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Executive Summary

Xoma is seeking royalties of 40% from future U.S. sales of Centocor's Centoxin (HA-1A) antisepsis monoclonal product as compensation for Centocor's infringement of its licensed patent for the E5 monoclonal antibody-based anti-endotoxin product. In a Jan. 20 release, Xoma said it will ask San Francisco Federal Court Judge Robert Schnacke to award the company a 40% royalty on Centoxin as part of the relief resulting from the Oct. 28 favorable jury trial verdict in Xoma's patent infringement suit against Centocor ("The Pink Sheet" Nov. 4, T&G-1). In December, Judge Schnacke ruled that Xoma would receive relief in the form of a percentage of future sales U.S. of Centoxin ("The Pink Sheet" Dec. 16, T&G-3). The court's decision on the amount of the award to Xoma may be finalized within the next month. Meanwhile, Xoma has been named by Centocor in a patent infringement suit filed in Delaware federal court on Feb. 18. Also named in the suit is future E5 marketer Pfizer. The Centocor suit charges that Xoma and Pfizer "have been and still are infringing" patent #5,057,598, awarded to Centocor Oct. 15, in that E5 embodies subject matter claimed in the '598 patent "relating to monoclonal antibodies used in treating clinical manifestations of gram negative bacterial infections, to pharmaceutical compositions comprising such antibodies, and to a method of treating infections with such pharmaceutical compositions." Centocor's patent issued during Xoma's infringement case against Centocor but was not admissible ("The Pink Sheet" Oct. 28, p. 11). On Feb. 19, Centocor reported that FDA "has raised additional issues concerning" the PLA for Centoxin. The company said it "believes these issues should be resolved satisfactorily." If not, Centocor noted, in the cautionary tone of public disclosure, the outcome could have a material adverse effect on both the PLA and Centocor. The company declined further comment on the issues raised by the agency. Manufacturing issues are apparently not in question. At the September advisory committee meeting, Centocor said that FDA had completed an inspection of the company's facility in Leiden, The Netherlands. FDA's Katheryn Stein, PhD, Division of Bacterial Products, said that "there are no significant manufacturing issues that need to be resolved" regarding Centoxin. Centocor has prepared for Centoxin's approval by training a 200-person salesforce to detail the sepsis treatment in the U.S. ("The Pink Sheet" Jan. 13, T&G-5). Many industry observers have been forecasting imminent FDA approval of Centoxin since shortly after Centoxin received a favorable review from FDA's Vaccines & Related Biologicals Advisory Committee on Sept. 4 ("The Pink Sheet" Sept. 9, p. 14). The delay in approval by FDA could be due to standard questions from the agency. However, new questions about both the cost and efficacy of Centoxin conceivably could have an impact on the agency's review of HA-1A. The cost of sepsis monoclonals is a concern among U.S. hospitals. Some hospitals and third party payers have been reviewing the potential costs of anti-endotoxin treatment and developing guidelines in advance of approval for usage of monoclonal sepsis products ("The Pink Sheet" Dec. 23, p. 14). In Europe, French physicians associated with public medical assistance facilities reportedly have asked that Centoxin's efficacy data be revisited in another clinical trial according to a report by a specialized news subsidiary of the Financial Times. The product was approved in Europe in 1991 based on the U.S. clinical trial data. Centoxin is currently marketed in six European countries: Germany, France, Denmark, The Netherlands, Luxemburg, and the U.K. At the September FDA advisory committee meeting, committee Chairman Richard Johnston, MD, Children's Hospital of Philadelphia, noted the difficulty of determining efficacy regarding Centocor. He pointed out that the committee "came down on the side of efficacy, with lots of reservations." Johnston and other committee members suggested that follow-up studies be conducted on Centoxin to reinforce the panel's conclusion that the product is safe and effective for presumptive gram-negative bacteremia. In the same Feb. 19 release that contained the announcement of its patent suit and possible regulatory difficulties, Centocor released its year-end results, reporting a loss of $195.6 mil. for the year, compared to a $132.3 mil. loss in the previous year. The company's sales in 1991 were $44.3 mil., up 35% from 32.9% mil. in 1990. Centocor said that Centoxin research and development expenses plus the cost of building its salesforce and production facilities total approximately $280 mil. The company's 1991 R&D budget was $71.7 mil. Centoxin sales during the nine months ending Sept. 30 were $4.5 mil., with $2.7 mil of those sales coming in the third quarter. The company added that fourth quarter sales were substantially higher than third quarter sales of HA-1A. Centocor continues to pursue aggressively outside financing to offset its heavy internal investments in R&D. Most recently, the company completed a "SWORD" (stock and warrant offering for R&D) offering on Jan. 21 for Tocor II that raised $84 mil. for small peptide molecule research. Tocor II was formed Nov. 6 "to engage in research, development and preliminary clinical studies in the field of small peptide molecule-based pharmaceutical products for the treatment of human diseases," the company said in a prospectus for the public offering. The spinoff involved 2.25 mil. units of stock and warrants priced at $40 per unit. Each unit includes one share of Tocor II stock and one series T warrant and one callable warrant to purchase shares of Centocor common stock. Centocor may repurchase Tocor for prices ranging from $58 per share in 1993 to $107 per share in 1995. Tocor II will fund Centocor's research into small molecule inhibitors of clinically relevant receptors previously identified by Centocor's monoclonal antibody program, the prospectus says. These molecules may have several advantages over large proteins like Centocor's monoclonal antibodies, including possible oral administration, rapid absorption, fewer side effects, greater specificity and greater stability. Tocor II will take any resulting products through early Phase II, the prospectus states. The research program will initially focus on disease areas "where Centocor has knowledge regarding certain related targeted receptors and relevant clinical research experience." Specific targets include: rheumatoid arthritis and other autoimmune diseases, adult respiratory distress syndrome, reperfusion syndrome and other inflammatory conditions, and cardiovascular diseases. Specific molecular targets include tumor necrosis factor, GMP-140, and CD18 for inflammatory indications, GPIIb/IIIa for cardiovascular indications and CD4 for autoimmune indications. Centocor has used R&D spin-offs four times in the past. Between 1985 and 1989, the company formed Centocor Cardiovascular Imaging Partners and Centocor Partners I & II. The company also used a "SWORD" to raise $27 mil. to fund its rheumatoid arthritis, multiple sclerosis and lupus research through its Tocor I project, effectively taking the revenue-generating burden off the diagnostics business Centocor then owned ("The Pink Sheet" Jan. 15, 1990, p. 14). Centocor bought out Tocor I on July 1, 1991. On Feb. 21, Centocor announced that it was buying out CP II, which was formed to develop Centoxin, with an advance payment of $12.4 mil. in cash. Centor announced its intention to buy out CP II, and bring Centoxin into the corporate fold, in December 1990.

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