1981 to December 1986. Dr. Korn received his Ph.D. from Stanford University and was a Helen Hay Whitney Postdoctoral Fellow at the Carnegie Institution of Washington and a Staff Scientist at the MRC Laboratory of Molecular Biology in Cambridge, England, before becoming an Assistant Professor at Stanford. Daniel J. Levitt, M.D., Ph.D., has served as President, Research and Development since May 2000. From November 1996 to April 2000 he served as Senior Vice President, Clinical and Regulatory Affairs of the Company. From February 1995 to October 1996 he served as Vice President of Drug Development and Chief Medical Officer of Geron Corporation. From January 1990 until January 1995, Dr. Levitt held various positions at Sandoz Pharma Ltd., most recently as Worldwide Head of Oncology Clinical Research and Development. From 1986 to 1990, Dr. Levitt held various positions with Roche, including Director of Clinical Oncology and Immunology. He received post-graduate training at Yale-New Haven Hospital and the University of Alabama Birmingham Medical School. Dr. Levitt holds an M.D. and Ph.D. from the University of Chicago Pritzker School of Medicine. Douglas O. Ebersole has served as our Senior Vice President, Legal and Licensing since April 1999. In addition, Mr. Ebersole has served as our Secretary since July 1992, and from July 1992 to April 1999 and again from April 2000, Mr. Ebersole served as our General Counsel. From April 1996 until April 1998, Mr. Ebersole served as Vice President, Licensing and Corporate Services, and from April 1998 to April 1999, he served as Senior Vice President, Legal, Licensing and Corporate Services, in addition to his positions as General Counsel and Secretary. Prior to joining us, he served first as Associate General Counsel and later as General Counsel at NeXT Computer. Prior to joining NeXT in 1989, he was a partner in the corporate department of the law firm Ware & Freidenrich. Mr. Ebersole received his J.D. from Stanford Law School. 34 40 Cary L. Queen, Ph.D., has been a director since January 1987 and has served as Vice President, Research, since April 1989 and as Senior Vice President since June 1993. Previously, Dr. Queen held positions at the National Institutes of Health from 1983 to 1986, where he studied the regulation of genes involved in the synthesis of antibodies. Dr. Queen received his Ph.D. in Mathematics from the University of California at Berkeley and subsequently served as an Assistant Professor of Mathematics at Cornell University. William R. Benjamin, Ph.D., has served as our Vice President, Drug Discovery since July 1997. Prior to joining us, from November 1982 to June 1997, Dr. Benjamin was an employee of Roche, most recently serving as Vice President of Inflammation and Autoimmune Diseases. At Roche, Dr. Benjamin was responsible for leading the drug discovery activities of a multidisciplinary research department in the areas of inflammatory and immune-based diseases. From January 1981 to November 1982, Dr. Benjamin was a postdoctoral fellow at the National Institute of Dental Research at the National Institutes of Health. Dr. Benjamin received his Ph.D. degree from the University of South Florida, College of Medicine. Christine C. Booker has served as our Vice President, Quality and Compliance since February 1996. Prior to joining us, from February 1995 through January 1996, Ms. Booker served as a consultant to us. From August 1994 to July 1996, Ms. Booker served as the principal consultant for Booker Associates. From March 1992 to October 1994, Ms. Booker served as Director, Quality Assurance for Synergen, Inc. From October 1980 to February 1992, Ms. Booker served in various positions at Genentech, including Associate Director, Technical Operations. Ms. Booker received her B.S. in Chemistry from DePaul University. Frances G. Charlson has served as our Vice President, Human Resources since April 2000. In addition, Ms. Charlson has served in increasing positions of responsibility in our Human Resources Department since joining us in October 1992. Prior to joining the Company, she worked at Alza Corporation for six years in Human Resources and prior to joining Alza, she worked in Human Resources at Scios. Ms. Charlson is a Certified Compensation Professional from the American Compensation Association. Ms. Charlson received her B.S. in Public Relations from San Jose State University. D. Scott Geyer has served as our Vice President, Technical Development since April 1998. Prior to that time, Mr. Geyer served as our Senior Director, Technical Operations from July 1997 to March 1998. Prior to joining us in July 1996, Mr. Geyer held various positions with the Ares-Serono Group from April 1987 to June 1996, most recently as Executive Director, Process Development at Ares Advanced Technology, Inc. Prior to that time, Mr. Geyer served in various positions at Ares Advanced Technology, Inc. from August 1994 to June 1996. Mr. Geyer received his B.S. in Microbiology from the University of Southwestern Louisiana and his M.S. in Veterinary Microbiology from Texas A&M University. Peter H. Grassam has served as our Vice President, Manufacturing and General Manager of our Plymouth, Minnesota facility since January 1998. From September 1993 to January 1998, Mr. Grassam served as the Vice President of Operations and General Manager at the Smithfield site of Alpha Beta Technology, Inc., and as the Vice President of Operations at Serono Laboratories, Inc., from January 1992 to September 1993. Mr. Grassam received his Bachelor of Pharmacy from the University of London and received his post graduate certification at Groby Road Hospital in England. Mr. Grassam is a Member of the Royal Pharmaceutical Society of Great Britain and the American Pharmaceutical Association. Robert L. Kirkman, M.D., has served as our Vice President, Business Development and Corporate Communications since July 1998. Prior to joining us, Dr. Kirkman served as the Chief of the Division of Transplantation at Brigham and Women's Hospital from 1992 to 1998. Dr. Kirkman was appointed to the position of Associate Professor of Surgery at Harvard Medical School from 1987 to 1998 and served as an Associate in Surgery at Massachusetts General Hospital from 1995 to 1998. Dr. Kirkman holds an M.D. from Harvard Medical School and received his post-graduate training at Peter Bent Brigham Hospital and Brigham and Women's Hospital. Corine K. Klingbeil, Ph.D. has served as our Vice Presidents of Preclinical Development since April 2000. Dr. Klingbeil joined us in January 1993 as Director, Preclinical Development until March 1995 35 41 when she became Senior Director. Dr. Klingbeil previously was department head and later Director, Preclinical Sciences and Development at Scios. After receiving her Ph.D. at the University of California at Santa Barbara, Dr. Klingbeil was a postdoctoral fellow at the University of California at San Francisco from 1983 to 1986. Jaisim Shah has served as our Vice President, Marketing since August 2000. Prior to joining us, he served in various marketing management positions at Bristol Myers Squibb, most recently as Vice President, Marketing, for U.S. Pharmaceutical Group, Infectious Diseases. He joined Roche Laboratories in 1991 as Product Director for biotech oncology products for the U.S. market. He then became Global Business Leader for oncology and virology, based in Basel, Switzerland, for Roche in 1993. He received his MA in International Economics from the University of Akron and an MBA in Marketing from Oklahoma University. Jurgen Drews, M.D., has been a director of the Company since February 1997. Since March 1998, Dr. Drews has served as a contributing advisor to OrbiMed Advisors. Dr. Drews served as President, Global Research and as a member of the Executive Committee of the Roche Group from January 1996 to December 1997. From January 1991 to December 1995, Dr. Drews served as President, International Research and Development and as a member of the Executive Committee for the Roche Group. Prior to that time, Dr. Drews served as Chairman of the Research Board and member of the Executive Committee for Roche from April 1986 to December 1990. Dr. Drews served as Head of International Pharmaceutical Research and Development for Sandoz from January 1982 to July 1985. Dr. Drews also serves as a director of MorphoSys GmbH, Genomics Pharmaceutical Company and Human Genome Sciences, Inc. George M. Gould, Esq., has been a director of the Company since October 1989. Since June 1996, Mr. Gould has served as of counsel to the law firm Gibbons, Del Deo, Dolan, Griffinger & Vecchione. From May 1996 to December 1996, Mr. Gould was a Senior Vice President of PharmaGenics, Inc. Prior to that time Mr. Gould served as Vice President, Licensing & Corporate Development and Chief Patent Counsel for Roche from October 1989 to May 1996. Max Link, Ph.D., has been a director of the Company since June 1993. Dr. Link served as the Chief Executive Officer of Boehringer Mannheim -- Therapeutics from October 1993 to May 1994 and as the Chief Executive Officer of Corange Ltd. from May 1993 to May 1994. Dr. Link served as the Chairman of Sandoz Pharma Ltd. from April 1992 to April 1993. Dr. Link served in various management positions at Sandoz Ltd. and Sandoz Pharmaceuticals Corporation from October 1971 to April 1992. Dr. Link is also a director of Access Pharmaceuticals, Inc., Alexion Pharmaceutical Inc., Cell Therapeutics, Inc., Cytrx Corp., Discovery Laboratories, Inc., Human Genome Sciences, Inc., Osiris Therapeutics, Inc. and Celsion Corporation. Jon S. Saxe, Esq., has been a director of the Company since March 1989. From January 1995 to April 1999, Mr. Saxe served as President of the Company. Since May 2000, Mr. Saxe has served as a consultant to us. From May 1999 to April 2000, Mr. Saxe served as Senior Advisor to the Chief Executive Officer of the Company. Mr. Saxe was a consultant to the Company from June 1993 to December 1994. He has served as President of Saxe Associates since May 1993. Mr. Saxe is also a director of Incyte Genomics Inc., Questcor, Inc., First Horizon Pharmaceuticals, Inc., InSite Vision, Inc., SciClone Pharmaceuticals, Inc. and ID Biomedical Corporation and three private companies. Mr. Saxe received his B.S.Ch.E. from Carnegie-Mellon University, his J.D. from George Washington University School of Law and his LL.M. from New York University School of Law. 36 42 DESCRIPTION OF CAPITAL STOCK This summary does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of our certificate of incorporation, as amended, and all applicable provisions of Delaware law. GENERAL We are authorized to issue 90,000,000 shares of common stock, $.01 par value, and 10,000,000 shares of preferred stock, $.01 par value. COMMON STOCK As of June 30, 2000, we had issued and outstanding approximately 39,849,124 shares of common stock held of record by approximately 125 stockholders. Holders of common stock are entitled to one vote per share for the election of directors and all other matters submitted to a vote of our stockholders. Subject to the rights of any holders of preferred stock that may be issued in the future, the holders of common stock are entitled to share ratably in such dividends as may be declared by our board of directors out of funds legally available therefor. In the event of our dissolution, liquidation or winding up, holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities and liquidation preferences of any preferred stock. Holders of common stock have no preemptive, subscription, redemption, conversion rights or similar rights. Our certificate of incorporation does not provide for cumulative voting rights with respect to the election of directors. All outstanding common stock is fully paid and nonassessable. Shares of our common stock are reserved for issuance under our option and employee stock purchase plans, and there are options outstanding under our stock plans for shares of common stock. PREFERRED STOCK Our board of directors has the authority, without any action by our stockholders, to issue preferred stock in one or more series with such designations, rights and preferences (including dividend, conversion, voting or other rights or liquidation preferences) as determined by our board of directors. The issuance of preferred stock could delay, defer or prevent a change of control and could decrease the amount of earnings and assets available for distribution to, or adversely affect the voting power or other rights of, holders of common stock. In addition, the issuance of preferred stock could have the effect of decreasing the market price of our common stock. At present, there are no shares of preferred stock outstanding. TRANSFER AGENT The transfer agent for our common stock is ChaseMellon Shareholder Services, LLC. Its address is 235 Montgomery Street, 23rd Floor, San Francisco, California 94104. Its telephone number is (415) 743-1444. 37 43 UNDERWRITING Under the terms and subject to the conditions contained in an underwriting agreement, dated , 2000, we have agreed to sell to the underwriters named below, for whom Credit Suisse First Boston Corporation, CIBC World Markets Corp. and SG Cowen Securities Corporation are acting as representatives, the following respective numbers of shares of our common stock:
NUMBER UNDERWRITER OF SHARES ----------- --------- Credit Suisse First Boston Corporation...................... -- CIBC World Markets Corp..................................... -- SG Cowen Securities Corporation............................. -- --------- Total............................................. 2,500,000 =========
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated. We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to 375,000 additional shares from us at the public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock. The underwriters propose to offer the shares of common stock initially at the offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering, the public offering price and concession and discount to broker/dealers may be changed by the representatives. The following table summarizes the compensation and estimated expenses we will pay:
PER SHARE TOTAL -------------------------------- -------------------------------- WITHOUT WITH WITHOUT WITH OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT -------------- -------------- -------------- -------------- Underwriting Discounts and Commissions paid by us..... $ $ $ $ Expenses, payable by us......
The representatives have informed us that the underwriters do not expect discretionary sales to exceed 5% of the common stock being offered. We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse First Boston Corporation for a period of 90 days after the date of this prospectus, except issuances of shares of our common stock pursuant to the conversion of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date of this prospectus, grants of employee stock options pursuant to the terms of a plan in effect on the date of this prospectus, or issuances of shares of our common stock pursuant to the exercise of such options. All of our executive officers and directors have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, 38 44 whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any of these types of transactions, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 60 days after the date of this prospectus. We have agreed to indemnify the underwriters against liabilities under the Securities Act or contribute to payments which the underwriters may be required to make in that respect. In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, penalty bids and passive market making in accordance with Regulation M under the Exchange Act. - Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. - Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allloted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market. - Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option -- a naked short position -- that position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. - Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. - In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of the common stock until the time, if any, at which a stabilizing bid is made. These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on The Nasdaq Stock Market's National Market or otherwise and, if commenced, may be discontinued at any time. A prospectus in electronic format may be made available on the Web sites maintained by one or more of the underwriters participating in this offering. The representatives may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make internet distributions on the same basis as other allocations. 39 45 NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the common stock in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of common stock are made. Any resale of the common stock in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the common stock. REPRESENTATIONS OF PURCHASERS By purchasing common stock in Canada and accepting a purchase confirmation a purchaser is representing to us and the dealer from whom the purchase confirmation is received that: - the purchaser is entitled under applicable provincial securities laws to purchase such common stock without the benefit of a prospectus qualified under those securities laws - where required by law, the purchaser is purchasing as principal and not as agent, and - the purchaser has reviewed the text above under "Resale Restrictions." RIGHTS OF ACTION (ONTARIO PURCHASERS) The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by Ontario securities law. As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. ENFORCEMENT OF LEGAL RIGHTS All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of common stock to whom the Securities Act, British Columbia, applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any common stock acquired by the purchaser pursuant to this offering. The report must be in the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from us. Only one report must be filed for common stock acquired on the same date and under the same prospectus exemption. TAXATION AND ELIGIBILITY FOR INVESTMENT Canadian purchasers of common stock should consult their own legal and tax advisors about the tax consequences of an investment in the common stock in their particular circumstances and about the eligibility of the common stock for investment by the purchaser under relevant Canadian legislation. 40 46 LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 1999, as set forth in their report thereon. We have incorporated our financial statements by reference in reliance upon Ernst & Young LLP's report given upon their authority as experts in accounting and auditing. 41 47 WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and current reports, proxy statements and other information with the SEC. In connection with this offering we have filed with the SEC a registration statement under the Securities Act of 1933 relating to the common stock we are offering. As permitted by the SEC rules, this prospectus omits certain information included in the registration statement. For a more complete understanding of our common stock and this offering, you should refer to the registration statement, including its exhibits. The SEC allows us to "incorporate by reference" the information we file with it, which means we can disclose important information to you by referring you to those documents. The information included in the following documents is incorporated by reference and is considered to be a part of this prospectus. The most recent information that we file with the SEC automatically updates and supersedes older information. We have previously filed the following reports with the SEC and are incorporating them by reference into this prospectus: 1. Our Annual Report on Form 10-K for the year ended December 31, 1999; 2. Our Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2000 and June 30, 2000; 3. Our Current Reports on Form 8-K filed on February 14, 2000 and March 1, 2000; and 4. The description of our common stock included in our Registration Statement on Form 8-A filed on December 23, 1991, and any amendments or reports filed for the purpose of updating that description. We also automatically incorporate by reference all documents we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 both (a) after the date of the initial registration statement of which this prospectus forms a part and prior to the effectiveness of that registration statement, and (b) after the effectiveness of the registration statement of which this prospectus forms a parts and before all of the shares registered under that registration statement are sold. We will provide without charge, to each person who receives a prospectus, a copy of the information that has been incorporated by reference in this prospectus. If you would like to obtain this information from us, please direct your request to us in writing at Protein Design Labs, Inc. Attn: Corporate Communications, 34801 Campus Drive, Fremont, California 94555 or contact us by telephone at (510) 574-1400. The registration statement can also be inspected and copied at prescribed rates at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC regional offices at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the registration statement is publicly available through the SEC's site on the World Wide Web, located at http://www.sec.gov. In addition, you may read and copy our SEC filings at the office of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. 42 48 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Protein Design Labs, Inc. Logo - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 49 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered hereunder. Except for the SEC registration, the Nasdaq Listing Fee and the NASD filing fee, all amounts are estimates. SEC registration fee........................................ $ 59,438 Nasdaq Listing Fee.......................................... 17,500 NASD filing fee............................................. 23,015 Accounting fees and expenses................................ 50,000 Legal fees and expenses..................................... 120,000 Blue Sky fees and expenses (including counsel fees)......... 1,000 Printing and engraving expenses............................. 100,000 Transfer agent's and registrar's fees and expenses.......... 1,000 Miscellaneous expenses, including listing fees.............. 28,047 -------- Total....................................................... $400,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law ("DGCL") authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers under certain circumstances for liabilities incurred in connection with their activities in such capacities (including reimbursement for expenses incurred). The Registrant's Restated Certificate of Incorporation provides that the Registrant will indemnify its directors and officers to the fullest extent permitted by law and that directors shall not be liable for monetary damages to the Registrant or its stockholders for breach of fiduciary duty, except to the extent that the DGCL prohibits elimination or limitation of such liability. The Registrant's Restated Certificate of Incorporation provides that no director of the Registrant will be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Registrant or to its stockholders, (ii) for acts or omissions not made in good faith or involving intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the DGCL, or (iv) for any transactions from which the director derives an improper personal benefit. In addition, the Registrant's Amended and Restated Bylaws provide that any director or officer who was or is a party or is threatened to be made a party to any action or proceeding by reason of his or her services to the Registrant will be indemnified to the fullest extent permitted by the DGCL. The Registrant has entered into agreements with each of its executive officers and directors under which the Registrant has agreed to indemnify each of them against expenses and losses incurred for claims brought against them by reason of their being an officer or director of the Registrant. There is no pending litigation or proceeding involving a director or officer of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any pending or threatened litigation that may result in claims for indemnification by any director or executive officer. II-1 50 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement 5.1 Opinion of Gray Cary Ware & Freidenrich LLP 23.1 Consent of Gray Cary Ware & Freidenrich LLP (contained in Exhibit 5.1) 23.2 Consent of Ernst & Young LLP, independent auditors 24.1 Power of Attorney (contained on the signature page hereof)
ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 51 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the County of Alameda, State of California on August 28, 2000. PROTEIN DESIGN LABS, INC. By: /s/ LAURENCE JAY KORN ------------------------------------ Laurence Jay Korn Chief Executive Officer and Chairperson of the Board of Directors POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Laurence Jay Korn and Cary L. Queen, and each of them, with full power of substitution and resubstitution and each with full power to act without the other, his or her true and lawful attorney-in-fact and agent, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any and all new registration statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the offering contemplated by this Registration Statement, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission or any state, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Date: August 28, 2000 /s/ LAURENCE JAY KORN -------------------------------------------------------- Laurence Jay Korn Chief Executive Officer and Chairperson of the Board of Directors (Principal Executive Officer) Date: August 28, 2000 /s/ ROBERT L. KIRKMAN -------------------------------------------------------- Robert L. Kirkman Vice President, Business Development and Corporation Communications (Principal Accounting Officer) Date: August 28, 2000 /s/ JON S. SAXE -------------------------------------------------------- Jon S. Saxe Director
II-3 52 Date: August 28, 2000 /s/ CARY L. QUEEN -------------------------------------------------------- Cary L. Queen Director Date: August 28, 2000 /s/ GEORGE M. GOULD -------------------------------------------------------- George M. Gould Director Date: August 28, 2000 /s/ MAX LINK -------------------------------------------------------- Max Link Director Date: August 28, 2000 /s/ JURGEN DREWS -------------------------------------------------------- Jurgen Drews Director
II-4 53 INDEX TO EXHIBITS
EXHIBIT NO. - ------- 1.1 Form of Underwriting Agreement 5.1 Opinion of Gray Cary Ware & Freidenrich LLP 23.1 Consent of Gray Cary Ware & Freidenrich LLP (contained in Exhibit 5.1) 23.2 Consent of Ernst & Young LLP, independent auditors 24.1 Power of Attorney (contained on the signature page hereof)
EX-1.1 2 ex1-1.txt EXHIBIT 1.1 1 EXHIBIT 1.1 [NUMBER OF SHARES] PROTEIN DESIGN LABS, INC. COMMON STOCK UNDERWRITING AGREEMENT [Insert date] CREDIT SUISSE FIRST BOSTON CORPORATION - ----------------------------------- - -----------------------------------, As Representatives of the Several Underwriters, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. Introductory. Protein Design Labs, Inc., a Delaware corporation ("COMPANY"), proposes to issue and sell ____________shares ("FIRM SECURITIES") of its Common Stock ("SECURITIES") and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than ____________ additional shares ("OPTIONAL SECURITIES") of its Securities as set forth below. The Firm Securities and the Optional Securities are herein collectively called the "OFFERED Securities". The Company hereby agrees with the several Underwriters named in Schedule A hereto ("UNDERWRITERS") as follows: 2. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the several Underwriters that: (a) A registration statement (No. 333-_______) relating to the Offered Securities, including a form of prospectus, has been filed with the Securities and Exchange Commission ("COMMISSION") and either (i) has been declared effective under the Securities Act of 1933 ("ACT") and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement ("INITIAL REGISTRATION STATEMENt") has been declared effective, either (i) an additional registration statement ("ADDITIONAL REGISTRATION STATEMENT") relating to the Offered Securities may have been filed with the Commission pursuant to Rule 462(b) ("RULE 462(b)") under the Act and, if so filed, has become effective upon filing pursuant to such Rule and the Offered Securities all have been duly registered under the Act pursuant to the initial registration statement and, if applicable, the additional registration statement or (ii) such an additional registration statement is proposed to be filed with the Commission pursuant to Rule 462(b) and will become effective upon filing pursuant to 1 2 such Rule and upon such filing the Offered Securities will all have been duly registered under the Act pursuant to the initial registration statement and such additional registration statement. If the Company does not propose to amend the initial registration statement or if an additional registration statement has been filed and the Company does not propose to amend it, and if any post-effective amendment to either such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("RULE 462(c)") under the Act or, in the case of the additional registration statement, Rule 462(b). For purposes of this Agreement, "EFFECTIVE TIME" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, the additional registration statement means (i) if the Company has advised the Representatives that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Representatives that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Representatives that it proposes to file one, "EFFECTIVE TIME" with respect to such additional registration statement means the date and time as of which such registration statement is filed and becomes effective pursuant to Rule 462(b). "EFFECTIVE DATE" with respect to the initial registration statement or the additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all material incorporated by reference therein, including all information contained in the additional registration statement (if any) and deemed to be a part of the initial registration statement as of the Effective Time of the additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("RULE 430A(b)") under the Act, is hereinafter referred to as the "INITIAL REGISTRATION STATEMENT". The additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of the additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as the "ADDITIONAL REGISTRATION STATEMENT". The Initial Registration Statement and the Additional Registration Statement are herein referred to collectively as the "REGISTRATION STATEMENTS" and individually as a "REGISTRATION STATEMENT". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("RULE 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, including all material incorporated by 2 3 reference in such prospectus, is hereinafter referred to as the "PROSPECTUS". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act. (b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement conformed in all respects to the requirements of the Act, and the rules and regulations of the Commission ("RULES AND REGULATIONS") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of the Additional Registration Statement (if any), each Registration Statement conformed, or will conform, in all respects to the requirements of the Act, and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of the Additional Registration Statement is prior to the execution and delivery of this Agreement, the Additional Registration Statement each conforms, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of the Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will conform, in all respects to the requirements of the Act and the Rules and Regulations, and neither of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will conform in all respects to the requirements of the Act and the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus based upon written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. (c) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as presently conducted and as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification. (d) Each subsidiary of the Company has been duly incorporated and is an existing corporation in good standing under the laws of the jurisdiction of its 3 4 incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and the capital stock of each subsidiary owned by the Company, directly or through subsidiaries, is owned free from liens, encumbrances and defects. (e) The Offered Securities and all other outstanding shares of capital stock of the Company have been duly authorized; all outstanding shares of capital stock of the Company are, and, when the Offered Securities have been delivered and paid for in accordance with this Agreement on each Closing Date (as defined below), such Offered Securities will have been, validly issued, fully paid and nonassessable and will conform to the description thereof contained in the Prospectus; and the stockholders of the Company and other third parties have no preemptive rights with respect to the Securities. (f) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the heading "Actual" under the caption "Capitalization," and after giving effect to the offering will be as set forth under the heading "As Adjusted", in each case under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus) and the number of authorized, issued and outstanding options and other rights is set forth in the footnotes under such caption. The shares of issued and outstanding capital stock of the Company have been issued in compliance, in all material respects, with all federal and state securities laws. Except as disclosed in the Prospectus, there are no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of the Company's capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option and purchase plans and the options or other rights granted and exercised thereunder set forth in the Prospectus accurately and fairly describe, in all material respects, the information required to be shown with respect to such plans, arrangements, options and rights. (g) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment in connection with this offering. (h) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the 4 5 securities registered pursuant to a Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (i) The Offered Securities have been approved for listing on The Nasdaq Stock Market's National Market. (j) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws. (k) The execution, delivery and performance of this Agreement, and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (l) Each agreement other than the Listed Agreements (as hereinafter defined) described in the Prospectus or filed as an exhibit to the Registration Statement (such agreements other than the Listed Agreements, collectively, the "IN-FORCE AGREEMENTS") is in full force and effect and is valid and enforceable by the Company or one of its subsidiaries, as applicable, in accordance with its terms, assuming the due authorization, execution and delivery thereof by each of the other parties thereto except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) to the extent that rights to indemnity or contribution thereunder may be limited by federal and state securities laws or the public policy underlying such laws. None of the Company, any of its subsidiaries, or to the Company's knowledge, any other party is in default in the observance or performance of any term or obligation to be performed by it under any In-Force Agreement, and no event has occurred that with notice or lapse of time or both would constitute such a default, in any such case where such default or event would have Material Adverse Effect. No default exists, and no event has occurred that with notice or lapse of time or both would constitute a default, in the due performance and observance of any term, covenant or condition, by the Company or any of its subsidiaries of any other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any of them or their respective properties or business may be bound or affected where such default or event would have a Material Adverse Effect. [For purposes of this Section 5 6 [____], "LISTED AGREEMENTS" shall mean [[(i) the License Agreement between the Company and Hoffmann-La Roche Inc., effective January 31, 1989, and the letter dated November 4, 1992 amending such agreement, (ii) the License Agreement between the Company and F. Hoffmann-La Roche & Co., effective January 31, 1989, (iii) the Agreement between the Company and Kanebo, Ltd., dated February 29, 1992, (iv) the Asset Purchase and License Agreement among the Company, Sandoz Pharma Ltd. and Sandoz Pharmaceuticals Corporation, dated April 13, 1993, and the letter dated October 21, 1993 amending such agreement, (v) the License Agreement among the Company, Sandoz Pharma Ltd. and Sandoz Ltd., dated April 13, 1993, (vi) the Joint Development, Marketing and License Agreement between the Company and Corange International Limited, dated October 28, 1993, as amended, and (vii) the Industrial Lease Agreement between the Company and Ardenstone LLC, effective as of July 1, 1997.]] (m) This Agreement has been duly authorized, executed and delivered by the Company. (n) Except as disclosed in the Prospectus, the Company and its subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them; and except as disclosed in the Prospectus, the Company and its subsidiaries hold any leased real or personal property under valid and enforceable leases with no exceptions that would materially interfere with the use made or to be made thereof by them. (o) The Company and its subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business now operated by them and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole ("MATERIAL ADVERSE EFFECT"). (p) No labor dispute with the employees of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (q) The Company and its subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now operated by them or proposed to be operated by them as described in the Prospectus, presently employed by them, or as described or contemplated in the Prospectus and have not received any notice of infringement of or conflict with asserted rights of others with 6 7 respect to any intellectual property rights that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (r) Except as disclosed in the Prospectus, neither the Company nor any of its subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances (collectively, "ENVIRONMENTAL LAWS"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (s) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company, any of its subsidiaries or any of their respective properties that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are threatened or, to the Company's knowledge, contemplated. (t) The financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates shown and their results of operations and cash flows for the periods shown, and, except as otherwise disclosed in the Prospectus, such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis and the schedules included in each Registration Statement present fairly the information required to be stated therein; and the assumptions used in preparing the pro forma financial statements included in each Registration Statement and the Prospectus provide a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (u) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole, and, except as disclosed in or 7 8 contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (v) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (w) All material tax returns required to be filed by the Company and each of its subsidiaries in any jurisdiction have been filed, other than those filings being contested in good faith, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due pursuant to such returns or pursuant to any assessment received by the Company or any of its subsidiaries have been paid, other than those being contested in good faith and for which adequate reserves have been established on the books and records of the Company in accordance with GAAP. To the Company's knowledge, there are no proposed, material Tax assessments against the Company. To the Company's knowledge, the accruals and reserves on the books and records of the Company in respect of any material Tax liability for any Taxable period not finally determined are adequate to meet any assessments of Tax for any such period. For purposes of this Agreement, the terms "TAX" and "TAXES" shall mean all Federal, state, local, and foreign taxes, and other assessments of a similar nature (whether imposed directly or through withholding), including any interest, additions to tax, or penalties applicable thereto. (x) The Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in, or that has constituted or that might reasonably be expect to constitute, the stabilization or manipulation of the price of the Common Stock. (y) To the knowledge of the Company, Ernst & Young LLP, who have certified the financial statements filed with the Commission as part of each Registration Statement, are independent public auditors as required by the Act and the Rules and Regulations. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; and (C) access to assets is permitted only in accordance with management's general or specific authorization. (z) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its businesses and the value of its properties and as is customary for companies engaged in similar industries. 3. Purchase, Sale and Delivery of Offered Securities. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters 8 9 agree, severally and not jointly, to purchase from the Company, at a purchase price of $____ per share, the respective number of shares of Firm Securities set forth opposite the names of the Underwriters in Schedule A hereto. The Company will deliver the Firm Securities to the Representatives for the accounts of the Underwriters, at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 220, Palo Alto, California, against payment of the purchase price in Federal (same day) funds by official bank check or checks or wire transfer to an account at a bank acceptable to Credit Suisse First Boston Corporation ("CSFBC") drawn to the order of __________________ at the office of Skadden, Arps, Slate, Meagher & Flom LLP, at _______ A.M., New York time, on ____________________________, or at such other time not later than seven (7) full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "FIRST CLOSING DATE". For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934, the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Offered Securities sold pursuant to the offering. The certificates for the Firm Securities so to be delivered will be in definitive form, in such denominations and registered in such names as CSFBC requests and will be made available for checking and packaging at the above office of Skadden, Arps, Slate, Meagher & Flom LLP at least 24 hours prior to the First Closing Date. In addition, upon written notice from CSFBC given to the Company from time to time not more than thirty (30) days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all of the Optional Securities at the purchase price per Security to be paid for the Firm Securities. The Company agrees to sell to the Underwriters the number of shares of Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the number of shares of Firm Securities set forth opposite such Underwriter's name bears to the total number of shares of Firm Securities (subject to adjustment by CSFBC to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CSFBC to the Company. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "OPTIONAL CLOSING DATE", which may be the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "CLOSING DATE"), shall be determined by CSFBC but shall be not later than five (5) full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Representatives for the accounts of the several Underwriters, at the office of Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 220, Palo Alto, California, against payment of the purchase price therefor in Federal (same day) funds by official bank check or checks or wire 9 10 transfer to an account at a bank acceptable to CSFBC drawn to the order of ________________, at the above office of Skadden, Arps, Slate, Meagher & Flom LLP. The certificates for the Optional Securities being purchased on each Optional Closing Date will be in definitive form, in such denominations and registered in such names as CSFBC requests upon reasonable notice prior to such Optional Closing Date and will be made available for checking and packaging at the above office of Skadden, Arps, Slate, Meagher & Flom LLP at a reasonable time in advance of such Optional Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. Certain Agreements of the Company. The Company agrees with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company will file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule 424(b)) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company will advise CSFBC promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company will file the additional registration statement or, if filed, will file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or will make such filing at such later date as shall have been consented to by CSFBC. (b) The Company will advise CSFBC promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, the Additional Registration Statement (if any) or the Prospectus and will not effect such amendment or supplementation without CSFBC's consent; and the Company will also advise CSFBC promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplementation of a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and will use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued. 10 11 (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will promptly notify CSFBC of such event and will promptly prepare and file with the Commission, at its own expense, an amendment or supplement which will correct such statement or omission or an amendment which will effect such compliance. Neither CSFBC's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6. (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company will make generally available to its securityholders an earnings statement covering a period of at least twelve (12) months beginning after the Effective Date of the Initial Registration Statement (or, if later, the Effective Date of the Additional Registration Statement) which will satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "AVAILABILITY DATE" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal year, "AVAILABILITY DATE" means the 90th day after the end of such fourth fiscal quarter. (e) The Company will furnish to the Representatives copies of each Registration Statement (five (5) of which will be signed and will include all exhibits), each related preliminary prospectus, and, so long as a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company will pay the expenses of printing and distributing to the Underwriters all such documents. (f) The Company will arrange for the qualification of the Offered Securities for sale under the laws of such jurisdictions as CSFBC designates and will continue such qualifications in effect so long as required for the distribution. (g) During the period of five (5) years hereafter, the Company will furnish to the Representatives and, upon request, to each of the other Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to the Representatives (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed 11 12 with the Commission under the Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (h) The Company will pay all expenses incident to the performance of its obligations under this Agreement, for any filing fees and other expenses (including fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities for sale for the filing fee incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. of the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters. (i) For a period of ninety (90) days after the date of the initial public offering of the Offered Securities, the Company will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to, any additional shares of its Securities or securities convertible into or exchangeable or exercisable for any shares of its Securities, or publicly disclose the intention to make any such offer, sale, pledge, disposition or filing, without the prior written consent of CSFBC, except issuances of Securities pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date hereof, grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, or issuances of Securities pursuant to the exercise of such options. 6. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date will be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Representatives shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Ernst & Young LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating to the effect that: 12 13 (i) in their opinion the financial statements and schedules examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Registration Statements do not comply as to form in all materials respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent specified date not more than three (3) business days prior to the date of this Agreement, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated net assets, as compared with amounts shown on the latest balance sheet included in the Prospectus; or (C) for the period from the closing date of the latest income statement included in the Prospectus to the closing date of the latest available income statement read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest income statement included in the Prospectus, in consolidated net sales, net operating income, or in the total or per share amounts of consolidated net income, except in all cases set forth in clauses(B) and (C) above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and 13 14 (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. For purposes of this subsection, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "REGISTRATION STATEMENTS" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of the Additional Registration is subsequent to such execution and delivery, "REGISTRATION STATEMENTS" shall mean the Initial Registration Statement and the additional registration statement as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its Effective Time, and (iii) "PROSPECTUS" shall mean the Prospectus included in the Registration Statements. All financial statements and schedules included in material incorporated by reference into the Prospectus shall be deemed included in the Registration Statements for purposes of this subsection. (b) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CSFBC. If the Effective Time of the Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CSFBC. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission. 14 15 (c) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as one enterprise which, in the judgment of a majority in interest of the Underwriters including the Representatives, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any material suspension or material limitation of trading in securities generally on the New York Stock Exchange or The Nasdaq Stock Market's National Market, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or, New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters including the Representatives, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (d) The Representatives shall have received an opinion, dated such Closing Date, of Gray Cary Ware and Freidenrich LLP, counsel for the Company, to the effect that: (i) Each of the Company and its subsidiaries has been duly incorporated and is an existing corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own its properties and conduct its business as described in the Prospectus; and each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; (ii) The Offered Securities delivered on such Closing Date and all other outstanding shares of the Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Securities; (iii) There are no contracts, agreements or understandings known to such counsel between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect 15 16 to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act; (iv) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940. (v) No consent, approval, authorization or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and such as may be required under state securities laws; (vi) Except as disclosed in the Prospectus, such counsel does not know of any legal or governmental proceedings pending or threatened to which the Company or any of its subsidiaries is or could be a party or to which any of their respective property is or could be subject, which might result, singly or in the aggregate, in a Material Adverse Effect; (vii) The Company is not and, after giving effect to the offering and sale of the Notes and the application of the net proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended; (viii) The execution, delivery and performance of this Agreement and the issuance and sale of the Offered Securities will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any statute, any rule, regulation or order of any governmental agency or body or any court having jurisdiction over the Company or any subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such subsidiary is a party or by which the Company or any such subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or the charter or by-laws of the Company or any such subsidiary, and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement; (ix) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, the Additional Registration Statement (if any) was filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial 16 17 Registration Statement or the Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; such counsel have no reason to believe that any part of a Registration Statement or any amendment thereto, as of its effective date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus or any amendment or supplement thereto, as of its issue date or as of such Closing Date, contained any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; the descriptions in the Registration Statements and Prospectus of statutes, legal and governmental proceedings and contracts and other documents are accurate and fairly present the information required to be shown; and such counsel do not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; it being understood that such counsel need express no opinion as to the financial statements or other financial data contained in the Registration Statements or the Prospectus; and (x) All contracts and other agreements to which the Company or any of its subsidiaries is a party that are described in the Prospectus are accurately described therein. (xi) This Agreement has been duly authorized, executed and delivered by the Company. (xii) The information required to be set forth in the Registration Statement under the captions "Description of Capital Stock," and "Business - Legal Proceedings" is to our knowledge accurately and adequately set forth therein in all material respects. (e) You shall have received on the Closing Dates, if any, an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date, as the case may be, of Townsend and Townsend and Crew LLP, patent counsel for the Company, to the effect that: 17 18 (i) To the such patent counsel's knowledge, the statements with respect to patent matters in (A) the Prospectus under the captions "Risk Factors--Our humanization patents are being opposed and a successful challenge could limit our future revenues," "Risk Factors--If we are unable to protect our patents and proprietary technology, we may not be able to compete successfully" and "Risk Factors--We may require additional patent licenses in order to manufacture or sell our potential products," (B) the Company's annual report on Form 10-K for the fiscal year ended December 31, 1998 under the captions "Business--Patents and Proprietary Technology," "Risk Factors--Uncertainty of Patents and Proprietary Technology; Opposition Proceedings" and "Item 3. Legal Proceedings," (C) the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 1999 under the caption "Risk Factors--Uncertainty of Patents and Proprietary Technology; Opposition Proceedings," (D) the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 1999 under the caption "Risk Factors--Uncertainty of Patents and Proprietary Technology; Opposition Proceedings," and (E) the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 1999 under the caption "Risk Factors--Uncertainty of Patents and Proprietary Technology; Opposition Proceedings" (collectively, the "Patent Paragraphs") are accurate in all material respects and fairly present the information disclosed therein; (ii) To such patent counsel's knowledge, such patent counsel believes that the statements in the Patent Paragraphs do not contain any untrue statement of material fact nor omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (iii) To such patent counsel's knowledge, except as referred to in the Patent Paragraphs, there are no legal proceedings relating to patent rights of the Company to which the Company is a party and no such proceedings are threatened or contemplated. (f) You shall have received on the Closing Dates, if any, an opinion (satisfactory to you and counsel for the Underwriters), dated the Closing Date or such Option Closing Date, as the case may be, of Hepworth Lawrence Bryer and Bizley, patent counsel for the Company, to the effect that: (i) Such counsel has reviewed the Patent Paragraphs and, to the best of such patent counsel's knowledge and belief, the statements made therein are accurate in all material respects and fairly present the information required to be shown; and such counsel does not know of any legal or governmental proceedings required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or disclosed therein; and 18 19 (ii) To the best of such patent counsel's knowledge and belief, no untrue statements of material fact are made in the Patent Paragraphs, nor has any material fact been omitted which is necessary to make the statements therein not misleading. (g) The Representatives shall have received from Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Representatives may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (h) The Representatives shall have received a certificate, dated such Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or are contemplated by the Commission; the Additional Registration Statement (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to Rule 462(b), including payment of the applicable filing fee in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the [If closing date of latest income statement in Prospectus is more recent than latest balance sheet date, insert--respective] date[s] of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. (i) The Representatives shall have received a letter, dated such Closing Date, of Ernst & Young LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three (3) days prior to such Closing Date for the purposes of this subsection. (j) On or prior to the date of this Agreement, the Representatives shall have received lockup letters from each of the executive officers and directors of the Company. The Company will furnish the Representatives with such conformed copies of such opinions, certificates, letters and documents as the Representatives reasonably request. CSFBC may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the 19 20 obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter, its partners, directors and officers and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below. (b) Each Underwriter will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any who controls the Company within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf 20 21 of each Underwriter: the concession and reallowance figures appearing in the _______ paragraph under the caption "Underwriting." (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement (i) includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied 21 22 by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company under this Section shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. Default of Underwriters. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate number of shares of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate number of shares of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total number of shares of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term 22 23 "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. Survival of Certain Representations and Obligations. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Underwriter, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Underwriters pursuant to Section 7 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. Notices. All communications hereunder will be in writing and, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, NY 10010-3629, Attention: Investment Banking Department--Transactions Advisory Group, with a copy to Skadden, Arps, Slate, Meagher & Flom LLP, 525 University Avenue, Suite 220, Palo Alto, California 94301, Attention: Gregory C. Smith, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 34801 Campus Drive, Fremont, California 94555, Attention: Laurence Korn, with a copy to Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, California 94301, Attention: Gregory M. Gallo; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder. 12. Representation of Underwriters. The Representatives will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by the Representatives jointly or by CSFBC will be binding upon all the Underwriters. 13. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 23 24 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. 24 25 If the foregoing is in accordance with the Representatives' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, PROTEIN DESIGN LABS, INC. By: ------------------------------------ Name: Laurence Jay Korn Title: Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION - ----------------------------------- - ----------------------------------- Acting on behalf of themselves and as the Representatives of the several Underwriters By: CREDIT SUISSE FIRST BOSTON CORPORATION By: ----------------------------------- Name: Title: 1 26 SCHEDULE A
Principal Amount of Underwriter Firm Securities ----------- --------------- Credit Suisse First Boston Corporation................................. [$] [____________________]................................................. [___________________] [____________________]................................................. [___________________] [____________________]................................................. [___________________] ------------------- Total....................................................... [$] ===================
2 EX-5.1 3 ex5-1.txt EXHIBIT 5.1 1 EXHIBIT 5.1 August 28, 2000 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: As counsel to Protein Design Labs, Inc. a Delaware corporation (the "Company"), we are rendering this opinion in connection with the filing of a Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission covering the offering of up to 2,875,000 shares of the Company's Common Stock, $.01 par value, together with any additional shares covered by a registration statement filed pursuant to Rule 462 (collectively, the "Shares"). We have examined all instruments, documents and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. We express no opinion with respect to (i) the availability of equitable remedies, including specific performance, or (ii) the effect of bankruptcy, insolvency, reorganization, moratorium or equitable principles relating to or limiting creditors' rights generally. Based on such examination, we are of the opinion that the Shares, when issued and sold in accordance with the Registration Statement, will be duly authorized, legally issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement and any registration statement filed pursuant to Rule 462 and to the use of our name wherever it appears in said Registration Statement and any registration statement filed pursuant to Rule 462, including the Prospectuses constituting a part thereof, as originally filed or as subsequently amended. Respectfully submitted, /s/ Gray Cary Ware & Freidenrich LLP GRAY CARY WARE & FREIDENRICH LLP EX-23.2 4 ex23-2.txt EXHIBIT 23.2 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Financial Data" and "Experts" in the Registration Statement (Form S-3) and related Prospectus of Protein Design Labs, Inc. for the registration of 2,875,000 shares of its common stock and to the incorporation by reference therein of our report dated February 1, 2000 with respect to the consolidated financial statements of Protein Design Labs, Inc. included in its Annual Report on Form 10-K for the year needed December 31, 1999, filed with the Securities and Exchange Commission. /s/ ERNST & YOUNG LLP Palo Alto, California August 25, 2000 -----END PRIVACY-ENHANCED MESSAGE-----