Tanox, Inc.

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Tanox, Inc.

10555 Stella Link
Houston, Texas 77025
U.S.A.
Telephone: (713) 578-4000
Fax: (713) 578-5000
Web site: http://www.tanox.com

Public Company
Incorporated: 1986 as Tanox Biosystems, Inc.
Employees: 127
Sales: $20.5 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: TNOX
NAIC: 541710 Research and Development in the Physical Sciences and Engineering Sciences; 325412 Pharmaceutical Preparation Manufacturing

Tanox, Inc. is a biotechnology company engaged in the development of monoclonal antibodies that treat unmet medical needs related to asthma, allergy, inflammation, autoimmune disease, and other conditions stemming from an overactive immune system. Working with Novartis AG and Genentech, Inc., the company has developed Xolair, the first biological therapy for allergic asthma, which is marketed by Novartis and Genentech. Tanox's collaborative agreement with Novartis and Genentech includes research and development work on other treatments undergoing Food and Drug Administration-mandated clinical trials, such as TNX-355, which is a monoclonal antibody designed to combat human immunodeficiency virus (HIV). Other applications of the company's technology target conditions such as severe peanut allergy and acute inflammation in chemotherapy patients. Tanox's main manufacturing facility is located in San Diego, California.

ORIGINS

Tanox began its efforts to bring a product to market in the late 1980s, embarking on the long road toward commercialization that virtually every start-up biotechnology company was forced to endure. The lengthy struggle to develop a marketable therapeutic outlasted the marriage of the company's founders, Nancy Chang and Tse Wen Chang, who formed the company, initially named Tanox Biosystems, Inc., in March 1986. Nancy Chang stayed with the company, guiding it through its formative years and leading it toward its ultimate objective of selling a product on the market. The process took nearly 20 years. For Chang, who received her doctorate degree in biological chemistry from Harvard University, Tanox became her life's work, a career devoted to the development of therapeutic monoclonal anti-bodies.

Chang, along with her then-husband, was employed by the Baylor College of Medicine when she started Tanox, serving as an associate professor in the institution's molecular virology division. She remained at Baylor until 1992, but took an active role in running Tanox, serving as its president and chairwoman upon inception and adding the title of chief executive officer in 1990, a significant year in the company's development. The year marked Tanox's first partnership agreement with a larger company, a necessity for any small biotechnology company that gave Tanox essential financial and technical help in its research and development endeavors. Chang and her small staff of scientists attracted the attention of a deep-pocketed partner because of their work in developing monoclonal antibodies, a nascent and promising field of science during the late 1980s.

The human immune system has several general mechanisms to combat infections, toxins, and cancers. Tanox focused on one such mechanism, the ability of the body to produce proteins called antibodies that attack and help remove foreign agents, known as antigens, from the body. Each antibody is tailor made for the antigen it is intended to attack, possessing particular attributes that enable it to complete its task, much like a particular key that matches a particular lock. In some cases, cases ranging from allergic diseases to autoimmune diseases such as HIV, the immune system is at fault, essentially instigating or fanning hostilities within the body instead of fighting to protect it. With asthma or seasonal allergic rhinitis (hay fever), for instance, the immune system responds to the antigen, an allergen in the case of allergic diseases, by producing an immunoglobulin E, or IgE, form of antibody, which only serves to trigger the symptoms of the disease. In a more severe case of malfunction, the immune system becomes the body's own worst enemy, mistakenly identifying normal cells as foreign agents, which triggers an immune response against the body resulting in autoimmune disease and associated tissue destruction. One way scientists helped the immune system when it faltered in its mission was by using monoclonal antibodies, genetically engineered antibodies designed to target a specific antigen. Such was the focus of Tanox's research and development efforts, specifically monoclonal antibodies that targeted the IgE antigen, an immune system pathway.

Not long after the company was incorporated, a small group of Tanox scientists discovered a novel approach for the treatment of allergic disease by reducing the levels of IgE in the blood. The company's discovery of an anti-IgE antibody attracted the attention of CibaGeigy Ltd., later to become the Swiss pharmaceutical giant, Novartis AG. The two companies agreed to collaborate in 1990, a deal that provided essential financial support to the fledgling company and marked the beginning of a relationship that would endure for more than 15 years. Under the terms of partnership, the two companies agreed to develop anti-IgE antibodies to treat allergic diseases. Tanox's research and development efforts were focused on monoclonal antibodies for the treatment of allergy, asthma, HIV infection, inflammation, and other related diseases, but at the forefront of the company's work was a treatment for allergic asthma, a therapeutic initially referred to as "E25." The treatment, based on the company's discovery made in 1987, would take years of further work and more time still to gain approval from the Food and Drug Administration (FDA), a lengthy and costly process that was not without controversy.

As Tanox's research staff concentrated on developing E25, a legal dispute erupted that threatened to make their work irrelevant. The problem arose from meetings Tanox had with Genentech, Inc., a major U.S. biotechnology company. Forming partnerships with larger companies was vital to Tanox's existence, prompting it to broker a deal with Novartis and enter discussions with Genentech in 1989 and 1990. After the two companies discussed collaborating on the development of an antibody for the treatment of allergies and asthma, they were unable to agree on terms to work together on commercializing the discovery, ending their discussions in 1990. Several years passed before Tanox filed a lawsuit against Genentech, alleging that one month after discussions between the two companies ended, Genentech launched a competing allergy program that violated an agreement between the two companies. Tanox filed its lawsuit in December 1993 and Genentech was quick to respond, filing its own lawsuit against Tanox in January 1994, alleging patent infringement. Remarkably, after the legal salvos were fired, the dispute resulted in a partnership between the two companies, providing additional support to Chang's pioneering work. In 1996, Genentech signed a collaborative agreement with Tanox and Novartis, forming a trio committed to commercializing monoclonal antibodies that addressed afflictions occurring along the IgE pathway.

COMPANY PERSPECTIVES

We are committed to becoming a world leader in providing effective therapies for immune-mediated diseases, infectious disease, inflammation and cancer. Through the development and use of innovative technologies, we will create products that address unmet medical needs by treating the underlying cause of disease.

Despite the backing of billion-dollar partners, Tanox endured bleak financial times throughout the 1990s. E25 was granted "fast-track" status by the FDA, a designation reserved for promising drugs that targeted critical, unmet medical needs, but an accelerated approval process did little to improve the company's financial condition. Tanox, like virtually every small biotechnology company, was forced to endure years of mounting losses and meager revenue totals as it struggled to bring its first product to market. The company's financial results at the end of the decade epitomized the hardships of operating as a therapeutic pioneer: Tanox generated $1.4 million in revenue in 1999, a year in which losses totaled more than $23 million.

INITIAL PUBLIC OFFERING IN 2000

For Chang and her staff, hopes for a financially successful future were pinned to the release of E25. To obtain some financial help and cash in on the growing expectations of E25's effectiveness in treating allergic asthma, Tanox turned to Wall Street, filing for an initial public offering (IPO) of stock in 2000. The company originally had planned to complete its IPO in 1993, an offering that was expected to raise roughly $30 million in proceeds, but the offering was withdrawn. The seven-year wait proved to be financially prudent, resulting in exponentially higher proceeds for the company. The IPO was completed in May 2000, when Tanox's shares debuted at $28.50 per share, raising $244 million in proceeds in what ranked as one of the largest public debuts in the history of the biotechnology industry. At the time of the offering, E25 had completed Phase III clinical trials in both allergic asthma and hay fever, with regulatory approval expected to be granted sometime between 2002 and 2003. As Chang prepared for the long-awaited release of the company's first commercial product, she did what she could to keep costs at minimum. In 2001, the company's research operations in Taiwan, the Netherlands, and the United States were consolidated at the company's headquarters in Houston. Revenue by the end of the year had slipped to a paltry $419,000. The company's losses in 2001 amounted to more than $21 million.

Tanox's mission to offer a product to sufferers of allergic asthma ended 17 years after it was begun. In June 2003, the FDA approved E25, which had been given the trade name Xolair, to treat moderate-to-severe persistent asthma in adults and adolescents. Xolair, marketed by Novartis and Genentech, was introduced the following month, the first humanized monoclonal antibody evaluated for asthma and the first therapeutic to target the IgE antibody. For its part, Tanox received a royalty on net sales of Xolair of between 8 and 12 percent, which, according to Chang's estimates, would enable the company to begin turning a profit by 2007. Analysts expected Xolair to generate $750 million in an nual revenue by 2008.

KEY DATES

1986:: Tanox is formed.
1990:: Tanox signs a collaborative agreement with Ciba-Geigy Ltd., later to become Novartis AG.
1996:: Genentech, Inc. joins the partnership between Tanox and Novartis.
2000:: Tanox completes its initial public offering of stock, raising $244 million.
2003:: The company's first product, Xolair, is introduced on the market.
2006:: Founder Nancy Chang steps down as chief executive officer.

A PRODUCT PIPELINE FOR THE FUTURE

As Tanox neared its 20th anniversary, the company was still a work in progress, a company with one marketable product that arguably was still in the developmental phase of its existence. Consistent profits, something that had eluded the company during its first two decades in business, depended on the market success of Xolair and the commercialization of other therapeutics in Tanox's development pipeline. Midway through the first decade of the 21st century, there were two promising treatments buoying hopes for improved financial performance in the near future. One was given the preliminary name "TNX-901," a monoclonal antibody developed to treat those with severe peanut allergies, the most common food allergy. An estimated 1.5 million Americans suffered from the condition, and each year between 50 and 100 of the afflicted died after eating just one or two peanuts. TNX-901, which targeted the IgE pathway, was in Phase II clinical trials by the time Xolair was approved, registering encouraging results. Tests demonstrated that TNX-901 raised the average threshold at which patients had an allergic reaction from half a peanut to nearly nine peanuts. Tanox's other promising monoclonal antibody was dubbed "TNX-355," a treatment for HIV that was undergoing clinical trials midway through the decade. TNX-355, another antibody that targeted the IgE pathway, worked by coating the cells that HIV targeted to prevent HIV from entering them. Data collected during clinical trials showed TNX-355 reduced the amount of HIV in the body by an estimated 95 percent. "As a company," Chang said in a January 11, 2006 interview with the Houston Chronicle, "we are very excited. This is our second home-run opportunity to take this drug to the market for thousands and thousands of people who can benefit from this drug. We see a real product opportunity in this drug."

As Tanox prepared for the years ahead, the true merit of the work completed during its first 20 years of business would be determined during its next two decades of business.

The commercial success of Xolair, which was approved for sale in Europe in October 2005, TNX-901, TNX-355, and other treatments in the company's product pipeline offered potential financial rewards that would validate years of research and development efforts. As the company headed toward this new, conclusive era of existence, it did so under new leadership. Chang relinquished day-to-day control over the company in February 2006, passing the reins of command to Danong Chen, whom she had groomed for the chief executive officer role for the previous four years. Chang remained Tanox's chairwoman. Chen, who had met Chang at Baylor College, assumed responsibility for shepherding the company's products towards commercial success and fulfilling Chang's pledge of making Tanox profitable between 2007 and 2009.