Item 1. Legal Proceedings
From time to time, we are a party to legal proceedings in the course of our
business. We do not expect any such current legal proceedings to have a material
adverse effect on our business or financial condition.
Item 1A. Risk Factors
We operate in an environment that involves a number of significant risks and
uncertainties. We caution you to read the following risk factors, which have
affected, and/or in the future could affect, our business, operating results,
financial condition, and cash flows. The risks described below include
forward-looking statements, and actual events and our actual results may differ
substantially from those discussed in these forward-looking statements.
Additional risks and
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uncertainties not currently known to us or that we currently deem immaterial may
also impair our business operations. Furthermore, additional risks and
uncertainties are described under other captions in this report and in our
Annual Report on Form 10-K for the year ended December 31, 2005 and should be
considered by our investors.
Risks Related to Our Financial Results and Need for Additional Financing
We have had a history of operating losses and we may never achieve
profitability. If we continue to incur operating losses, we may be unable to
continue our operations.
From inception on January 8, 1988 through June 30, 2006, we had a cumulative
loss of $629.2 million. If we continue to incur operating losses and fail to
become a profitable company, we may be unable to continue our operations. We
have no products that are available for sale and do not know when we will have
products available for sale, if ever. In the absence of revenue from the sale of
products or other sources, the amount, timing, nature or source of which cannot
be predicted, our losses will continue as we conduct our research and
development activities. We currently receive contract manufacturing revenue from
our agreement with Merck and, until June 30, 2005, we received contract research
and development revenue from our agreement with The Procter & Gamble Company.
Our agreement with Procter & Gamble expired in June 2005 and our agreement with
Merck will expire before the end of 2006. The expiration of these agreements
results in a significant loss of revenue to the Company.
We will need additional funding in the future, which may not be available to us,
and which may force us to delay, reduce or eliminate our product development
programs or commercialization efforts.
We will need to expend substantial resources for research and development,
including costs associated with clinical testing of our product candidates. We
believe our existing capital resources will enable us to meet operating needs
through at least mid-2008; however, our projected revenue may decrease or our
expenses may increase and that would lead to our capital being consumed
significantly before such time. We will likely require additional financing in
the future and we may not be able to raise such additional funds. If we are able
to obtain additional financing through the sale of equity or convertible debt
securities, such sales may be dilutive to our shareholders. Debt financing
arrangements may require us to pledge certain assets or enter into covenants
that would restrict our business activities or our ability to incur further
indebtedness and may contain other terms that are not favorable to our
shareholders. If we are unable to raise sufficient funds to complete the
development of our product candidates, we may face delay, reduction or
elimination of our research and development programs or preclinical or clinical
trials, in which case our business, financial condition or results of operations
may be materially harmed.
We have a significant amount of debt and may have insufficient cash to satisfy
our debt service and repayment obligations. In addition, the amount of our debt
could impede our operations and flexibility.
We have a significant amount of convertible debt and semi-annual interest
payment obligations. This debt, unless converted to shares of our common stock,
will mature in October
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2008. We may be unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on our debt. Even if we are able to
meet our debt service obligations, the amount of debt we already have could hurt
our ability to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements, or other purposes. In addition,
our debt obligations could require us to use a substantial portion of cash to
pay principal and interest on our debt, instead of applying those funds to other
purposes, such as research and development, working capital, and capital
expenditures.
Risks Related to Development of Our Product Candidates
Successful development of any of our product candidates is highly uncertain.
Only a small minority of all research and development programs ultimately
result in commercially successful drugs. We have never developed a drug that has
been approved for marketing and sale, and we may never succeed in developing an
approved drug. Even if clinical trials demonstrate safety and effectiveness of
any of our product candidates for a specific disease and the necessary
regulatory approvals are obtained, the commercial success of any of our product
candidates will depend upon their acceptance by patients, the medical community,
and third-party payers and on our partners' ability to successfully manufacture
and commercialize our product candidates. Our product candidates are delivered
either by intravenous infusion or by intravitreal or subcutaneous injections,
which are generally less well received by patients than tablet or capsule
delivery. If our products are not successfully commercialized, we will not be
able to recover the significant investment we have made in developing such
products and our business would be severely harmed.
We intend to study our lead product candidates, the VEGF Trap, VEGF Trap-Eye,
and IL-1 Trap, in a wide variety of indications. We intend to study the VEGF
Trap in a variety of cancer settings, the VEGF Trap-Eye in different eye
diseases and ophthalmologic indications, and the IL-1 Trap in a variety of
systemic inflammatory disorders. Many of these current trials are exploratory
studies designed to identify what diseases and uses, if any, are best suited for
our product candidates. It is likely that our product candidates will not
demonstrate the requisite efficacy and/or safety profile to support continued
development for most of the indications that are to be studied. In fact, our
product candidates may not demonstrate the requisite efficacy and safety profile
to support the continued development for any of the indications or uses.
Clinical trials required for our product candidates are expensive and
time-consuming, and their outcome is highly uncertain. If any of our drug trials
are delayed or achieve unfavorable results, we will have to delay or may be
unable to obtain regulatory approval for our product candidates.
We must conduct extensive testing of our product candidates before we can
obtain regulatory approval to market and sell them. We need to conduct both
preclinical animal testing and human clinical trials. Conducting these trials is
a lengthy, time-consuming, and expensive process. These tests and trials may not
achieve favorable results for many reasons, including, among others, failure of
the product candidate to demonstrate safety or efficacy, the development of
serious or life-threatening adverse events (or side effects) caused by or
connected with exposure to the product candidate, difficulty in enrolling and
maintaining subjects in the clinical trial, lack
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of sufficient supplies of the product candidate, and the failure of clinical
investigators, trial monitors and other consultants, or trial subjects to comply
with the trial plan or protocol. A clinical trial may fail because it did not
include a sufficient number of patients to detect the endpoint being measured or
reach statistical significance. A clinical trial may also fail because the
dose(s) of the investigational drug included in the trial were either too low or
too high to determine the optimal effect of the investigational drug in the
disease setting. For example, we are studying higher doses of the IL-1 Trap in
different diseases after a phase 2 trial using lower doses of the IL-1 Trap in
subjects with rheumatoid arthritis failed to achieve its primary endpoint.
We will need to reevaluate any drug candidate that does not test favorably
and either conduct new trials, which are expensive and time consuming, or
abandon the drug development program. Even if we obtain positive results from
preclinical or clinical trials, we may not achieve the same success in future
trials. Many companies in the biopharmaceutical industry, including us, have
suffered significant setbacks in clinical trials, even after promising results
have been obtained in earlier trials. The failure of clinical trials to
demonstrate safety and effectiveness for the desired indication(s) could harm
the development of the product candidate(s), and our business, financial
condition, and results of operations may be materially harmed.
The development of serious or life-threatening side effects with any of our
product candidates would lead to delay or discontinuation of development, which
could severely harm our business.
During the conduct of clinical trials, patients report changes in their
health, including illnesses, injuries, and discomforts, to their study doctor.
Often, it is not possible to determine whether or not the drug candidate being
studied caused these conditions. Various illnesses, injuries, and discomforts
have been reported from time-to-time during clinical trials of our product
candidates. Although our current drug candidates appeared to be generally well
tolerated in clinical trials conducted to date, it is possible as we test any of
them in larger, longer, and more extensive clinical programs, illnesses,
injuries, and discomforts that were observed in earlier trials, as well as
conditions that did not occur or went undetected in smaller previous trials,
will be reported by patients. Many times, side effects are only detectable after
investigational drugs are tested in large scale, phase 3 clinical trials or, in
some cases, after they are made available to patients after approval. If
additional clinical experience indicates that any of our product candidates has
many side effects or causes serious or life-threatening side effects, the
development of the product candidate may fail or be delayed, which would
severely harm our business.
Our VEGF Trap is being studied for the potential treatment of certain types
of cancer and our VEGF Trap-Eye candidate is being studied in diseases of the
eye. There are many potential safety concerns associated with significant
blockade of vascular endothelial growth factor, or VEGF. These risks, based on
the clinical and preclinical experience of systemically delivered VEGF
inhibitors, including the systemic delivery of the VEGF Trap, include bleeding,
hypertension, and proteinuria. These serious side effects and other serious side
effects have been reported in our systemic VEGF Trap studies in cancer and
diseases of the eye. In addition, patients given infusions of any protein,
including the VEGF Trap delivered through intravenous administration, may
develop severe hypersensitivity reactions, referred to as infusion reactions.
These and other
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complications or side effects could harm the development of the VEGF Trap for
the treatment of cancer or the VEGF Trap-Eye for the treatment of diseases of
the eye.
Although the IL-1 Trap was generally well tolerated and was not associated
with any drug-related serious adverse events in the phase 2 rheumatoid arthritis
study completed in 2003, safety or tolerability concerns may arise as we test
higher doses of the IL-1 Trap in patients with other inflammatory diseases and
disorders. Like TNF-antagonists such as EnbrelÒ (Amgen) and RemicadeÒ
(Centocor), the IL-1 Trap affects the immune defense system of the body by
blocking some of its functions. Therefore, there may be an increased risk for
infections to develop in patients treated with the IL-1 Trap. In addition,
patients given infusions of the IL-1 Trap have developed hypersensitivity
reactions, referred to as infusion reactions. These and other complications or
side effects could harm the development of the IL-1 Trap.
Our product candidates in development are recombinant proteins that could cause
an immune response, resulting in the creation of harmful or neutralizing
antibodies against the therapeutic protein.
In addition to the safety, efficacy, manufacturing, and regulatory hurdles
faced by our product candidates, the administration of recombinant proteins
frequently causes an immune response, resulting in the creation of antibodies
against the therapeutic protein. The antibodies can have no effect or can
totally neutralize the effectiveness of the protein, or require that higher
doses be used to obtain a therapeutic effect. In some cases, the antibody can
cross react with the patient's own proteins, resulting in an "auto-immune" type
disease. Whether antibodies will be created can often not be predicted from
preclinical or clinical experiments, and their appearance is often delayed, so
that there can be no assurance that neutralizing antibodies will not be created
at a later date - in some cases even after pivotal clinical trials have been
completed. Subjects who received the IL-1 Trap in clinical trials have developed
antibodies. It is possible that as we test the VEGF Trap with more sensitive
assays in different patient populations and larger clinical trials, we will find
that subjects given the VEGF Trap develop antibodies to the product candidate.
We may be unable to formulate or manufacture our product candidates in a way
that is suitable for clinical or commercial use.
Changes in product formulations and manufacturing processes may be required
as product candidates progress in clinical development and are ultimately
commercialized. If we are unable to develop suitable product formulations or
manufacturing processes to support large scale clinical testing of our product
candidates, including the VEGF Trap, VEGF Trap-Eye, and IL-1 Trap, we may be
unable to supply necessary materials for our clinical trials, which would delay
the development of our product candidates. Similarly, if we are unable to supply
sufficient quantities of our product or develop product formulations suitable
for commercial use, we will not be able to successfully commercialize our
product candidates.
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Risks Related to Intellectual Property
If we cannot protect the confidentiality of our trade secrets or our patents are
insufficient to protect our proprietary rights, our business and competitive
position will be harmed.
Our business requires using sensitive and proprietary technology and other
information that we protect as trade secrets. We seek to prevent improper
disclosure of these trade secrets through confidentiality agreements. If our
trade secrets are improperly exposed, either by our own employees or our
collaborators, it would help our competitors and adversely affect our business.
We will be able to protect our proprietary rights from unauthorized use by third
parties only to the extent that our rights are covered by valid and enforceable
patents or are effectively maintained as trade secrets. The patent position of
biotechnology companies involves complex legal and factual questions and,
therefore, enforceability cannot be predicted with certainty. Our patents may be
challenged, invalidated, or circumvented. Patent applications filed outside the
United States may be challenged by third parties who file an opposition. Such
opposition proceedings are increasingly common in the European Union and are
costly to defend. We have patent applications that are being opposed and it is
likely that we will need to defend additional patent applications in the future.
Our patent rights may not provide us with a proprietary position or competitive
advantages against competitors. Furthermore, even if the outcome is favorable to
us, the enforcement of our intellectual property rights can be extremely
expensive and time consuming.
We may be restricted in our development and/or commercialization activities by,
and could be subject to damage awards if we are found to have infringed, third
party patents or other proprietary rights.
Our commercial success depends significantly on our ability to operate
without infringing the patents and other proprietary rights of third parties.
Other parties may allege that they have blocking patents to our products in
clinical development, either because they claim to hold proprietary rights to
the composition of a product or the way it is manufactured or used.
We are aware of patents and pending applications owned by Genentech that
claim certain chimeric VEGF receptor compositions. Although we do not believe
that the VEGF Trap or VEGF Trap-Eye infringes any valid claim in these patents
or patent applications, Genentech could initiate a lawsuit for patent
infringement and assert its patents are valid and cover the VEGF Trap or VEGF
Trap-Eye. Genentech may be motivated to initiate such a lawsuit at some point in
an effort to impair our ability to develop and sell the VEGF Trap or VEGF
Trap-Eye, which represents a potential competitive threat to Genentech's
VEGF-binding products and product candidates. An adverse determination by a
court in any such potential patent litigation would likely materially harm our
business by requiring us to seek a license, which may not be available, or
resulting in our inability to manufacture, develop and sell the VEGF Trap or
VEGF Trap-Eye or in a damage award.
Any patent holders could sue us for damages and seek to prevent us from
manufacturing, selling, or developing our drug candidates, and a court may find
that we are infringing validly issued patents of third parties. In the event
that the manufacture, use, or sale of any of our clinical candidates infringes
on the patents or violates other proprietary rights of third parties, we may be
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prevented from pursuing product development, manufacturing, and
commercialization of our drugs and may be required to pay costly damages. Such a
result may materially harm our business, financial condition, and results of
operations. Legal disputes are likely to be costly and time consuming to defend.
We seek to obtain licenses to patents when, in our judgment, such licenses
are needed. If any licenses are required, we may not be able to obtain such
licenses on commercially reasonable terms, if at all. The failure to obtain any
such license could prevent us from developing or commercializing any one or more
of our product candidates, which could severely harm our business.
Regulatory and Litigation Risks
If we do not obtain regulatory approval for our product candidates, we will not
be able to market or sell them.
We cannot sell or market products without regulatory approval. If we do not
obtain and maintain regulatory approval for our product candidates, the value of
our company and our results of operations will be harmed. In the United States,
we must obtain and maintain approval from the United States Food and Drug
Administration (FDA) for each drug we intend to sell. Obtaining FDA approval is
typically a lengthy and expensive process, and approval is highly uncertain.
Foreign governments also regulate drugs distributed in their country and
approval in any country is likely to be a lengthy and expensive process, and
approval is highly uncertain. None of our product candidates has ever received
regulatory approval to be marketed and sold in the United States or any other
country. We may never receive regulatory approval for any of our product
candidates.
If the testing or use of our products harms people, we could be subject to
costly and damaging product liability claims. We could also face costly and
damaging claims arising from employment law, securities law, environmental law,
or other applicable laws governing our operations.
The testing, manufacturing, marketing, and sale of drugs for use in people
expose us to product liability risk. Any informed consent or waivers obtained
from people who sign up for our clinical trials may not protect us from
liability or the cost of litigation. Our product liability insurance may not
cover all potential liabilities or may not completely cover any liability
arising from any such litigation. Moreover, we may not have access to liability
insurance or be able to maintain our insurance on acceptable terms.
Our operations may involve hazardous materials and are subject to environmental,
health, and safety laws and regulations. We may incur substantial liability
arising from our activities involving the use of hazardous materials.
As a biopharmaceutical company with significant manufacturing operations, we
are subject to extensive environmental, health, and safety laws and regulations,
including those governing the use of hazardous materials. Our research and
development and manufacturing activities involve the controlled use of
chemicals, viruses, radioactive compounds, and other hazardous materials.
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The cost of compliance with environmental, health, and safety regulations is
substantial. If an accident involving these materials or an environmental
discharge were to occur, we could be held liable for any resulting damages, or
face regulatory actions, which could exceed our resources or insurance coverage.
Changes in the securities laws and regulations have increased, and are likely to
continue to increase, our costs.
The Sarbanes-Oxley Act of 2002, which became law in July 2002, has required
changes in some of our corporate governance, securities disclosure and
compliance practices. In response to the requirements of that Act, the SEC and
the NASDAQ Stock Market have promulgated new rules and listing standards
covering a variety of subjects. Compliance with these new rules and listing
standards has increased our legal costs, and significantly increased our
accounting and auditing costs, and we expect these costs to continue. These
developments may make it more difficult and more expensive for us to obtain
directors' and officers' liability insurance. Likewise, these developments may
make it more difficult for us to attract and retain qualified members of our
board of directors, particularly independent directors, or qualified executive
officers.
In future years, if we or our independent registered public accounting firm are
unable to conclude that our internal control over financial reporting is
effective, the market value of our common stock could be adversely affected.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted
rules requiring public companies to include a report of management on the
Company's internal control over financial reporting in their annual reports on
Form 10-K that contains an assessment by management of the effectiveness of our
internal control over financial reporting. In addition, the independent
registered public accounting firm auditing our financial statements must attest
to and report on management's assessment and on the effectiveness of our
internal control over financial reporting. Our independent registered public
accounting firm provided us with an unqualified report as to our assessment and
the effectiveness of our internal control over financial reporting as of
December 31, 2005, which report was included in our Annual Report on Form 10-K
for the year ended December 31, 2005. However, we cannot assure you that
management or our independent registered public accounting firm will be able to
provide such an assessment or unqualified report as of future year-ends. In this
event, investors could lose confidence in the reliability of our financial
statements, which could result in a decrease in the market value of our common
stock.
Risks Related to Our Dependence on Third Parties
If our collaboration with sanofi-aventis for the VEGF Trap is terminated, our
business operations and our ability to develop, manufacture, and commercialize
the VEGF Trap in the time expected, or at all, would be harmed.
We rely heavily on sanofi-aventis to assist with the development of the VEGF
Trap oncology program. Sanofi-aventis funds all of the development expenses
incurred by both companies in connection with the VEGF Trap oncology program. If
the VEGF Trap oncology program continues, we will rely on sanofi-aventis to
assist with funding the VEGF Trap program, provide
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commercial manufacturing capacity, enroll and monitor clinical trials, obtain
regulatory approval, particularly outside the United States, and provide sales
and marketing support. While we cannot assure you that the VEGF Trap will ever
be successfully developed and commercialized, if sanofi-aventis does not perform
its obligations in a timely manner, or at all, our ability to develop,
manufacture, and commercialize the VEGF Trap in cancer indications will be
significantly adversely affected. Sanofi-aventis has the right to terminate its
collaboration agreement with us at any time upon twelve months advance notice.
If sanofi-aventis were to terminate its collaboration agreement with us, we
would not have the resources or skills to replace those of our partner, which
could cause significant delays in the development and/or manufacture of the VEGF
Trap and result in substantial additional costs to us. We have no sales,
marketing, or distribution capabilities and would have to develop or outsource
these capabilities. Termination of the sanofi-aventis collaboration agreement
would create substantial new and additional risks to the successful development
of the VEGF Trap oncology program.
Our collaborators and service providers may fail to perform adequately in their
efforts to support the development, manufacture, and commercialization of our
drug candidates.
We depend upon third-party collaborators, including sanofi-aventis and
service providers such as clinical research organizations, outside testing
laboratories, clinical investigator sites, and third-party manufacturers and
product packagers and labelers, to assist us in the development of our product
candidates. If any of our existing collaborators or service providers breaches
or terminates its agreement with us or does not perform its development or
manufacturing services under an agreement in a timely manner or at all, we could
experience additional costs, delays, and difficulties in the development or
ultimate commercialization of our product candidates.
Risks Related to the Manufacture of Our Product Candidates
We have limited manufacturing capacity, which could inhibit our ability to
successfully develop or commercialize our drugs.
Before approving a new drug or biologic product, the FDA requires that the
facilities at which the product will be manufactured be in compliance with
current good manufacturing practices, or cGMP requirements. Manufacturing
product candidates in compliance with these regulatory requirements is complex,
time-consuming, and expensive. To be successful, our products must be
manufactured for development, following approval, in commercial quantities, in
compliance with regulatory requirements, and at competitive costs. If we or any
of our product collaborators or third-party manufacturers, product packagers, or
labelers are unable to maintain regulatory compliance, the FDA can impose
regulatory sanctions, including, among other things, refusal to approve a
pending application for a new drug or biologic product, or revocation of a
pre-existing approval. As a result, our business, financial condition, and
results of operations may be materially harmed.
Our manufacturing facility is likely to be inadequate to produce sufficient
quantities of product for commercial sale. We intend to rely on our corporate
collaborators, as well as contract manufacturers, to produce the large
quantities of drug material needed for commercialization of our products. We
rely entirely on third-party manufacturers for filling and finishing services.
We will have to depend on these manufacturers to deliver material on a timely
basis and to comply
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with regulatory requirements. If we are unable to supply sufficient material on
acceptable terms, or if we should encounter delays or difficulties in our
relationships with our corporate collaborators or contract manufacturers, our
business, financial condition, and results of operations may be materially
harmed.
We may expand our own manufacturing capacity to support commercial production
of active pharmaceutical ingredients, or API, for our product candidates. This
will require substantial additional funds, and we will need to hire and train
significant numbers of employees and managerial personnel to staff our facility.
Start-up costs can be large and scale-up entails significant risks related to
process development and manufacturing yields. We may be unable to develop
manufacturing facilities that are sufficient to produce drug material for
clinical trials or commercial use. In addition, we may be unable to secure
adequate filling and finishing services to support our products. As a result,
our business, financial condition, and results of operations may be materially
harmed.
We may be unable to obtain key raw materials and supplies for the manufacture
of our product candidates. In addition, we may face difficulties in developing
or acquiring production technology and managerial personnel to manufacture
sufficient quantities of our product candidates at reasonable costs and in
compliance with applicable quality assurance and environmental regulations and
governmental permitting requirements.
If any of our clinical programs are discontinued, we may face costs related to
the unused capacity at our manufacturing facilities.
We have large-scale manufacturing operations in Rensselaer, New York. Under a
long-term manufacturing agreement with Merck, which expires in October 2006, we
produce an intermediate for a Merck pediatric vaccine at our facility in
Rensselaer, New York. We also use our facilities to produce API for our own
clinical and preclinical candidates. When we no longer use our facilities to
manufacture the Merck intermediate or if clinical candidates are discontinued,
we will have to absorb overhead costs and inefficiencies.
Certain of our raw materials are single-sourced from third parties; third-party
supply failures could adversely affect our ability to supply our products.
Certain raw materials necessary for manufacturing and formulation of our
product candidates are provided by single-source unaffiliated third-party
suppliers. We would be unable to obtain these raw materials for an indeterminate
period of time if these third-party single-source suppliers were to cease or
interrupt production or otherwise fail to supply these materials or products to
us for any reason, including due to regulatory requirements or action, due to
adverse financial developments at or affecting the supplier, or due to labor
shortages or disputes. This, in turn, could materially and adversely affect our
ability to manufacture our product candidates for use in clinical trials, which
could materially and adversely affect our business and future prospects.
Also, certain of the raw materials required in the manufacturing and the
formulation of our clinical candidates may be derived from biological sources,
including mammalian tissues, bovine serum, and human serum albumin. There are
certain European regulatory restrictions on using
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these biological source materials. If we are required to substitute for these
sources to comply with European regulatory requirements, our clinical
development activities may be delayed or interrupted.
Risks Related to Commercialization of Products
If we are unable to establish sales, marketing, and distribution capabilities,
or enter into agreements with third parties to do so, we will be unable to
successfully market and sell future products.
We have no sales or distribution personnel or capabilities and have only a
small staff with marketing capabilities. If we are unable to obtain those
capabilities, either by developing our own organizations or entering into
agreements with service providers, we will not be able to successfully sell any
products that we may obtain regulatory approval for and bring to market in the
future. In that event, we will not be able to generate significant revenue, even
if our product candidates are approved. We cannot guarantee that we will be able
to hire the qualified sales and marketing personnel we need or that we will be
able to enter into marketing or distribution agreements with third-party
providers on acceptable terms, if at all. Under the terms of our collaboration
agreement with sanofi-aventis, we currently rely on sanofi-aventis for sales,
marketing, and distribution of the VEGF Trap in cancer indications, should it be
approved in the future by regulatory authorities for marketing. We will have to
rely on a third party or devote significant resources to develop our own sales,
marketing, and distribution capabilities for our other product candidates,
including the VEGF Trap-Eye, and we may be unsuccessful in developing our own
sales, marketing, and distribution organization.
Even if our product candidates are approved for marketing, their commercial
success is highly uncertain because our competitors may get to the marketplace
before we do with better or lower cost drugs or the market for our product
candidates may be too small to support commercialization or sufficient
profitability.
There is substantial competition in the biotechnology and pharmaceutical
industries from pharmaceutical, biotechnology, and chemical companies. Many of
our competitors have substantially greater research, preclinical and clinical
product development and manufacturing capabilities, and financial, marketing,
and human resources than we do. Our smaller competitors may also enhance their
competitive position if they acquire or discover patentable inventions, form
collaborative arrangements, or merge with large pharmaceutical companies. Even
if we achieve product commercialization, our competitors have achieved, and may
continue to achieve, product commercialization before our products are approved
for marketing and sale.
Genentech has an approved VEGF antagonist, Avastin® (Genentech), on the
market for treating certain cancers and many different pharmaceutical and
biotechnology companies are working to develop competing VEGF antagonists,
including Novartis, OSI Pharmaceuticals, and Pfizer. Many of these molecules are
farther along in development than the VEGF Trap and may offer competitive
advantages over our molecule. Novartis has an ongoing phase 3 clinical
development program evaluating an orally delivered VEGF tyrosine kinase
inhibitor in different cancer settings. Onyx Pharmaceuticals and Bayer have
received approval from the FDA to market and sell the first oral medication that
targets tumor cell growth and new vasculature
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formation that fuels the growth of tumors. The marketing approvals for
Genentech's VEGF antagonist, Avastin, and their extensive, ongoing clinical
development plan for Avastin in other cancer indications, may make it more
difficult for us to enroll patients in clinical trials to support the VEGF Trap
and to obtain regulatory approval of the VEGF Trap in these cancer settings.
This may delay or impair our ability to successfully develop and commercialize
the VEGF Trap. In addition, even if the VEGF Trap is ever approved for sale for
the treatment of certain cancers, it will be difficult for our drug to compete
against Avastin and the Onyx/Bayer kinase inhibitor, because doctors and
patients will have significant experience using these medicines. In addition, an
oral medication may be considerably less expensive for patients than a biologic
medication, providing a competitive advantage to companies that market such
products.
The market for eye diseases is also very competitive. OSI Pharmaceuticals and
Pfizer are marketing an approved VEGF inhibitor (Macugen®) for age-related
macular degeneration (wet AMD). Novartis and Genentech are collaborating on the
commercialization and further development of a VEGF antibody fragment
(Lucentis™) for the treatment of wet AMD and other eye indications that was
approved by the FDA in June 2006. In addition, it has been reported that
ophthalmologists are using a third-party reformulated version of Genentech's
approved VEGF antagonist, Avastin, with success for the treatment of wet AMD.
The marketing approval of Macugen and Lucentis and the potential off-label use
of Avastin make it more difficult for us to enroll patients in our clinical
trials and successfully develop the VEGF Trap-Eye. Even if the VEGF Trap-Eye is
ever approved for sale for the treatment of eye diseases, it may be difficult
for our drug to compete against Lucentis or Macugen, because doctors and
patients will have significant experience using these medicines. Moreover, the
relatively low cost of therapy with Avastin in patients with wet AMD presents a
further competitive challenge in this indication.
The availability of highly effective FDA approved TNF-antagonists such as
Enbrel® (Amgen), Remicade® (Centocor), and Humira® (Abbott Laboratories), and
the IL-1 receptor antagonist Kineret®(Amgen), and other marketed therapies makes
it more difficult to successfully develop and commercialize the IL-1 Trap. This
is one of the reasons we discontinued the development of the IL-1 Trap in adult
rheumatoid arthritis. In addition, even if the IL-1 Trap is ever approved for
sale, it will be difficult for our drug to compete against these FDA approved
TNF-antagonists in indications where both are useful because doctors and
patients will have significant experience using these effective medicines.
Moreover, in such indications these approved therapeutics may offer competitive
advantages over the IL-1 Trap, such as requiring fewer injections.
There are both small molecules and antibodies in development by third parties
that are designed to block the synthesis of interleukin-1 or inhibit the
signaling of interleukin-1. For example, Novartis is developing an antibody to
interleukin-1 and Amgen is developing an antibody to the interleukin-1 receptor.
These drug candidates could offer competitive advantages over the IL-1 Trap. The
successful development of these competing molecules could delay or impair our
ability to successfully develop and commercialize the IL-1 Trap. For example, we
may find it difficult to enroll patients in clinical trials for the IL-1 Trap if
the companies developing these competing interleukin-1 inhibitors commence
clinical trials in the same indications.
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We are developing the IL-1 Trap for the treatment of a spectrum of rare
diseases associated with mutations in the CIAS1 gene. These rare genetic
disorders affect a small group of people, estimated to be between several
hundred and a few thousand. There may be too few patients with these genetic
disorders to profitably commercialize the IL-1 Trap in this indication.
The successful commercialization of our product candidates will depend on
obtaining coverage and reimbursement for use of these products from third-party
payers.
Sales of biopharmaceutical products largely depend on the reimbursement of
patients' medical expenses by government health care programs and private health
insurers. Without the financial support of the governments or third-party
payers, the market for any biopharmaceutical product will be limited. These
third-party payers increasingly challenge the price and examine the
cost-effectiveness of products and services. Significant uncertainty exists as
to the reimbursement status of any new therapeutic, particularly if there exist
lower-cost standards of care. Third-party payers may not reimburse sales of our
products, which would harm our business.
Risk Related to Employees
We are dependent on our key personnel and if we cannot recruit and retain
leaders in our research, development, manufacturing, and commercial
organizations, our business will be harmed.
We are highly dependent on our executive officers. If we are not able to
retain any of these persons or our Chairman, our business may suffer. In
particular, we depend on the services of P. Roy Vagelos, M.D., the Chairman of
our board of directors, Leonard Schleifer, M.D., Ph.D., our President and Chief
Executive Officer, George D. Yancopoulos, M.D., Ph.D., our Executive Vice
President, Chief Scientific Officer and President, Regeneron Research
Laboratories, Murray A. Goldberg, our Senior Vice President, Finance &
Administration, Chief Financial Officer, Treasurer, and Assistant Secretary,
Neil Stahl, Ph.D., our Senior Vice President, Preclinical Development and
Biomolecular Science, and Randall G. Rupp, Ph.D., our Senior Vice President,
Manufacturing Operations. There is intense competition in the biotechnology
industry for qualified scientists and managerial personnel in the development,
manufacture, and commercialization of drugs. We may not be able to continue to
attract and retain the qualified personnel necessary for developing our
business.
Risks Related to Our Common Stock
Our stock price is extremely volatile.
There has been significant volatility in our stock price and generally in
the market prices of biotechnology companies' securities. Various factors and
events may have a significant impact on the market price of our common stock.
These factors include, by way of example:
• progress, delays, or adverse results in clinical trials;
• announcement of technological innovations or product candidates by us or
competitors;
• fluctuations in our operating results;
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• public concern as to the safety or effectiveness of our product candidates;
• developments in our relationship with collaborative partners;
• developments in the biotechnology industry or in government regulation of
healthcare;
• large sales of our common stock by our executive officers, directors, or
significant shareholders;
• arrivals and departures of key personnel; and
• general market conditions.
The trading price of our common stock has been, and could continue to be,
subject to wide fluctuations in response to these and other factors, including
the sale or attempted sale of a large amount of our common stock in the market.
Broad market fluctuations may also adversely affect the market price of our
common stock.
Future sales of our common stock by our significant shareholders or us may
depress our stock price and impair our ability to raise funds in new share
offerings.
A small number of our shareholders beneficially own a substantial amount of
our common stock. As of April 13, 2006, our seven largest shareholders,
including sanofi-aventis, beneficially owned 47.9% of our outstanding shares of
Common Stock, assuming, in the case of Leonard S. Schleifer, M.D. Ph.D., our
Chief Executive Officer, and P. Roy Vagelos, M.D., our Chairman, the conversion
of their Class A Stock into Common Stock and the exercise of all options held by
them which are exercisable within 60 days of April 13, 2006. As of April 13,
2006, sanofi-aventis owned 2,799,552 shares of Common Stock, representing
approximately 5.1% of the shares of Common Stock then outstanding. Under our
stock purchase agreement with sanofi-aventis, through September 5, 2006,
sanofi-aventis may sell no more than 250,000 of these shares in any calendar
quarter. After September 5, 2006, sanofi-aventis may sell no more than 500,000
of these shares in any calendar quarter. If sanofi-aventis, or our other
significant shareholders or we, sell substantial amounts of our Common Stock in
the public market, or the perception that such sales may occur exists, the
market price of our Common Stock could fall. Sales of Common Stock by our
significant shareholders, including sanofi-aventis, also might make it more
difficult for us to raise funds by selling equity or equity-related securities
in the future at a time and price that we deem appropriate.
Our existing shareholders may be able to exert significant influence over
matters requiring shareholder approval.
Holders of Class A Stock, who are generally the shareholders who purchased
their stock from us before our initial public offering, are entitled to ten
votes per share, while holders of Common Stock are entitled to one vote per
share. As of April 13, 2006, holders of Class A Stock held 4.1% of all shares of
Common Stock and Class A Stock then outstanding, and had 29.7% of the combined
voting power of all of Common Stock and Class A Stock then outstanding. These
shareholders, if acting together, would be in a position to significantly
influence the election of our directors and to effect or prevent certain
corporate transactions that require majority or supermajority approval of the
combined classes, including mergers and other business combinations. This may
result in our company taking corporate actions that you may not consider to be
in your best interest and may affect the price of our Common Stock. As of
April 13, 2006:
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• our current officers and directors beneficially owned 14.6% of our
outstanding shares of Common Stock, assuming conversion of their Class A
Stock into Common Stock and the exercise of all options held by such
persons which are exercisable within 60 days of April 13, 2006, and 33.2%
of the combined voting power of our outstanding shares of Common Stock and
Class A Stock, assuming the exercise of all options held by such persons
which are exercisable within 60 days of April 13, 2006; and
• our seven largest shareholders beneficially owned 47.9% of our outstanding
shares of Common Stock assuming, in the case of Leonard S. Schleifer, M.D.,
Ph.D., our Chief Executive Officer, and P. Roy Vagelos, M.D., our Chairman,
the conversion of their Class A Stock into Common Stock and the exercise of
all options held by them which are exercisable within 60 days of April 13,
2006. In addition, these seven shareholders held 54.3% of the combined
voting power of our outstanding shares of Common Stock and Class A Stock,
assuming the exercise of all options held by our Chief Executive Officer
and our Chairman which are exercisable within 60 days of April 13, 2006.
The anti-takeover effects of provisions of our charter, by-laws, and rights
agreement, and of New York corporate law, could deter, delay, or prevent an
acquisition or other "change in control" of us and could adversely affect the
price of our common stock.
Our amended and restated certificate of incorporation, our by-laws, our
rights agreement and the New York Business Corporation Law contain various
provisions that could have the effect of delaying or preventing a change in
control of our company or our management that shareholders may consider
favorable or beneficial. Some of these provisions could discourage proxy
contests and make it more difficult for you and other shareholders to elect
directors and take other corporate actions. These provisions could also limit
the price that investors might be willing to pay in the future for shares of our
common stock. These provisions include:
• authorization to issue "blank check" preferred stock, which is preferred
stock that can be created and issued by the board of directors without
prior shareholder approval, with rights senior to those of our common
shareholders;
• a staggered board of directors, so that it would take three successive
annual meetings to replace all of our directors;
• a requirement that removal of directors may only be effected for cause and
only upon the affirmative vote of at least eighty percent (80%) of the
outstanding shares entitled to vote for directors, as well as a requirement
that any vacancy on the board of directors may be filled only by the
remaining directors;
• any action required or permitted to be taken at any meeting of shareholders
may be taken without a meeting, only if, prior to such action, all of our
shareholders consent, the effect of which is to require that shareholder
action may only be taken at a duly convened meeting;
• any shareholder seeking to bring business before an annual meeting of
shareholders must provide timely notice of this intention in writing and
meet various other requirements; and
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• under the New York Business Corporation Law, a plan of merger or
consolidation of the Company must be approved by two-thirds of the votes of
all outstanding shares entitled to vote thereon. See the risk factor
immediately above captioned "Our existing shareholders may be able to exert
significant influence over matters requiring shareholder approval."
We have a shareholder rights plan which could make it more difficult for a
third party to acquire us without the support of our board of directors and
principal shareholders. In addition, many of our stock options issued under our
2000 Long-Term Incentive Plan may become fully vested in connection with a
"change in control" of the Company, as defined in the plan.
Item 4. Submission of Matters to a Vote of Security Holders
On June 9, 2006, we conducted our Annual Meeting of Shareholders pursuant to
due notice. A quorum being present either in person or by proxy, the
shareholders voted on the following matters:
1. To elect four Directors to hold office for a three-year term as Class III
directors, and until their successors are duly elected and qualified.
2. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent registered public accounting firm for our fiscal year ending
December 31, 2006.
No other matters were voted on. The number of votes cast was:
For Withheld
1. Election of Class II Directors
Charles A. Baker. 68,193,948 1,341,920
Michael S. Brown, M.D. 68,530,409 1,005,459
Arthur F. Ryan 68,681,939 853,929
George L. Sing 68,239,673 1,296,195
The terms of office of Leonard S. Schleifer, M.D., Ph.D., Eric M. Shooter,
Ph.D., George D. Yancopoulos, M.D., Ph.D., Alfred G. Gilman, M.D., Ph.D., Joseph
L. Goldstein, M.D., and P. Roy Vagelos, M.D. continued after the meeting.
For Against Abstain
2. Ratification of the Appointment of Independent
Registered Public Accounting Firm 69,093,166 105,312 337,390
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