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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission File Number: 0-22890
SANGSTAT MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
6300 Dumbarton Circle
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($.001 par value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of March 28, 2001 was approximately $112,629,000 (based on the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market of $8.50 on that date). Shares of Common
Stock held by each officer, director, and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 28, 2001 approximately 19,474,360 shares of the Registrant's Common
Stock, $.001 par value, were outstanding.
AMENDMENT NO. 1 The undersigned Registrant hereby amends Part I, to read in full as
follows: PART I ITEM 1. BUSINESS The following discussion and analysis should be read in
conjunction with "Selected Consolidated Financial Data" and our Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual Report
on Form 10-K. Except for the historical information contained herein, the
discussion in this Annual Report on Form 10-K contains certain forward-looking
statements that involve risks and uncertainties, such as statements of our
plans, objectives, expectations and intentions. The cautionary statements made
in this Annual Report on Form 10-K should be read as being applicable to all
related forward-looking statements wherever they appear in this Annual Report on
Form 10-K. Our actual results could differ materially from those discussed here.
Factors that could cause or contribute to such differences include those
discussed in "Risk Factors," as well as those discussed elsewhere herein. In
particular, we have included forward-looking statements regarding the following:
(i) our strategy; (ii) the anticipated timing of our regulatory filings and
approvals; (iii) other product development efforts that we intend to undertake,
including expanded uses and indications for existing products, and the related
capital outlays; (iv) the growth of our product sales and markets; (v) the
results of our litigation; (vi) our future revenue and expenses; and (vii) the
anticipated timing of the sale of our division known as The Transplant
Pharmacy. Overview SangStat is a global biotechnology company building on its foundation in
transplantation to discover, develop and market high value therapeutic products
in the transplantation, immunology and hematology/oncology areas. Since 1988, we
have been dedicated to improving the outcome of organ and bone marrow
transplantation through the development and marketing of products to address all
phases of transplantation in the worldwide market. Our US headquarters are in
Fremont, California. We also maintain a strong European presence, including
direct sales and marketing forces in all major European markets and distributors
throughout the rest of the world. Our stock is traded on the Nasdaq under the
symbol "SANG". Our web site is located at www.sangstat.com. Our business is currently organized into two segments: Pharmaceutical
Products and Transplantation Services (see our Consolidated Financial Statements
and Notes thereto). The Pharmaceutical Products segment consists of five
marketed products, three principal product candidates and additional product
candidates in various stages of research and development. We plan to capitalize
on our products and product pipeline by developing relationships with key
providers and managed care organizations to better integrate the management of
transplant recipients' care to improve the outcomes and lower the costs of
transplants. In October 2000, we announced the implementation of a strategy to refocus the
company. This strategy involves building on our foundation in transplantation to
grow a core business in high value therapeutics. SangStat was a
diagnostic/pharmaceutical company focused on solid organ transplantation, with
particular emphasis on the cyclosporine market. The success of Thymoglobulin and
its potential in areas beyond solid organ transplantation has provided us with
an opportunity to pursue new markets. In addition, the changing nature of the
cyclosporine market, including other generic entrants and the increased use of
other chronic immunosuppressants, has reduced the overall potential in the solid
organ transplantation market. We are now focusing on a variety of therapeutic products and product
candidates to address the pre-transplant, acute care and chronic phases of
transplantation as well as product candidates in hematology and immunology. We currently sell the following products:
Fremont, California 94555
(Address of principal executive offices, including zip code)
510-789-4300
(Registrant's telephone number, including area code)
Preferred Share Purchase Rights
(Title of Class)
Our principal products under development include:
We also announced in October 2000 that we hoped to sell The Transplant Pharmacy (TTP), which comprises our transplantation services segment. In early March, we received several non-binding offers to purchase TTP, one of which we accepted on March 13, 2001, thus committing to a formal plan to sell this segment. We are currently in advanced negotiations with this bidder and expect to complete the sale of TTP by April 30, 2001. Consequently, the historical consolidated statements of operations and cash flows have been restated for all periods presented to account for TTP as a discontinued operation.
Background
Organ Transplantation
Organ transplantation can save or improve the lives of patients with organ failures. Transplantation involves surgically replacing the failed organ of a transplant recipient with a healthy organ from a donor. Each year approximately 50,000 new patients receive donated organs. In order to prevent rejection of implanted organs, recipients must begin a life-long regimen of immunosuppressive therapy immediately upon receiving a donated organ. There are more than 240,000 patients in North America and Europe that need daily immunosuppressive therapy to prevent graft rejection and graft loss. Products that limit the need for immunosuppression and reduce the frequency and severity of rejection and infection episodes could significantly improve the cost- effectiveness and health benefits of transplantation.
The Transplant Immune Response
The function of the immune system is to protect the body from damage caused by invading microorganisms or other foreign matter. Differences between a donor's and a recipient's antigens lead to the recognition of the donor's organ as foreign matter by the recipient's immune system. Specifically, the donor organ antigens (HLA molecules) are recognized by the immune system of the graft recipient as being "non-self." When the recipient's immune system invades and attacks the donated organ, rejection and loss of the organ often occur.
Current therapies used to reduce the occurrence of rejection episodes involve the chronic use of immunosuppressants, which impair the entire immune system of the recipient. However, even with the use of immunosuppressants, rejection remains frequent. Chronic use of immunosuppressants can lead to serious side effects, including life-threatening infections, kidney or liver toxicity and cancers.
The Transplant Process
A typical transplant patient progresses through three phases:
A transplant candidate is registered on a national computerized waiting list. A candidate usually waits months or even years for a compatible organ. Organs harvested from donors are stored in a preservation solution such as Celsior to prevent deterioration. Each organ is cross-matched with potential recipients. The organ is then shipped in the same organ preservation solution to the recipient's transplant center. The length of storage time allowed before transplant varies among organ types and can severely limit the distance an organ can be shipped.
Transplant surgery has become a relatively safe and standardized procedure. After the transplant, however, the physician must prevent rejection for the transplant to be a success. Consequently, the success of the transplant is highly dependent on the immunosuppressive regimen that is initiated the day of transplantation and continued daily for the rest of the patient's life. Organ recipients must be regularly monitored to measure the body's immune response and blood drug levels and to help identify acute rejection episodes. Many patients undergo one or more rejection episodes in the first year after transplant and require additional immunosuppressants. Thymoglobulin and Lymphoglobuline are indicated for both prevention and treatment of rejection outside the US.
The use of immunosuppressants such as cyclosporine, initiated during the acute phase, is continued daily throughout the patient's lifetime to minimize or prevent the loss of the organ by rejection. These drugs impair the recipient's immune system in order to reduce the immune response against the graft. Even with the use of immunosuppressants, patients have an approximate 20% to 50% risk of losing a donated organ during the first three years following transplantation, and less than 50% of patients have functioning grafts after approximately ten years.
Bone Marrow or Stem Cell Transplantation
Bone marrow or stem cell transplantation is a standard therapy for many disease states, primarily cancer or pre-cancerous diseases. Stem cells, found in the peripheral blood or in the bone marrow, are given by an intravenous infusion to re-establish marrow function in a patient with damaged or defective bone marrow.
Immunosuppressive therapy, primarily anti-thymocyte globulin ("ATG") such as Lymphoglobuline and Thymoglobulin, chemotherapeutic agents, and/or irradiation are given as part of a conditioning regimen. The goals of this regimen are threefold: to limit the patient's ability to mount an immune response to the new bone marrow or stem cells, to provide space for the new cells, and to destroy any residual cancer if the patient is being treated for a malignancy.
Some of these patients experience graft versus host disease ("GVHD"). This is a condition in which the graft (i.e. the new immune system) begins to reject the host (i.e. the body). ABX-CBL is initially being developed to treat steroid- resistant GVHD and may eventually be developed to prevent it.
Aplastic Anemia
Aplastic anemia is a disease in which the stem cells disappear from the bone marrow and primarily affects young people. Aplastic anemia has a high mortality rate and, even with treatment, quality of life is poor. Patients with this disease are dependent on weekly blood transfusions that require frequent visits to the physicians' offices and are expensive ($10,000-15,000/year). Both Thymoglobulin and Lymphoglobuline are approved for treatment of aplastic anemia outside of the US and the majority of sales of Lymphoglobuline in Japan are for the treatment of aplastic anemia.
Myelodysplastic Syndrome (MDS)
MDS, also referred to as pre-leukemia, is a rare disease in which the bone marrow does not function normally and not enough normal blood cells are made. An estimated 30,000 to 40,000 people in the US suffer from MDS. Approximately 40% of patients will die from the consequences of ineffective blood cell production and 30% will progress to develop acute leukemia, a form of cancer where too many white blood cells are made. Supportive care with transfusions remains the principal therapy for less advanced types of MDS. Current treatments for the advanced types of the disease include chemotherapy and/or bone marrow transplantation, however these are ineffective or not available in the majority of cases.
As with aplastic anemia, the outcomes are generally poor, the quality of life is reduced, and the patients are dependent on weekly blood transfusions. We have orphan drug status for Thymoglobulin for the treatment of MDS and have a clinical study on going to obtain FDA approval for this indication.
Crohn's Disease and Ulcerative Colitis
Crohn's disease and ulcerative colitis are similar diseases that are often grouped together as inflammatory bowel disease (IBD). Crohn's disease is a chronic inflammatory disease of the gastrointestinal (GI) tract. Crohn's disease usually causes diarrhea, abdominal pain, often fever, and can cause rectal bleeding. Ulcerative colitis is an inflammatory disease of the colon, the large intestine, which is characterized by inflammation and ulceration of the innermost lining of the colon. Symptoms include diarrhea with or without rectal bleeding and sometimes abdominal pain. Unlike Crohn's disease, which can involve all regions of the intestine, ulcerative colitis affects only the colon. It is estimated that there are up to 1,000,000 Americans with either ulcerative colitis or Crohn's disease, roughly half of that number for each disease. We are developing RDP58 for treatment for both diseases.
Products and Product Candidates
The following tables summarize our principal products and product candidates.
Marketed Products |
|
Product |
Indications/Clinical Use |
Thymoglobulin®1 |
Prevention and treatment of acute graft rejection, severe aplastic anemia and steroid resistant GVHD1 |
Gengraf®2 |
Chronic immunosuppression (prevents organ rejection) |
Lymphoglobuline®3 |
Prevention and treatment of acute graft rejection, severe aplastic anemia and steroid resistant GVHD |
Celsior® |
Preserves organs prior to transplantation |
SangCya® Oral Solution (cyclosporine) 4 |
Chronic immunosuppression (prevents organ rejection) |
Principal Product Candidates |
|
Product Candidate |
Description and Potential Clinical Use |
Cyclosporine Capsule |
Chronic immunosuppression (prevents organ rejection). |
ABX-CBL |
An anti-CD147 monoclonal antibody for the treatment of steroid resistant GVHD currently in a multicenter, randomized and controlled Phase II/III study. Licensed from and co-developed with Abgenix |
RDP585 |
A rationally designed peptide that inhibits TNF-alpha synthesis. We are investigating its use for treatment of various autoimmune disorders, particularly ulcerative colitis and Crohn's disease. |
1
Approved in the US only for treatment of acute kidney rejection episodes.2
Distributed only in the US. Gengraf is a registered trademark of Abbott Laboratories, Inc.3
Not approved for sale in the US.4
Withdrawn from the US market in July 2000. Being sold in a small number of countries outside the US.5
Formerly known as Allotrap 1258.Marketed Products
Thymoglobulin
Description
Thymoglobulin is a pasteurized anti-thymocyte rabbit immunoglobulin that induces immunosuppression as a result of T-cell depletion and immune modulation. Thymoglobulin is made up of a variety of antibodies that recognize key receptors on T-cells, the cells of a transplant recipient's immune system that recognize and ultimately reject foreign objects such as a transplant. While the exact mechanism is unknown, researchers believe Thymoglobulin antibodies may inactivate and kill these T-cells, thus reversing the rejection process.
Market
We (or our distributors) market Thymoglobulin in 56 countries, though our revenues from Thymoglobulin come primarily from Europe and North America. Our primary European subsidiary, IMTIX-SangStat S.A.S. (also known as SangStat- Europe) was formerly the IMTIX division of Pasteur Mérieux Connaught, now Aventis Pasteur, a subsidiary of Aventis S.A. ("Aventis"). IMTIX has sold the current formulation of Thymoglobulin in France since 1994 and its predecessor product since 1984. In Europe, Thymoglobulin has the following indications:
In the US, we launched Thymoglobulin in February 1999. Thymoglobulin is indicated for treatment of acute rejection in kidney transplant recipients in the US. We intend to seek expanded indications for other organs within solid organ transplantation and seek new indications in hematological disorders such as MDS.
We market and sell Thymoglobulin outside Europe and North America through distributors. We have a distribution agreement with Aventis, which we are currently renegotiating, for most countries outside of Europe and North America. We have also entered into distribution agreements with distributors in certain Asian countries and are currently re-negotiating our distribution agreement with Aventis to obtain the right to distribute directly in certain territories. See "Strategic Relationships."
Clinical Studies
We have initiated a comparative induction study of Thymoglobulin versus Simulect, a monoclonal antibody marketed by Novartis Pharmaceuticals Inc. ("Novartis") in high-risk renal transplant recipients. The FDA has indicated that this trial will not be sufficient to support label indication changes or expansion. This is a prospective, randomized, open-label study conducted in 20 transplant centers with approximately 240 patients. Primary endpoints at 6 months will be graft survival, patient survival, incidence of acute rejection, and incidence of delayed graft function. We expect patient enrollment to be completed by year-end 2001.
Our other ongoing study with Thymoglobulin is in MDS. We have initiated an open-labeled, prospective, randomized, multi-center Phase IIb trial with Thymoglobulin in MDS. SangStat received Orphan Drug Designation for Thymoglobulin for treatment in MDS in September 2000. Orphan drug designation is granted to applicants when the prevalence of the disease for which approval is sought occurs in less than 200,000 patients in the US. The advantages of this designation include a waiver of the user fee, possible marketing exclusivity and tax credits for development costs. These advantages are intended to encourage sponsors to develop drugs for patients with rare diseases.
MDS is a rare disorder of the bone marrow that often results in bone marrow failure in older people and results in the need for transfusions and supportive care. The endpoint in this trial is transfusion independence at six months post therapy. Patient enrollment began in October 2000. In part because this is a rare disease, as evidenced by its orphan drug status, to date patient enrollment has been relatively slow. While we have expanded the number of centers participating in the study with the aim of trying to meet the enrollment goal, which is completion of enrollment of 72 patients into the study by 2001 year end, enrollment may not be completed by that time.
Gengraf® Cyclosporine Capsules/ SangCya® Oral Solution
Description
Cyclosporine is a potent immunosuppressive agent. Gengraf cyclosporine capsule, a product of Abbott Laboratories Inc. (Abbott) is a generic version of Neoral® capsules, which is marketed by Novartis. SangStat and Abbott co-promote and distribute Gengraf in the US. SangCya Oral Solution, which is a generic version of Neoral oral solution, was withdrawn from the US market in July 2000 and is currently being sold in a small number of countries outside the US. We recalled SangCya Oral Solution from the U.S. in July 2000 in response to a study in healthy volunteers that identified that SangCya is not bioequivalent to Neoral oral solution when mixed with apple juice as recommended in its labeling.
Cyclosporine Market
Cyclosporine is the leading immunosuppressive drug used to prevent graft rejection in transplantation. There are approximately 140,000 transplant recipients in the US and 250,000 worldwide who will require daily lifelong immunosuppressive therapy. The majority of these patients are prescribed cyclosporine. Cyclosporine is also indicated for the treatment of rheumatoid arthritis and adult non-immunocompromised psoriasis patients. Worldwide sales of cyclosporine are greater than $1 billion per year. The US market is approximately $500 million.
We entered into an agreement with Abbott in May 1999 for the co-promotion, distribution, and research in the US of SangCya Oral Solution and Gengraf. See "Strategic Relationships." This agreement enables both companies to maximize their strengths by combining SangStat's transplant expertise with Abbott's pharmaceutical presence, especially in the managed care arena.
We launched Gengraf cyclosporine capsules in May 2000 in the US through our combined SangStat/Abbott sales force. Novartis has sued Abbott for patent infringement with respect to Gengraf. See "Item 3 - Legal Proceedings." Gengraf's indications are identical to Neoral's indications and include (i) the prophylaxis of organ rejection in kidney, liver and heart allogeneic transplants; (ii) the treatment of patients with severe, active rheumatoid arthritis where the disease has not adequately responded to methotrexate; and (iii) the treatment of adult, non-immunocompromised patients with severe (i.e. extensive and or disabling), recalcitrant, plaque psoriasis who have failed to respond to at least one systemic therapy (e.g. PUVA, retinoids or methotrexate), or in patients for whom either systemic therapies are contraindicated, or cannot be tolerated.
We sell SangCya Oral Solution in the UK and Germany and we plan to file for marketing authorization for our cyclosporine capsule in the UK and US. See: "Principal Products in Development - Cyclosporine Capsules." In Europe, there are approximately 20,000 new transplant recipients per year concentrated in 250 transplant centers and over 100,000 transplant recipients in Europe who require daily lifelong immunosuppressive therapy from the time of transplant surgery.
Lymphoglobuline®
Description
Lymphoglobuline is an anti-thymocyte equine immunoglobulin that induces immunosuppression as a result of t-cell depletion and immune modulation. Outside the US, it is approved for the prevention and treatment of rejection episodes in kidney, heart, pancreas, or liver transplantation. In hematology, Lymphoglobuline is approved for treatment of aplastic anemia and in the treatment of GVHD.
Market
Lymphoglobuline is marketed in over 45 countries. Our sales force markets it in Europe and Canada. Outside these countries, it is sold through our distribution agreement with Aventis or through other distributors. Aventis Pharma markets it in Japan, where a high percentage of sales occur for treatment of aplastic anemia. We have no plans to seek approval for Lymphoglobuline in the US.
Celsior®
Description
Early graft loss remains a significant problem associated with cardiac transplantation and damage to the heart tissue can occur due to inadequate preservation. Effective organ preservation includes initial flushing of the heart tissues during the recovery process and cold storage while the donor heart is transported to the recipient. Celsior is the first and only flush and cold storage solution approved by the FDA for cardiac transplantation. It was designed specifically for cardiac transplantation to minimize myocardial edema, oxygen free radical-induced reperfusion injury, and diastolic stiffness.
Market
Celsior is sold throughout Europe and was launched in the US in September 1999. It is indicated for cardiac transplantation in the US. We recently terminated our Celsior lung trial for financial reasons given the cost of the trial versus the sales of the product, but there is data from about seventy patients, which may result in a publication. Outside of Europe and North America, Celsior is sold through our distribution agreement with Aventis or through other distributors. There are approximately 5,000 cardiac and lung transplants each year worldwide.
Revenues from pharmaceutical products for 1998, 1999 and 2000 were $11,294,000, $44,303,000, and $63,145,000 respectively. Revenues from Thymoglobulin were 69% of 1999 revenues and 60% of 2000 revenues, and revenues from Lymphoglobuline were 19% of 1999 revenues and 12% of 2000 revenues, respectively. Combined revenues of these two products were 66% of 1998 revenues. In addition, revenues from Gengraf were 18% of total revenues from pharmaceutical products in 2000, and revenues from SangCya Oral Solution were 16% of total revenues from pharmaceutical products in 1998 and were immaterial in 1999.
Principal Products In Development
We currently have three principal products in development. Our research and development expenses were $17,688,000, $14,470,000 and $ 20,788,000 for 1998, 1999, and 2000 respectively.
Cyclosporine Capsules
We have exclusively licensed a novel cyclosporine capsule formulation, which uses a patented technology, from TrisPharma, a small US research and development company. We are conducting a small pilot study in healthy volunteers to demonstrate the new capsule's bioequivalence to Neoral cyclosporine capsules in water. The other filing requirements include a larger bioequivalence trial and stability testing. If the results of the bioequivalence trial and stability testing are positive, we expect to file a Marketing Authorization Application (MAA) with the Medicines Control Agency (MCA) of the United Kingdom (UK) in 2001. We have withdrawn our MAA in the UK for our cyclosporine capsule product known as Sang-2000 in favor of this newer formulation. We intend to follow the European Community Mutual Recognition Procedure for obtaining regulatory approval in multiple Member States.
ABX-CBL
In August 2000, we entered into a global co-development, supply and license agreement for ABX-CBL with Abgenix under which we obtained an exclusive worldwide license for the marketing and sale of ABX-CBL. ABX-CBL is an anti- CD147 monoclonal antibody for the treatment of steroid resistant GVHD and is currently in a multi-center, randomized, and controlled Phase II/III study. The study is designed to demonstrate statistically significant efficacy of a single dose level of ABX-CBL in comparison to a control group of patients. We received orphan drug designation for ABX-CBL for the treatment of steroid resistant GVHD in November 2000.
In an earlier Phase II trial completed in the fall of 1999, 52% of patients receiving 0.1 - 0.3 mg/kg ABX-CBL survived at least 100 days following initiation of therapy, compared to 22% of patients receiving the presumed no effect dose of 0.01 mg/kg. Approximately 25% of patients that undergo an allogeneic bone marrow transplant develop steroid resistant GVHD for which there is currently no standard approved therapy available.
RDP58
RDP58, a rationally designed peptide, is a novel inhibitor of TNF- alpha synthesis and is being investigated for treatment of various autoimmune disorders, particularly ulcerative colitis and Crohn's disease.
TNF-alpha is a cytokine released in excess in various autoimmune disorders. It triggers activation of immune responses and inflammation. Animal models, including studies in primates, suggest that RDP58 could decrease levels of TNF- alpha, reduce inflammation, and improve clinical outcomes. RDP58 is different from currently available TNF inhibitors in that it prevents the synthesis of TNF-alpha on a translational level as opposed to binding TNF-alpha to inhibit function. It is currently being tested in an oral formulation. We plan to file a Clinical Trial Experiment application (CTX) with the MCA in the UK and, following approval of the CTX, begin Phase I/II clinical trials studying RDP58 for both ulcerative colitis and Crohn's disease in the UK in 2001.
The Transplant Pharmacy®/TransplantRx.comTM
We established The Transplant Pharmacy (TTP) in September of 1996. This program provides mail order distribution of drugs and other services for transplant patients. In November of 1999, we introduced TransplantRx.com, the first on-line pharmacy dedicated to organ transplantation. Designed as an extension to the mail order service, TransplantRx.com provides patients, their families and health care providers with a place to purchase all of their medications and access information and resources on transplantation on-line. We announced in October 2000 that we hoped to sell The Transplant Pharmacy (TTP), which comprises our transplantation services segment. In early March, we received several non-binding offers to purchase TTP, one of which we accepted on March 13, 2001, thus committing to a formal plan to sell this segment. We are currently in advanced negotiations with this bidder and expect to complete the sale of TTP by April 30, 2001. We are not including the accounts receivable and inventory in the sale, and we plan to liquidate these assets as soon as practicable following the closing of the sale. Consequently, the historical consolidated statements of operations and cash flows have been restated for all periods presented to account for TTP as a discontinued operation. See Note 15 of the Notes to Consolidated Financial Statements.
Sales and Marketing
In the US we market products through our direct sales force. As of March 5, 2001, we have 21 Transplant Account Managers, supervised by three regional sales directors, who call on or "detail" primarily to the approximately 250 transplant centers in the US. A number of the Account Managers have backgrounds in transplantation, either from detailing other transplant products or with clinical backgrounds as nurses or as transplant coordinators in transplant centers. We also have two national account directors who call on group purchasing organizations and managed care groups and one open position for a national account director. Sales to McKesson HBOC and Cardinal Health Inc., accounted for 15% and 13%, respectively, of total revenues in 2000. Sales to McKesson HBOC accounted for approximately 11% of our total revenues in 1999. No customer accounted for more than 10% of our total revenues in 1998.
We reorganized our European sales and marketing departments in 2000 following the hiring of a new head of European operations and a new VP of Sales and Marketing in Europe. We have approximately 30 sales and marketing people spread throughout the major European markets. There are also approximately 250 transplant and hematology centers in Europe.
The marketing departments in the US and Europe work together in a coordinated, cohesive fashion with each other and with the sales force. Product concepts and market penetration programs are targeted to blend clinical data with proven marketing techniques. In 2000, the marketing departments conducted multiple faculty training meetings in which academicians and researchers presented clinical data on our products to over 125 clinicians from transplant centers. We also use a variety of marketing techniques to promote our products, including sampling, journal advertising, promotional material, specialty publications, rebate coupons, product guarantees, educational conferences and exposure of our products on the Internet.
For certain territories and products, however, we have distributors. See "Strategic Relationships." To the extent we enter into co-promotion or other licensing arrangements, any revenues received by us will be dependent on the efforts of third parties, which may not be successful.
Revenues for sales outside of the US were $8,022,000, $26,209,000 and $21,873,000 for 1998, 1999, and 2000 respectively, the majority of which have come from Europe since the acquisition of IMTIX in September 1998. Additional information regarding long-lived assets and revenues outside of the US can be found in Note 16 of the Notes to Consolidated Financial Statements.
We use a logistics provider to store and distribute our products from one central warehousing location in Memphis, Tennessee. When our logistics provider receives a purchase order through electronic data input, phone, mail or facsimile, it sends the order to the warehouse for shipment, usually within 24 hours, to the customer placing the order. The logistics provider is also responsible for invoicing and collections.
We evaluate on an ongoing basis potential collaborative relationships with corporate and other partners where such relationships may complement and expand SangStat's research, development, sales and marketing capabilities. We may not be interested in or able to negotiate any additional collaborative arrangements. If we establish such relationships, they may not be successful.
Co-Promotion, Distribution and Research Agreement with Abbott
In May 1999, we signed a multi-year co-promotion, distribution and research agreement with Abbott for SangCya Oral Solution (which was withdrawn from the US market in July 2000) and Gengraf in the US. We are the exclusive distributor for Gengraf in the U.S. and share marketing, promotional and development expenses as well as the profits from the co-promotion of the products with Abbott. The agreement ends December 31, 2004 unless both companies agree to extend it. In addition, either party may terminate the agreement if the other party is acquired by Novartis or a licensee of Neoral or Sandimmune, products sold by Novartis. Further, if we are acquired by Novartis or its licensee prior to May 2002, Abbott may recover from us all milestone payments made under the agreement. Pursuant to this agreement, Abbott made an equity investment of $14 million during 1999 in exchange for approximately 894,000 shares of common stock, representing a premium to fair market value at that time aggregating to $1.3 million. In addition, Abbott made a series of up- front and milestone payments totaling $20.8 million, including $1.9 million received in January 2000 and $5.0 million received in May 2000, and a long-term loan of $16 million to us received during 1999. In January 2000, we made a milestone payment of $4.0 million to Abbott under the terms of the agreement. No further milestone payments are required from either company. All up-front and milestone payments received, net of milestone payments made, and the premium received on the sale of common stock to Abbott are recorded as deferred revenue and recognized ratably over the term of the agreement as revenue from collaborative agreements. In May 2000, Abbott and we launched Gengraf, the cyclosporine capsule developed by Abbott. In connection with the equity investment, Abbott and we entered into a Right of First Refusal Agreement and a Registration Rights Agreement, and amended and restated our existing Supply Agreement.
Co-Development, Supply and License Agreement with Abgenix, Inc.
In August 2000, we entered into a global co-development, supply and license agreement with Abgenix, Inc., for ABX-CBL, an antibody developed by Abgenix. Under the agreement, we have an exclusive worldwide license for the marketing and sale of ABX-CBL. ABX-CBL is an anti-CD 147 monoclonal antibody for the treatment of steroid resistant graft versus host disease (GVHD) and is currently in a multicenter, randomized, and controlled PhaseII/III study. Development costs will be shared equally, as would any potential profits from the sales of collaboration products. We share responsibility for product development with Abgenix, including the ongoing Phase II / III clinical trial. We will market any potential products and Abgenix will be responsible for manufacturing ABX-CBL. We also have the right, subject to the terms and conditions of the agreement, to commercialize other anti-CD147 antibodies developed by Abgenix.
Under the terms of the agreement, we made an initial license fee payment of $1.0 million to Abgenix. Two additional milestone payments of $1.0 million are due to Abgenix under the terms of the agreement contingent on achievement of certain milestones. The license fee payment and the milestone payments, if any are paid to Abgenix, will be non-refundable and non-creditable against any future obligations under this agreement.
If ABX-CBL receives regulatory approval and is launched, we are required to pay Abgenix $6.1 million for our share of development expenses incurred prior to January 1, 2000, provided that we do not have any obligation to pay Abgenix until the first anniversary of the launch of ABX-CBL and the timing of payment varies depending on ABX-CBL's sales. We have also agreed to pay Abgenix for one- half of the development costs for ABX-CBL from January 1, 2000 to August 8, 2000, with our share being approximately $1.9 million. We must pay Abgenix this amount over a two-year period commencing with a $1.0 million payment, which has already been paid, and two equal payments of the remaining amount payable by the end of June 2001 and 2002. The license fee and the initial payment of development expenses are recorded as research and development expenses. The agreement terminates upon the later of ten years or the date on which no product is being developed or sold. In addition, the agreement may be terminated by either party on a product by product basis with six months notice prior to the first regulatory approval and with twelve months notice thereafter. Under the agreement, however, a party terminating the agreement prior to its scheduled termination is obligated to grant certain licenses so as to allow the other party to continue promotion of the products and to pay its share of incurred or anticipated development expenses. If, for example, Abgenix terminated the agreement early, we would be entitled to an exclusive, worldwide license for the marketing and sale of ABX-CBL in return for royalty payments.
Aventis Pasteur
We entered into a Distribution Agreement with Aventis in April 1999 that expires March 31, 2002. Aventis is our exclusive distributor for Thymoglobulin and Lymphoglobuline for most countries outside of North America, Europe and Japan (where Thymoglobuline and Lymphoglobuline are distributed by Aventis Pharma). The contract has minimum purchase requirements. If Aventis does not meet these minimums, the agreement becomes non-exclusive, which means we can sell to another distributor in the same country. In 2000, Aventis purchased approximately $5.8 million in products under this agreement. Aventis sells these products either through its local subsidiary or through a distributor that often distributes other Aventis products. We are currently re-negotiating this distribution agreement to allow us to contract directly with distributors in countries in which Aventis has no direct presence (e.g. Israel and certain Asian countries). The agreement automatically terminates upon our ceasing to maintain any required licenses to distribute Thymoglobuline and Lymphoglobuline. Aventis also performs certain steps in the manufacturing process of Thymoglobulin and Lymphoglobuline. See "Manufacturing". In addition, pursuant to the purchase of IMTIX on September 30, 1998, we pay Aventis royalties on Thymoglobulin and Lymphoglobuline contingent upon the sales of these products. In 1999 and 2000, royalty payments on Lymphoglobuline to Aventis totaled approximately $646,000 and $622,000 respectively. We expect these royalty payments to increase in future years since we will begin paying royalties on Thymoglobulin commencing on the third anniversary of the purchase of IMTIX (October 1, 2001).
Competition
The drug industry is very competitive. The drugs we market compete with existing and new drugs being created by pharmaceutical, biopharmaceutical, and biotechnology companies and universities. Many of these entities have significantly greater research and development capabilities, as well as substantial marketing, manufacturing, financial and managerial resources and represent significant competition for us. Many of the competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic effect than products we are developing or marketing and may be more effective and less costly. In addition, many of our competitors have significantly greater experience than we do in conducting clinical trials of pharmaceutical products and obtaining regulatory approvals of such products. This could cause our competitors to succeed in commercializing products more rapidly than we can. The principal factors upon which our products compete are:
We believe we compete favorably with respect to all of these factors. Gengraf, however, is a generic drug, which means we compete favorably against the branded drug, Neoral, on pricing, but some physicians may be reluctant to prescribe generic drugs.
Competitive products with respect to our material products include the following:
Our Products |
Competitive Products |
Competitor |
Thymoglobulin/Lymphoglobuline |
Orthoclone OKT® 3 |
Ortho Biotech |
|
ATGAM® |
Pharmacia & Upjohn Inc. |
|
Simulect® |
Novartis AG |
|
Zenapax® |
F. Hoffmann La-Roche Ltd. |
Gengraf, SangCya Oral Solution, & cyclosporine capsules
|
Neoral Sandimmune Prograf® Rapamune Generic cyclosporine capsule Generic cyclosporine capsule |
Novartis AG Novartis AG Fujisawa Pharmaceutical Co. Ltd. American Home Products (AHP) Eon Labs Sidmak |
Competitive products with respect to our product candidates include the following:
Our Product Candidates |
Competitive Products |
Competitor |
ABX-CBL |
MEDI-507 Nuvion (HuM291) |
Medimmune/BioTransplant Protein Design Labs |
|
|
|
RDP58 |
Enbrel® Remicade® |
Immunex - AHP Johnson & Johnson |
Our cyclosporine products are generic and compete against the branded cyclosporine products as well as other generic cyclosporine products that have been or may be approved. These products also compete against Prograf, marketed by Fujisawa Pharmaceutical Co. Ltd, which was approved by the FDA to be taken instead of cyclosporine. Roche's Cellcept® is indicated as a conjunctive therapy, to be taken with cyclosporine rather than instead of cyclosporine. As noted above, Thymoglobulin competes with OKT3, ATGAM, Simulect, and Zenapax. In the US, Thymoglobulin has been successful in establishing a market share against these products, which were all previously on the market. In Europe, Novartis and Roche have just started selling Simulect and Zenapax, respectively, and we believe that the launch of these two products may impact sales of Thymoglobulin and Lymphoglobuline in Europe.
ABX-CBL is expected to compete against two products that are also in clinical trials for the treatment of GVHD: Medimmune/BioTransplant's MEDI-507 and Protein Design Labs' Nuvion. In addition, other products are used for the prevention of GVHD and would therefore eliminate the need to use ABX-CBL for treatment.
RDP58 is an inhibitor of TNF-alpha synthesis. TNF-alpha is a cytokine released in excess in various autoimmune disorders. For that reason, many companies are pursuing development of a TNF-alpha inhibitor and we believe there could be substantial competition in this area. In addition, Immunex/AHP's Enbrel and Johnson & Johnson's Remicade are both TNF-alpha inhibitors that are currently approved for rheumatoid arthritis and Crohn's disease respectively.
Patents and Proprietary Technology
We have a number of issued patents and pending patent applications in the US and in corresponding countries with respect to the products we are selling, the products we have in development and our research areas. We aggressively seek patent protection on our inventions and our policy is to enforce our intellectual property rights. We have no issued patents covering Thymoglobulin and Lymphoglobuline and rely on our manufacturing know-how to protect these products. We have issued patents covering Celsior. SangCya Oral Solution and our cyclosporine capsules have formulation patent protection both issued and pending, but the cyclosporine compound is no longer patent-protected and there are several generics on the market in the US. We are pursuing patent protection for RDP58 and we believe that an issued patent may give us a competitive advantage.
We have twenty-nine issued patents and sixteen pending patent applications in the US and are pursuing corresponding patent applications in other countries.
Our patents expire on various dates beginning in the year 2008 and ending in the year 2017.
In addition, as discussed above, we have also licensed in certain patents and patent technology. We have an exclusive, worldwide license from Stanford University for certain issued patents and pending patent applications in the HLA and peptide area. We have licensed from Abgenix certain patents and patent applications that relate to ABX-CBL. We have licensed additional patents relating to cyclosporine from several groups. The licensor for each of these licenses is primarily responsible for prosecution of these patents and patent applications.
Patent applications in the US are maintained in secrecy until patents issue. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we were the first to discover compositions covered by our pending patent applications or the first to file patent applications on such compositions. There can be no assurance that our pending patent applications will result in issued patents, that any of our issued patents will afford protection against a competitor or that our products will not infringe on other patents.
We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our employees and consultants.
We have registered or applied for registration of the names of all of our marketed products and plan to register the names of our products under development once a name has been selected for the product candidate.
Manufacturing pharmaceutical products is a highly regulated process. The FDA and other regulatory agencies require that manufacturing be done in accordance with current Good Manufacturing Practices ("GMP"). Additionally, products can only be manufactured in facilities approved by the applicable regulatory authorities. Because of these and other factors, we may not be able to quickly and efficiently replace our manufacturing capacity in the event that we are unable to manufacture Thymoglobulin or Lymphoglobuline or one of our manufacturers is unable to manufacture one of our other products for us. See "Risk Factors - We may not be able to manufacture or obtain sufficient quantities of our products, which could lead to product shortages and harm our business," and "Risk Factors - Our reliance on third parties for manufacturing may delay product approval or once approved, result in a product shortage, which would reduce our revenues."
When we acquired IMTIX in 1998, we also acquired the manufacturing unit in Lyon, France that manufactured Thymoglobulin and Lymphoglobuline. Currently Aventis also performs certain steps in the manufacturing process of Thymoglobulin and Lymphoglobuline under contract to us. We perform the remaining manufacturing steps ourselves in manufacturing facilities that we lease from Aventis. These agreements with Aventis expire on dates ranging from 2008 to 2013. In 1999, partially in response to a letter from the FDA, we improved certain manufacturing processes at the Lyon facility and are continuing to improve these manufacturing processes in 2000 and 2001 as we move part of our operations to a new manufacturing building in the same location. Our manufacturing operations were not materially affected and we do not believe that they will be materially affected in the future. We believe that our facility currently complies with GMP.
We have no other manufacturing facility and the Lyon facility could not be used for products other than biologics. Therefore, we rely on third parties to manufacture our other products, both those that we sell and those in development. We depend on such third parties to perform their obligations in compliance with all regulatory requirements and on a timely basis. If any of our contract manufacturers fail to perform, such failure may delay our clinical development or submission of products for regulatory approval or result in product shortages with respect to our marketed products.
Abgenix is responsible for the manufacturing of ABX-CBL. If the supplier they have chosen fails to perform, it would have the same results discussed above: such failure may delay our clinical development or submission of products for regulatory approval or result in product shortages with respect to our marketed products.
With respect to raw materials, we have agreements for commercial scale production of cyclosporine bulk material with Gensia Sicor ("Sicor") and Abbott. Our Sicor agreement runs until October 31, 2013 and has an automatic five-year term renewal unless one party gives notice. Our Abbott agreement terminates December 31, 2004 and is automatically renewed until one party gives notice. Bulk cyclosporine is difficult to manufacture since it must be extracted from whole cells and carefully purified. We have an obligation to purchase a certain percentage of our future bulk cyclosporine requirements from Sicor and a minimum fixed amount from Abbott, subject to certain conditions being met. We believe we have sufficient quantities of bulk cyclosporine to meet our current needs. We believe we also have sufficient quantities of raw materials for our other products and product candidates.
Government Regulation
FDA and Other Regulatory Authorities
Our research and development activities, preclinical studies and clinical trials, and ultimately the manufacturing, marketing and labeling of our products, are subject to extensive regulation by the FDA and other regulatory authorities in the US and other countries ("Regulatory Agencies"). The US Federal Food, Drug, and Cosmetic Act (the "Act") and the regulations promulgated thereunder and other federal and state statutes and regulations govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising, promotion, import and export of our products and product candidates. Preclinical study and clinical trial requirements and the regulatory approval process typically take years and require the expenditure of substantial resources. Additional government regulation may be established that could prevent or delay regulatory approval of our product candidates. Delays or rejections in obtaining regulatory approvals would harm our ability to commercialize any product candidates we develop and our ability to receive product revenues. If regulatory approval of a product candidate is granted, the approval may include significant limitations on the indicated uses for which the product may be marketed.
The steps ordinarily required before a drug or biological product may be marketed in the US include the following:
Preclinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of each product. Laboratories that comply with FDA regulations regarding Good Laboratory Practice must conduct these preclinical safety tests. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA before the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. Submission of an IND may not result in FDA authorization to commence clinical trials or the lack of an objection may not mean that the FDA will ultimately approve an application for marketing approval.
Clinical trials are typically conducted in three sequential phases, but the phases may overlap.
Phase I |
Phase I clinical trials involve the initial introduction of the drug into healthy human volunteers. In Phase I clinical trials, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). |
Phase II |
Phase II clinical trials are conducted in a target patient population to gather evidence about the pharmacokinetics, safety and biological or clinical efficacy of the drug for specific indications, to determine dosage tolerance and optimal dosage, and to identify possible adverse effects and safety risks. |
Phase III |
When a compound has shown evidence of efficacy and an acceptable safety profile in Phase II evaluations, Phase III clinical trials are undertaken to evaluate clinical efficacy and to test for safety in an expanded patient population. |
Our products in clinical trials during 2001 may include Thymoglobulin for expanded labeling, ABX-CBL, RDP58, and bioequivalence studies for our cyclosporine capsule product.
Our clinical trials may not be completed successfully or within any specified time period. Either the FDA or we may suspend clinical trials at any time, if either of us concludes that clinical subjects are being exposed to an unacceptable health risk, or for other reasons. The conduct of clinical trials is complex and difficult, especially in Phase III. The design or the performance of the Phase III clinical trial protocols may not be successful.
The results of preclinical studies and clinical trials, if successful, are submitted in an application to seek FDA approval to market the drug or biological product for a specified use. The testing and approval process requires substantial time and effort, and there can be no assurance that any approval will be granted for any product or that approval will be granted according to any schedule. The FDA may refuse to approve an application if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy of the drug. Moreover, if regulatory approval of a drug product is granted, the approval will be limited to specific indications. Our product candidates may not receive regulatory approvals for marketing, or if approved, that approval may not be for the indications that we requested.
Other Regulatory Agencies follow similar procedures to those required by the FDA and require that the safety and efficacy of our pharmaceutical product candidates be supported through adequate and well-controlled clinical trials. If the results of our pivotal clinical trials submitted in application for approval do not establish the safety and efficacy of our product candidate to the satisfaction of any Regulatory Agency, we will not receive the approvals necessary to market our product candidate in that country.
In the European Union ("EU"), the registration process for products can be done through a decentralized procedure. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more Member States, certify that the dossier is identical to that on which the first approval was based or explain any differences and certify that identical dossiers are being submitted to all Member States from which recognition is sought. Within 90 days of receiving the application and assessment report, each Member State must decide whether to recognize the approval. The procedure encourages Member States to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. If such disputes cannot be resolved within the 90-day period provided for review, the application will be subject to a binding arbitration procedure.
Following approval, Regulatory Agencies continue to regulate our approved and marketed products. We must report adverse drug events associated with our products to Regulatory Agencies. In addition, Regulatory Agencies also inspect on a regular basis the equipment and facilities used to manufacture our products. A Regulatory Agency may suspend the manufacturing facilities (and order a recall of our products manufactured in that facility) if the Regulatory Agency believes that the product has not been manufactured in compliance with regulations. See "Manufacturing."
Environmental Regulation
In connection with our research and development activities we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens, and wastes. Although we believe that we have complied with these laws, regulations and policies in all material respects and have not been required to take any action to correct any noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and infectious biological specimens. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our resources.
Third Party Reimbursement
Our operating results will depend in part on the availability of adequate reimbursement for our products from third-party payers, such as government entities, private health insurers and managed care organizations. Third-party payers increasingly are seeking to negotiate the pricing of medical services and products. In some cases, third-party payers will pay or reimburse a user or supplier of a prescription drug product only a portion of the purchase price of the product. In the case of our prescription products, payment or reimbursement by third-party payers of only a portion of the cost of such products could make such products less attractive, from a cost perspective, to users, suppliers and prescribing physicians. Reimbursement, if available, may not be adequate. If government entities or other third-party payers for our products do not provide adequate reimbursement levels, our results of operations would be harmed.
A number of legislative and regulatory proposals aimed at changing the US health care system have been proposed in recent years. While we cannot predict whether any such proposals will be adopted, or the effect that any such proposals may have, such proposals, if enacted, could harm our business operations.
Product Liability Insurance
We face an inherent risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in adverse effects. Such risk exists even with respect to those products that are manufactured in licensed and regulated facilities or that otherwise received regulatory approval for commercial sale. We could be subject to significant product liability claims. We currently have product liability insurance in the amount of $25.0 million per claim and $25.0 million in the aggregate on a claims-made basis. Many of our customers require that we maintain product liability insurance coverage as a condition to their conducting business with us. As the loss of such insurance coverage could result in a loss of such customers, we intend to take all reasonable steps necessary to maintain such insurance coverage. However, insurance coverage may not be available in the future on commercially reasonable terms. Such insurance may not be adequate to cover potential product liability claims and the loss of insurance coverage or the assertion of a product liability claim or claims could harm our operating results.
As of December 31, 2000, we employed 287 people worldwide, of which 133 are in the US and Canada and 154 are in Europe, which includes approximately 65 employees in our manufacturing facility in Lyon, France, most of whom are represented by labor unions. 31 of our US employees work at The Transplant Pharmacy, which we expect to sell by April 30, 2001. We believe that we maintain good relations with our employees.
Jean-Jacques Bienaimé, 47, has been our President and Chief Operating Officer since June 1998 and became Chief Executive Officer on February 1, 1999. He was elected to the Board of Directors in March 1999. Mr. Bienaimé became Chairman of the Board of Directors in October 2000. From September 1992 to May 1998 Mr. Bienaimé was with Rhone Poulenc Rorer, Inc., a pharmaceutical company, rising to the position of Senior Vice President, Corporate Marketing and Business Development. He is currently a member of the board of Fox Chase Cancer Center and Aerogen Inc. Mr. Bienaimé received his degree in economics from Ecole Superieure de Commerce de Paris in France and an M.B.A. from the Wharton School, University of Pennsylvania.
Christophe M. Bianchi, M.D., 39, has been the President of our IMTIX-SangStat subsidiary and our Senior Vice President, Global Marketing and Business Development since January 2000. From 1989 to December 1999, Dr. Bianchi held various positions with Rhône-Poulenc Rorer, Inc., serving most recently as Vice President and Head, Global Marketing. Dr. Bianchi received an M.D. from the University of Reims in France, a degree from Ecole De Hautes Etudes Commerciales (EDHEC graduate school of management), and a Masters of Business Administration from the Wharton School, University of Pennsylvania.
Steve Aselage, 49, has been our Senior Vice President, North American Sales since February 1999. From 1995 to January 1999, Mr. Aselage was the Director of Sales and Marketing at Advanced Tissue Sciences, a tissue engineering company. Mr. Aselage received a B.S. in biology from the University of Notre Dame.
Roland Buelow, Ph.D., 42, has been our Senior Vice President of Research and Development since April 2000 and was Vice President of Research and Development from 1993 until 2000. Dr. Buelow received a Ph.D. in Biology from the Max- Planck Institute for Biology in Tuebingen, Germany. Dr. Buelow visited the University of Texas as a Fulbright scholar and spent two years at Stanford Medical School.
Stephen G. Dance, 50, has been our Senior Vice President, Finance since April 1999. From July 1998 to April 1999, Mr. Dance was Director of Financial Accounting, Planning and Reporting at Plantronics, Inc., a telecommunications company. From 1983 to July 1998, Mr. Dance held various positions with Syntex Corporation, a pharmaceutical company, which was acquired by Roche Holding Ltd., also a pharmaceutical company, in 1994, serving most recently as Controller, Syntex Laboratories, Inc. Mr. Dance holds a B.A. in French from Leeds University in England, is a Certified Public Accountant in the State of California and a fellow of the Institute of Chartered Accountants in England and Wales.
Ralph E. Levy, 52, has been our Senior Vice President, Operations since 1995 and Vice President, Operations from 1990 until 1995. Mr. Levy received a B.S. in chemistry from the City College of New York and an M.S. in chemistry from Seton Hall University.
Carole L. Nuechterlein, 40, has been our Senior Vice President and General Counsel since February 2001 and was Vice-President and General Counsel from October 1998 to January 2001. From 1991 to October 1998, Ms. Nuechterlein held various positions with Roche Bioscience and Syntex Corporation, which was acquired by Roche Holding Ltd. in 1994, serving most recently as Director of Legal Affairs. Ms. Nuechterlein received a B.A. in 1983 from Valparaiso University and a J.D. in 1986 from the University of Michigan.
Raymond J. Tesi, M.D., 45, has been our Senior Vice President, Medical Affairs and Clinical Development since August 1999. From May 1997 to August 1999, Dr. Tesi served as our Senior Vice President of Marketing. From 1994 until 1997, Dr. Tesi was an associate professor of surgery and director of the extra- renal transplantation program at Tulane Medical School in New Orleans, Louisiana. He was a transplantation surgical fellow at the Ohio State University Hospital. Dr. Tesi received an M.D. from the Washington University School of Medicine in St. Louis, Missouri.
Randell J. Correia, Pharm.D, 42, has been Vice President, The Transplant Pharmacy® of SangStat Medical Corporation since 1995. Dr. Correia received a doctor of pharmacy degree from the University of the Pacific in Stockton, California.
Robert C. Floc'h, Ph.D., 53, has been the General Manager of our IMTIX- SangStat subsidiary since we acquired IMTIX in September 1998. In addition, Dr. Floc'h has been General Manager at SangStat Atlantique, our previous operating subsidiary in France, since 1992. Dr. Floc'h received a doctor of pharmacy degree and a Ph.D. in medical chemistry from the University of Nantes.
Risk Factors
We have a history of operating losses and our future profitability is uncertain. We were incorporated in 1988 and have experienced significant operating losses since that date. As of December 31, 2000, our accumulated deficit was $177,636,000. Our operating expenses from continuing operations have increased from approximately $50.1 million to $74.0 million to $103.2 million over the three year period ended December 31, 2000. Total revenues from continuing operations have increased from approximately $11.3 million to $44.3 million to $63.1 million, while losses from continuing operations decreased from approximately $38.8 million to $29.7 million and increased to $40.0 million over the three year period ended December 31, 2000. We expect to continue to incur significant losses for the foreseeable future and we may not ever achieve significant revenues from product sales and we may not achieve profitable operations.
We may need to raise additional funds within the next 12 months and may not be able to secure adequate funds on terms acceptable to us. Within the next twelve months, we may need to raise additional funds through financings and collaborative research and development arrangements with corporate partners. We may not be able to raise funds on favorable terms, if at all, and our discussions with potential collaborative partners may not result in any agreements. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain technologies, product candidates or products that we would not otherwise relinquish. To raise funds, we may also be required to sell shares of our common stock, which may be at prices below the price at which you may have purchased shares. Such sales would also cause a dilution of your percent ownership of SangStat.
Our future growth depends on sales of key products. We expect to derive most of our future revenues from sales of Thymoglobulin, Lymphoglobuline, and Gengraf. We have limited experience selling our products in the US. Our sales of Thymoglobulin began in the US in February 1999. We began distributing Gengraf in May 2000. We are marketing Gengraf in the US under a co- promotion agreement with Abbott Laboratories. We cannot guarantee that Abbott will be able to effectively market Gengraf, and its failure to do so may adversely impact sales of these products.
Any factor adversely affecting the sales of Thymoglobulin, Lymphoglobuline, and Gengraf individually or together, or regulatory approval of our cyclosporine capsule product would harm our business and results of operations. The following factors could adversely affect the sale or approval of these products:
In particular, with respect to Gengraf, sales may be affected by the following:
We may not be able to manufacture or obtain sufficient quantities of our products, which could lead to product shortages and harm our business. Our manufacturing facility in Lyon must meet FDA standards of Good Manufacturing Practices and other regulatory guidelines. The FDA and other regulatory authorities inspect our manufacturing facility to ensure that it meets regulatory standards. If the FDA believes that we are not complying with its guidelines, it can issue a warning letter or prevent the import of Thymoglobulin into the US, which would reduce our revenues. In addition, Thymoglobulin and Lymphoglobuline are biologics and consequently difficult to manufacture. We acquired the IMTIX division of Aventis in 1998, including certain manufacturing capabilities with respect to Thymoglobulin and Lymphoglobuline. Before the acquisition, certain batches of Thymoglobulin did not meet manufacturing specifications, resulting in a shortage of Thymoglobulin for commercial sale. We still rely on Aventis for certain important manufacturing services, including quality assurance, quality control, and lyophilization. Aventis may not continue to effectively and continuously provide us these critical manufacturing services. In addition, we may experience manufacturing difficulties with respect to Thymoglobulin or Lymphoglobuline in the future that may impair our ability to deliver products to our customers, which could reduce our revenues and harm our business.
If our products do not receive regulatory approvals, or if we do not otherwise comply with government regulations, our business would be harmed. Our research, preclinical development, clinical trials, manufacturing, marketing and distribution of our products in the US and other countries are subject to extensive regulation by numerous governmental authorities including, but not limited to, the FDA. In order to obtain regulatory approval of a drug product, we must demonstrate to regulatory agencies, among other things, that the product is safe and effective for its intended uses and that the manufacturing facilities are in compliance with Good Manufacturing Practices requirements. The process of obtaining FDA and other required regulatory approvals is lengthy and will require the expenditure of substantial resources, and we do not know if we will obtain the necessary approvals for our product candidates. Moreover, for our approved products, the marketing, distribution and manufacture of our products remains subject to extensive regulatory requirements administered by the FDA and other regulatory bodies. Failure to comply with applicable regulatory requirements can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval, withdrawal of approvals and criminal prosecution of SangStat and our employees.
Our reliance on third parties for manufacturing may delay product approval or once approved, result in a product shortage, which would reduce our revenues. Except for Thymoglobulin and Lymphoglobuline, third parties manufacture all of our products and product candidates. There are three main risks associated with using third parties for manufacturing:
In addition, we may not be able to enter into commercial scale manufacturing contracts on a timely or commercially reasonable basis, or at all, for our product candidates. Abgenix, from whom we have licensed ABX-CBL, remains responsible for entering into and maintaining the manufacturing agreement with a third party for the manufacturing of this product candidate. For some of our potential products, we will need to develop our production technologies further for use on a larger scale to conduct human clinical trials and produce such products for sale at an acceptable cost.
If our manufacturers fail to perform their obligations effectively and on a timely basis, these failures may delay clinical development or submission of products for regulatory approval, or once a product is approved, result in product shortages, any of which would impair our competitive position either because of the delays or because of a loss of revenues. Additionally, because our products can only be manufactured in facilities approved by the applicable regulatory authorities, we may not be able to replace our manufacturing capacity quickly or efficiently in the event that our manufacturers are unable to manufacture their products.
A change in marketing strategy and a delay in product approval have created excess perishable inventories that may result in significant reductions in our future gross margins. We have significant amounts of bulk cyclosporine active ingredient inventory that we are not using to manufacture finished product in the amount anticipated. This inventory was originally purchased for use in cyclosporine finished products to be sold in the US and Europe. However, since we are now distributing Gengraf in the US and we have withdrawn SangCya Oral Solution from the US market, we are dependent on the European market to use this inventory. Although we plan to obtain marketing approval for a cyclosporine capsule product in Europe, the inherent uncertainty of the approval process makes it very difficult to forecast a launch date for this product. We currently expect approval of a cyclosporine capsule product in the UK in 2002. If the approval and product launch are delayed, we may not be able to convert all the inventory into finished product and sell it before its expiration date. As a result, we could write off portions of our bulk active ingredient in the future, which could significantly reduce the gross margin reported for that future period.
If we do not develop and market new products, our business will be harmed. To achieve profitable operations, we must successfully develop, obtain regulatory approval for, manufacture, introduce and market new products and product candidates. We may not be able to successfully do this. Our product candidates will require extensive development and testing, as well as regulatory approval before marketing to the public. Our cyclosporine capsule product candidate in Europe has been delayed and we do not anticipate having approval of a cyclosporine capsule product in Europe until 2002. In addition, cost overruns and product approval delays could occur due to the following:
These events would prevent or substantially slow down the development effort and ultimately would harm our business. Furthermore, there can be no assurance that our product candidates under development will be safe, effective or capable of being manufactured in commercial quantities at an economical cost, or that our products will not infringe the proprietary rights of others or will be accepted in the marketplace.
Our recall of SangCya Oral Solution in the US in July 2000 could result in an FDA investigation and negative marketing by our competitors. We recalled all lots of SangCya Oral Solution from the US wholesalers in July 2000 and at the same time announced its withdrawal from the US market. In addition to the loss of anticipated SangCya Oral Solution revenues, the FDA may conduct an investigation into the circumstances that led to the SangCya Oral Solution recall. Responding to an FDA investigation could be costly, time consuming, and may distract senior management from other tasks. Negative marketing may reduce sales of Gengraf or Thymoglobulin as competitors attempt to use the recall in marketing against our products and us. The FDA or other regulatory authorities may review our future drug approval applications more carefully, which may result in slower approval times. If approvals are delayed, revenues from these products would also be delayed.
Our business exposes us to the risk of product liability claims for which we may not be adequately insured. We face an inherent business risk of exposure to product liability claims in the event that the use of our products results in adverse effects during research, clinical development or commercial use. We cannot guarantee we will avoid significant product liability exposure. Our product liability insurance coverage is currently limited to $25 million, which may not be adequate to cover potential liability exposures. Moreover, we cannot assure you that adequate insurance coverage will be available at an acceptable cost, if at all, or that a product liability claim would not harm our results of operations.
Our inability to attract or retain key personnel could negatively affect our business. Our ability to develop our business depends in part upon our attracting and retaining qualified management and scientific personnel. As the number of qualified personnel is limited, competition for such personnel is intense. We cannot assure you that we will be able to continue to attract or retain such people. The loss of our key personnel or the failure to recruit additional key personnel could significantly impede attainment of our objectives and harm our financial condition and results of operations.
Operation of The Transplant Pharmacy may suffer while we are trying to sell the business, resulting in a lower sales price or inability to sell the business. On October 16, 2000, we announced that we hoped to sell The Transplant Pharmacy, or TTP, our mail order pharmacy business. We have put a retention program in place to encourage employees to stay while we are selling the division. If we cannot successfully retain employees, it will be very difficult to replace employees and we may be forced to use temporary employees. Loss of employees or use of temporary employees could adversely affect operations of TTP. If TTP operations are disrupted, TTP would likely produce lower revenues and lower collections of accounts receivable, which, if either occurred, could result in a lower sale price for TTP or an inability to sell TTP. We are in advanced negotiations with a potential buyer and expect to complete the sale of TTP by April 30, 2001, however there can be no assurance that this sale will occur.
Our litigation with Novartis may be resolved adversely and will be a drain on time and resources. While we have settled our patent litigation with Novartis regarding SangCya Oral Solution, we are involved in litigation with Novartis in the US and the UK, which could potentially harm sales of Gengraf in the US (due to the US regulatory litigation which would impact the labeling for all generic cyclosporine products), and SangCya Oral Solution and our cyclosporine capsule product candidates in Europe. The course of litigation is inherently uncertain and we may not achieve a favorable outcome. The litigation, whether or not resolved favorably to us, is likely to be expensive, lengthy and time consuming, and divert management's attention.
Novartis' patent lawsuit against Abbott with respect to Gengraf may be resolved adversely. Novartis sued Abbott in August 2000 claiming that Gengraf infringes certain Novartis patents. Novartis' complaint includes a plea for injunctive relief to prevent the sale of Gengraf in the US. The course of litigation is inherently uncertain: Novartis may choose to name us in this suit, Abbott may not prevail, or Abbott may choose to settle on terms adverse to our interests. Should we be named in this suit, we may incur expenses before reimbursement, if any, by Abbott who is obligated under our agreement to indemnify us against such suits. Should Novartis succeed in obtaining a preliminary or permanent injunction, Gengraf may be temporarily or permanently removed from the market. If Abbott or we were forced to remove Gengraf from the market before our co-promotion agreement with Abbott expires on December 31, 2004, our revenues would be decreased materially.
We may have a charge against earnings if we lose a breach of contract lawsuit. In August 2000, two affiliated suppliers sued our French subsidiary, IMTIX-SangStat SAS, for breach of contract because we ordered lower quantities than were anticipated by the agreements. The suppliers are asking for damages of $5 million for lost profits and reimbursement of capital expenditures. A hearing was held in late December 2000 and we currently anticipate a ruling in mid-April 2001. The course of litigation is inherently uncertain and we may not achieve a favorable outcome. If the court finds in the suppliers' favor, we would suffer a one-time charge against earnings, which could be material if these parties are awarded the full amount requested.
Our future success depends on our ability to successfully manage growth. We continue to expand our operations, which places a strain upon our management, systems and resources. Our ability to compete effectively and to manage future growth, if any, will require us to continue to, on a timely basis, improve our financial and management controls, reporting systems and procedures and expand, train and manage an increasing number of employees. Our failure to do so would harm our results of operations.
Failure to protect our intellectual property will adversely affect our business. Our success depends in part on our ability to obtain and enforce patent protection for our products and to preserve our trade secrets. We hold patents and pending patent applications in the US and abroad. Some of our patents involve specific claims and thus do not provide broad coverage. There can be no assurance that our patent applications or any claims of these patent applications will be allowed, be valid or enforceable. These patents or claims of these patents may not provide us with competitive advantages for our products. Our competitors may successfully challenge or circumvent our issued patents and any patents issued under our pending patent applications. We have not conducted extensive patent and art searches with respect to our product candidates and technologies, and we do not know if third-party patents or patent applications exist or filed in the US, Europe or other countries. This would have an adverse effect on our ability to market our products. We do not know if claims in our patent applications would be allowed, be valid or enforceable, or that any of our products would not infringe on others' patents or proprietary rights in the US or abroad. We also have patent licenses from third parties whose patents and patent applications are subject to the same risks as ours.
We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our employees and consultants. We cannot guarantee these agreements will not be breached, that we would have adequate remedies for any such breach or that our trade secrets will not otherwise become known or independently developed by competitors.
We have registered or applied for trademark registration of the names of all of our marketed products and plan to register the names of our products under development once a name has been selected for the product candidate. We have registered or applied for trademark registration of the names of most of our products under development or commercialized for research and development use. However, these trademark registrations may not be granted to us or may be challenged by competitors.
We face substantial competition, which could adversely affect our revenues and results of operations. The drugs we develop compete with existing and new drugs being created by pharmaceutical, biopharmaceutical, biotechnology companies and universities. Many of these entities have significantly greater research and development capabilities, as well as substantial marketing, manufacturing, financial and managerial resources and represent significant competition. The principal factors upon which our products compete are product utility, therapeutic benefits, ease of use, effectiveness, marketing, distribution and price. With respect to our products, we are competing against large companies that have significantly greater financial resources and established marketing and distribution channels for competing products.
The drug industry is intensely price competitive and we expect we will face this and other forms of competition. Developments by others may render our products or technologies obsolete or noncompetitive, and we may not be able to keep pace with technological developments. Many of our competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for products that compete with our own. Some of these products may have an entirely different approach or means of accomplishing the desired therapeutic effect than our products and may be more effective and less costly. In addition, many of these competitors have significantly greater experience than we do in undertaking preclinical testing and human clinical trials of pharmaceutical products and obtaining regulatory approvals of such products. Accordingly, our competitors may succeed in commercializing products more rapidly than we can.
Other treatments for the problems associated with transplantation that our products seek to address are currently available and under development. To the extent these therapeutics or monitoring products address the problems associated with transplantation on which we have focused, they may represent significant competition.
We depend on collaborative relationships and any failure by our strategic partners to perform could adversely affect our competitive position. We have a number of strategic relationships for the development and distribution of our products. In particular, we have entered into a multi- year co-promotion, distribution and research agreement for Gengraf in the US with Abbott. We are dependent upon Abbott for certain regulatory, manufacturing, marketing, and sales activities under the agreement. Abbott may not perform satisfactorily and any such failure may impair our ability to deliver products on a timely basis, or otherwise impair our competitive position, which would harm our business. We have also entered into a Co- Development, Supply and License Agreement with Abgenix, Inc. with respect to the development, marketing and sale of ABX-CBL. We are dependent upon Abgenix for certain development and manufacturing activities under the agreement. Abgenix may not perform satisfactorily and any such failure may delay regulatory approval, product launch, impair our ability to deliver products on a timely basis, or otherwise impair our competitive position, which would harm our business. We may enter into additional collaborative relationships with corporate and other partners to develop and commercialize certain of our potential products. We cannot assure you that we will be able to negotiate acceptable collaborative arrangements in the future, that such collaborations will be available to us on acceptable terms or that any such relationships, if established, will be scientifically or commercially successful.
Fluctuations in quarterly and annual operating results may adversely affect our stock price. Our quarterly and annual operating results may fluctuate due to a variety of factors. We therefore believe that quarter-to- quarter comparisons of our operating results may not be a good indication of our future performance, and you should not rely on them to predict our future performance or the future performance of our stock. Our operating losses have been substantial each year since inception. We also expect losses to continue in the near future as a result of a number of factors, including:
Our operating results may also fluctuate significantly as a result of other factors, including:
Fluctuations in our operating results have affected our stock price in the past and are likely to continue to do so in the future. In particular, the realization of any of the risks described herein could have a significant and adverse impact on the market price for our stock.
Our stock price as well as the stock prices for competitors in our industry has historically been volatile. The market prices for securities of pharmaceutical and biotechnology companies, including ours, are highly volatile. The stock market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price for our common stock may fluctuate as a result of factors such as:
The uncertainty of pharmaceutical pricing and reimbursement may negatively impact our results of operations. Our ability to successfully commercialize our products may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. The pricing, availability of distribution channels and reimbursement status of newly approved healthcare products is highly uncertain and we cannot assure you that adequate third-party coverage will be available for us to maintain price levels sufficient for realization of an appropriate return on our investment in product development. In certain foreign markets, pricing or profitability of healthcare products is subject to government control. In the US, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental control. In addition, an increasing emphasis on managed care in the US has and will continue to increase the pressure on pharmaceutical pricing. While we cannot predict whether any such legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on our business, the announcement of such proposals or efforts could harm our ability to raise capital, and the adoption of such proposals or efforts could harm our results of operations. Further, to the extent that such proposals or efforts harm other pharmaceutical companies that are our prospective corporate partners, our ability to establish corporate collaborations may be adversely affected. In addition, third-party payers are increasingly challenging the prices charged for medical products and services. We do not know whether our products and product candidates, if approved, will be considered cost effective or that reimbursement to the consumer will be available or will be sufficient to allow us to sell our products on a competitive basis.
Our use of hazardous materials could result in unexpected costs or liabilities. In connection with our research and development activities and operations, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. We cannot assure you that we will not incur significant costs to comply with environmental and health and safety regulations. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and infectious biological specimens. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our ability to pay.
Our charter documents, stockholder rights plan and Delaware law may serve to deter a takeover. Certain provisions of our Certificate of Incorporation and our Bylaws could delay or make more difficult a merger, tender offer or proxy contest, which could adversely affect the market price of our common stock. Our board of directors has the authority to issue up to 5 million shares of preferred stock and to determine the price, rights preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. Further, we have adopted a stockholder rights plan. Under this plan we may issue a dividend to stockholders who hold rights to acquire our shares or, under certain circumstances, an acquiring corporation, at less than half their fair market value. The plan could have the effect of delaying, deferring or preventing a change in control. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit us from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control.
ITEM 2. PROPERTIES
Our global headquarters are located in Fremont, California. Floor space in Fremont is approximately 44,000 square feet, including offices, laboratory space, storage area and specialized areas for some pilot production and preclinical testing. The lease for the Fremont building space will expire in 2005 and may be renewed for subsequent years. Our monthly rent on this lease is approximately $54,000.
Our European headquarters are located in Lyon, France. We lease 1,560 square meters in Lyon, France for sales, marketing, finance, clinical, and administration. We have one floor for which the lease expires in 2003 and for which we pay approximately 46,700 French francs a month (approximately $6,500 based on an exchange rate of 7.2 French francs per U.S. dollar). We lease a second floor for which the lease expires in 2004 and for which we pay 57,500 French francs a month (approximately $8,000).
We also lease approximately 38,300 square feet from Aventis in Marcy L'Etoile (just outside of Lyon), France for manufacturing. The manufacturing leases, which cover two different buildings, expire in 2013 but may be terminated at our option upon giving one year's notice. The monthly rent for both buildings is approximately 140,400 French francs (approximately $19,500). In 2001, our monthly rent will increase by 121,250 French francs ($16,840) to reflect completion of a new manufacturing area in 2000.
In addition, we lease small administrative offices in the other countries.
We believe that our current facilities are suitable and adequate to meet our needs for the foreseeable future and anticipate that we will be able to expand our facilities to nearby locations as the need develops.
ITEM 3. LEGAL PROCEEDINGS
The following is a description of our current litigation. The course of litigation is inherently uncertain and we may not achieve a favorable outcome. See "Item 1 - Risk Factors - Our litigation with Novartis may be resolved adversely and will be a drain on time and resources."
Novartis vs. SangStat
On July 27, 2000, we entered into a global settlement agreement with Novartis AG and Novartis Pharmaceuticals Corporation with respect to the patent infringement lawsuits filed against us regarding SangCya® Oral Solution, USP [MODIFIED] as well as the counterclaim we filed against Novartis Pharmaceuticals Corporation in the US. As part of the settlement, we have entered into a global license agreement pursuant to which Novartis shall license US patent #5,389,382 and its foreign counterparts to us and we shall pay Novartis a royalty on sales of SangCya Oral Solution. The settlement and license applies only to SangCya Oral Solution and does not apply to cyclosporine capsule products. We do not expect the terms of the settlement to have a material financial impact on us in the foreseeable future.
Novartis vs. Abbott
Novartis has sued Abbott claiming that Gengraf® (cyclosporine capsule, USP, MODIFIED), infringes certain Novartis patents. Novartis' complaint includes a plea for injunctive relief to prevent the sale of Gengraf in the US, but to date they have not moved for a preliminary injunction. The trial date has been set for October 1, 2001. The discovery schedule is still before the court pending resolution of differences between the parties' proposals. Abbott has informed us that it does not believe it infringes the Novartis patents. We have not been named a defendant in this lawsuit, and under our agreement with Abbott, Abbott is obligated to indemnify us against such suits. The course of litigation is inherently uncertain, however; Novartis may choose to name us in this suit, Abbott may not prevail, or Abbott may choose to settle on terms adverse to our interests. Should we be named in this suit, we may incur expenses prior to reimbursement (if any) by Abbott pursuant to its indemnity obligation. Should Novartis succeed in obtaining a preliminary or permanent injunction, Gengraf may be temporarily or permanently removed from the market.
Novartis Regulatory Litigation
US Regulatory Litigation
Novartis US sued the FDA on February 11, 1999 in the United States District Court for the District of Columbia (case number 1: 99CV-00323) alleging that the FDA did not follow its own regulations in approving SangCya Oral Solution in October 1998. The lawsuit alleges that because Neoral oral solution and SangCya Oral Solution are based on different formulation technologies, they should be classified as different dosage forms. Novartis asks that the court (i) allow Novartis to keep its microemulsion labeling; (ii) declare microemulsion to be a separate dosage form; and (iii) rescind the AB rating that was given to SangCya Oral Solution. We intervened in this lawsuit. The parties have all filed motions for summary judgment with the Court and are awaiting a final ruling. The Court has dismissed the counts that relate specifically to the approval of SangCya Oral Solution, but Novartis may appeal this decision. Because we permanently withdrew SangCya Oral Solution from the US market in July 2000, we do not believe that this lawsuit will have any material impact on SangStat.
UK Regulatory Litigation - SangCya Oral Solution
On October 18, 1999, Novartis UK was granted leave to seek judicial review of the decision by the Medicines Control Agency (the "MCA") to approve SangCya Oral Solution (Case No. HC- 1969/99). On March 30, 2000, the High Court in London dismissed Novartis' application for judicial review and ruled that the MCA acted properly in granting the SangCya Oral Solution marketing authorization. Novartis appealed the High Court's decision and the hearing was held before the Court of Appeal on November 13 and 14, 2000. The Court of Appeal has stayed ruling on this matter pending the answer of certain questions of law to be submitted to the European Court of Justice ("ECJ"). We estimate that the ECJ will issue its ruling in approximately eighteen to twenty four months. Following the ECJ ruling, the parties would go back to the Court of Appeal who will then apply the ECJ ruling on the law to the facts of this case.
UK Regulatory Litigation - Cyclosporine Capsules
In November 1999, Novartis filed a request with the High Court in London for judicial review of the refusal by MCA to state that it would not reference Neoral data in approving any cyclosporine capsule application. An agreement was reached between the parties in which Novartis agreed to stay the judicial review until the earlier of (i) the decision on the judicial review of SangCya Oral Solution or (ii) MCA's approval of a marketing authorization for a cyclosporine capsule product, and in return, we agreed that we would not launch or commence mutual recognition procedures in relation to the cyclosporine capsule marketing authorization (including a request to MCA to prepare an assessment report) for a period of 28 days commencing on the day on which we notify Novartis' solicitors of capsule approval. The parties had agreed to continue the stay until the appeal of the High Court decision with respect to the judicial review of SangCya Oral Solution. The stay of this application for judicial review will remain in place pending the ECJ ruling on the questions of law and resulting Court of Appeal judgment.
Novartis has also indicated that it will seek an injunction to prevent our cyclosporine capsule from being sold in the United Kingdom until final resolution of the judicial review relating to our cyclosporine capsule. Because the High Court ruled in favor of the MCA with respect to the SangCya Oral Solution marketing authorization and the Court of Appeal has referred questions of law to the ECJ, we believe that it is unlikely that a court would grant Novartis a preliminary injunction with respect to our cyclosporine capsule marketing authorization. If the Court of Appeals reverses the High Court's ruling following the ECJ's decisions on questions of law, either the MCA could still approve our cyclosporine capsule as supra-bioavailable to Sandimmune without referencing Neoral data or the MCA could decide not to approve our cyclosporine capsule marketing authorization until the expiration of the ten year data exclusivity period for Neoral capsules (approximately 2004).
Italian Regulatory/Trade Secret LitigationOn May 5, 2000, Novartis Farma S.p.A. ("Novartis Italy") served IMTIX SangStat s.r.l., our Italian subsidiary, and IMTIX SangStat Ltd. with a summons to the Milan Tribunal. Novartis Italy alleges that by requesting mutual recognition from the Italian Health Authorities of the SangCya Oral Solution dossier approved by the MCA, we implicitly requested that the Italian Health Authorities review the Neoral dossier. Novartis alleges that this request is an act of unfair competition in that (i) the Neoral data has ten year exclusivity and (ii) the data is secret and by requesting mutual recognition, we are responsible for the Health Authorities act of unfair competition following use of the Neoral dossier in reviewing the SangCya Oral Solution dossier. While the summons acknowledges that the UK High Court did not invalidate the SangCya Oral Solution marketing authorization, it does not acknowledge that the High Court ruled that the MCA could review the Neoral data. To the best of our knowledge, Novartis Italy has not filed suit against the Italian Health Authorities. The initial appearance of the parties before the Milan Tribunal was scheduled for January 2001. We filed our response to the complaint at that time and the hearing was postponed until September 2001.
We do not yet have marketing approval for SangCya Oral Solution in Italy. Novartis Italy is seeking damages and an injunction to prevent the sale by SangStat of SangCya Oral Solution, or any other product for which we may obtain approval based upon a reference to the Neoral dossier, which we believe is intended to block our cyclosporine capsule from sale in Italy. We believe that resolution of this matter will depend on the resolution of the UK regulatory litigation, since the MCA's actions are the basis for the Italian lawsuit.
Breach of Contract Suit
In August 2000, two affiliated suppliers, IFFA CREDO and Elevage Scientifique des Dombes, sued our French subsidiary, IMTIX-SangStat SAS, for breach of contract because we ordered lower quantities than were anticipated by the agreements. They claim that the quantities set forth in the agreements were fixed orders; we believe that they were forecasts only. We believe that the agreements provide that if we purchased less than the forecast amounts, we would pay a penalty equal to a percentage of the difference between the amount ordered and the amount forecast. The suppliers claim this provision only applied during the first year of the agreement. The suppliers are asking for damages of 37 million French Francs (approximately $5 million) for lost profits and reimbursement of capital expenditures. Under our interpretation, we would owe them 2.2 million French Francs (approximately $300,000) for 2000 and 1.6 million French Francs (approximately $200,000) in 2001, presuming no further orders are placed with these suppliers. The claim was filed under a "Fast Track" provision in the Lyon Commercial Courts and a hearing on the merits occurred at the end of December 2000. We currently anticipate a ruling in mid-April 2001. If the plaintiffs were to prevail, the court would likely appoint an expert to assess the exact amount of damages suffered by the plaintiffs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
SANGSTAT MEDICAL CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SANGSTAT MEDICAL CORPORATION
By:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
/s/ Jean-Jacques Bienaimé Jean-Jacques Bienaimé |
CEO & Chairman of the Board of Directors |
September 7, 2001 |
* |
Chief Financial Officer (Principal Accounting Officer) |
September 7, 2001 |
* |
Director |
September 7, 2001 |
* |
Director |
September 7, 2001 |
* |
Director |
September 7, 2001 |
* |
Director |
September 7, 2001 |
* |
Director |
September 7, 2001 |
* By: /s/ Jean-Jacques Bienaimé
Name: Jean-Jacques Bienaimé
Attorney-in-fact