ZymoGenetics second-quarter net loss declines to $3.8 million

ZymoGenetics, Inc. (NASDAQ:ZGEN) today reported substantially improved financial results for the quarter ended June 30, 2010. For the second quarter of 2010, the company's net loss declined to $3.8 million, or $0.04 per share, a $23.2 million improvement from the $27.0 million loss, or $0.39 per share, reported for the second quarter of 2009. The improvement resulted from higher revenues as well as reduced operating expenses.

“We are experiencing substantial momentum in all aspects of our business”

"We are experiencing substantial momentum in all aspects of our business," said Douglas E. Williams, Ph.D., Chief Executive Officer of ZymoGenetics. "Phase 2b randomized comparative clinical trials for two of our product candidates are now underway in hepatitis C and melanoma. Encouraging results from our Phase 2a trials in those diseases indicate we could have game-changing compounds with tremendous potential to assist patients in need. In addition, RECOTHROM sales are steadily growing and our financial trends continue to improve."

Financial Results

Revenues for the second quarter of 2010 increased to $37.7 million from $22.6 million for the second quarter of 2009. The increase was attributable to a $9.4 million increase in collaboration and license revenues and nearly a doubling of net sales of RECOTHROM^® Thrombin, topical (Recombinant).

Net U.S. sales of RECOTHROM were $11.9 million for the second quarter of 2010 compared to $6.0 million for the second quarter of 2009, an increase of 98%. Compared to the first quarter of 2010, net sales in the second quarter increased by 32%. In the second quarter of 2010, both RECOTHROM market share and hospital unit demand increased versus the first quarter of 2010.

Collaboration and license revenues were $25.6 million for the second quarter of 2010 compared to $16.3 million in the second quarter of the prior year. The increase was primarily related to recognition of revenue associated with the December 2009 license agreement with Novo Nordisk for IL-21 antagonists and incremental revenues recognized related to the company's PEG-Interferon lambda collaboration with Bristol-Myers Squibb due to advancement and expansion of clinical development activities. These increases were partially offset by reduced revenues from collaborations with Bayer and Merck Serono, both of which ended in the fourth quarter of 2009.

Costs and expenses for the second quarter of 2010 decreased by 18% to $38.9 million from $47.2 million for the second quarter of 2009. Overall, the decrease was attributable to expense reductions resulting from the company's 2009 restructuring, which is expected to continue to benefit the company's expense structure in coming quarters.

Research and development expenses for the second quarter of 2010 were $23.7 million, a decrease of $5.4 million from the 2009 quarter. The decrease was primarily attributable to a reduction of headcount related expenses in 2010 resulting from the reductions in force made in April and December 2009 and related severance expenses incurred in the second quarter of 2009. These savings were partially offset by an increase in costs related to the PEG-Interferon lambda development program, which advanced to Phase 2b clinical testing in the second quarter of 2010.

Selling, general and administrative expenses for the second quarter of 2010 were $12.6 million, compared to $16.7 million for the second quarter of 2009. The decrease was primarily related to reduced headcount related expenses in 2010, severance expenses incurred in the second quarter of 2009 and the discontinuation of Bayer commission expense, which is now being charged against a liability recorded in December 2009.

As of June 30, 2010, the company had $205.5 million of cash, cash equivalents and short-term investments.

Business Highlights

ZymoGenetics is on track in the execution of its 2010 business plan, as reflected by the following progress:

PEG-Interferon lambda (PEG-IFN lambda)

PEG-IFN lambda advanced into an international, randomized Phase 2b clinical trial in treatment-naïve patients with chronic hepatitis C virus (HCV) infection. The trial will enroll approximately 600 patients with genotypes 1 - 4 to assess the safety and antiviral efficacy of PEG-IFN lambda compared to PEGASYS^®. The primary endpoint of the trial is the proportion of patients who achieve undetectable levels of HCV RNA after 12 weeks of therapy. From 4 doses of PEG-IFN lambda tested in the Phase 2a clinical trial, the 3 highest doses were selected for Phase 2b (120 mcg, 180 mcg and 240 mcg). Phase 2b enrollment is now expected to be completed in the third quarter of 2010, one quarter ahead of schedule. PEG-IFN lambda is being developed in collaboration with Bristol-Myers Squibb Company.

RECOTHROM

Sales and market share for RECOTHROM continued to expand during the second quarter of 2010. Hospital unit demand for RECOTHROM increased by approximately 11% over the first quarter of 2010. Estimated RECOTHROM market share in dollars grew to 22% of total stand-alone thrombin sales in the second quarter of 2010 from approximately 19% in the first quarter of 2010.

Interleukin-21 (IL-21)

The company and its collaborator, the National Cancer Institute of Canada Clinical Trials Group, reported encouraging results from a Phase 2a study with IL-21 in metastatic melanoma at the American Society of Clinical Oncology 2010 meeting. The reported objective response rate of 23%, disease control rate of 64% and median progression free survival of 4.3 months compared favorably to other published results for immunotherapeutic agents tested in Stage 4 melanoma. Patient survival data continues to be collected, and the company expects to have overall survival results from the Phase 2a study in the fourth quarter of 2010.

A randomized Phase 2b clinical trial was initiated in metastatic melanoma in late June. The trial will compare IL-21 to dacarbazine, a chemotherapy agent approved for treatment of melanoma. The primary endpoint of the trial is progression-free survival. Results from the Phase 2b study will drive the development of Phase 3 strategy and are expected to optimize product value in future partnering discussions. ZymoGenetics has worldwide rights to IL-21.