"We made substantial progress during the quarter toward our goals for the year," said Douglas E. Williams, Ph.D., Chief Executive Officer of ZymoGenetics. "The development of PEG-Interferon lambda is proceeding according to plan, with the recent completion of Phase 1b enrollment and preparations underway for Phase 2 initiation later this year. RECOTHROM® sales trends are on track to meet our guidance for the year. The company's financial outlook has been improved through the corporate restructuring announced in April. We're focused on continuing to build on these trends over the remainder of the year."

Financial Results

Revenues for the second quarter of 2009 were $22.6 million compared to $12.6 million for the prior year quarter. The increase resulted from higher collaboration and license revenues and higher sales of RECOTHROM in the United States.

RECOTHROM net sales were $6.0 million for the second quarter of 2009 compared to $1.4 million for the second quarter of 2008. The increase was attributable to increased market share as additional hospitals converted from bovine thrombin to RECOTHROM and existing customers increased their purchase volumes of RECOTHROM. Second quarter 2009 RECOTHROM hospital unit demand also increased from first quarter of 2009, growing by approximately 24%. Costs of product sales rose in line with sales.

Collaboration and license revenues were $16.3 million for the second quarter of 2009 compared to $9.5 million in the prior year quarter. The increase was primarily related to the PEG-Interferon lambda collaboration with Bristol-Myers Squibb signed in January of 2009 and the acceleration of previously deferred revenue associated with the August 2008 restructuring of the atacicept co-development relationship with Merck Serono. These increases were partially offset by decreased milestones on out-licensed products and reduced revenue recognition under the RECOTHROM collaboration with Bayer Healthcare.

Research and development expenses for the second quarter of 2009 were $29.1 million, a decrease of $3.9 million from the second quarter of 2008. The decrease was primarily the result of all research and development costs under the atacicept co-development collaboration being assumed by Merck Serono, partially offset by $7.0 million of severance costs associated with our April 2009 restructuring.

Selling, general and administrative expenses for the second quarter of 2009 were $16.7 million compared to $16.0 million in the second quarter of 2008. The increase primarily resulted from $1.8 million of severance costs associated with the April 2009 restructuring and increased commissions due Bayer Healthcare on RECOTHROM net sales, partially offset by reduced stock-based compensation and legal expenses.

Net other expense for the second quarter of 2009 totaled $2.3 million as compared to $0.8 million for the second quarter of 2008. The increase resulted from lower investment income for the second quarter of 2009, which was caused by reduced amounts available to invest and lower rates of return on those investments. Interest expense related to the first $25.0 million draw on the Deerfield Management debt financing in November 2008 also contributed to the increased expense.

As of June 30, 2009, the company had $118.2 million of cash, cash equivalents and short-term investments. This amount does not include a $25.0 million milestone payment from Bristol-Myers Squibb received in July or an additional $70.0 million expected to be received later this year under the PEG-Interferon lambda collaboration agreement. A funding arrangement with Deerfield Management allows the company to borrow up to an additional $75.0 million through January 26, 2010 with repayment of outstanding principal and interest in June 2013.

Business Highlights

ZymoGenetics business highlights for the second quarter of 2009 included the following.

PEG-Interferon lambda

Interim Phase 1b results were presented at the European Association for the Study of the Liver annual meeting in April 2009, showing that PEG-Interferon lambda was well tolerated and demonstrated robust, dose-dependent anti-viral activity as a single agent and in combination with ribavirin. In collaboration with Bristol-Myers Squibb Company (BMS), the company is working toward initiation of Phase 2 testing in Hepatitis C patients later this year. Phase 1b patient enrollment was completed in the second quarter, and activities in support of Phase 2 initiation are underway. In recognition of this progress, in June 2009, the company earned a milestone payment of $25.0 million from BMS, which was received in July 2009, bringing total milestone payments received from BMS in 2009 to $130.0 million.

RECOTHROM® Thrombin, topical (Recombinant)

End user demand for RECOTHROM continued to increase in the second quarter. Overall hospital demand increased by approximately 24% in the second quarter of 2009 versus the first quarter of 2009. The company's partner, Bayer Healthcare, continues to pursue approval in Europe, Canada and Australia.

Results from the Phase 3b RECOTHROM clinical trial were published in the June issue of Journal of the American College of Surgeons.