1================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, DC 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JuneFOR THE QUARTERLY PERIOD ENDED JUNE 30, 20012002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------- --------
Commission file numberFOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19612
IMCLONE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 04-2834797
(State or other jurisdiction of (IRS employer
incorporation or organization) (IRS Employer Identification No.identification no.)
180 VARICK STREET, NEW YORK, NY 10014
(Address of principal executive offices) (Zip Code)code)
(212) 645-1405
Registrant's telephone number, including area code
Not ApplicableNOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X[X] No ------ ------[ ]
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF AUGUST 12, 2001
Common Stock, par value $.001 72,149,154
CLASS OUTSTANDING AS OF AUGUST 13, 2002
----- ---------------------------------
Common Stock, par value $.001 73,385,235 Shares
================================================================================
2
IMCLONE SYSTEMS INCORPORATED
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 20012002 (unaudited) and December 31, 2000 22001 ....... 1
Unaudited Consolidated Statements of Operations - Three and six months ended
June 30, 2002 and 2001 and 2000 3.............................................................. 2
Unaudited Consolidated Statements of Cash Flows - Six months ended
June 30, 2002 and 2001 and 2000 4.............................................................. 3
Notes to Consolidated Financial Statements 5.......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 913
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15.......................... 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 24
Item 2. Changes in Securities and Use of Proceeds ........................................... 25
Item 4. Submission of Matters to a Vote of Security Holders 15................................. 25
Item 6. Exhibits and Reports on Form 8-K 16.................................................... 26
1
3
PART 1 - FINANCIAL INFORMATION
ItemITEM 1 - Financial StatementsFINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
ASSETS JUNE 30, DECEMBER 31,
2002 2001
2000
--------- ----------
(UNAUDITED)-----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 9,51565,535 $ 60,32538,093
Securities available for sale 181,499 236,844......................................... 286,077 295,893
Prepaid expenses 3,811 2,628
Note receivable - officer 297 282...................................................... 5,679 3,891
Amounts due from corporate partners (Note 7) .......................... 16,562 8,230
Other current assets 5,039 7,138.................................................. 4,395 3,547
--------- ---------
Total current assets 200,161 307,217
--------- ---------
Property and equipment:
Land 2,723 2,111
Building and building improvements 11,202 10,989
Leasehold improvements 8,059 7,863
Machinery and equipment 13,444 9,995
Furniture and fixtures 1,490 1,311
Construction in progress 60,983 37,436
--------- ---------
Total cost 97,901 69,705
Less accumulated depreciation and amortization (18,597) (17,105).............................................. 378,248 349,654
--------- ---------
Property and equipment, net 79,304 52,600
--------- ---------............................................. 145,420 107,248
Patent costs, net 1,533 1,168....................................................... 1,632 1,513
Deferred financing costs, net 6,266 7,114
Investment in equity securities and other........................................... 4,556 5,404
Note receivable ......................................................... 10,000 10,000
Other assets 375 3,392............................................................ 4,518 383
--------- ---------
$ 287,639544,374 $ 371,491474,202
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ...................................................... $ 7,91814,947 $ 12,72916,919
Accrued expenses 9,348 11,374...................................................... 22,660 11,810
Interest payable 4,445 4,444
Deferred...................................................... 4,442 4,446
Current portion of deferred revenue 6,241 2,434
Fees potentially refundable to corporate partner -- 28,000(Note 7) .......................... 36,627 20,683
Current portion of long-term liabilities 531 626
Preferred stock called for redemption and dividends payable -- 25,764.............................. 236 426
--------- ---------
Total current liabilities 28,483 85,371......................................... 78,912 54,284
--------- ---------
Deferred revenue, less current portion (Note 7) ......................... 298,612 182,813
Long-term debt .......................................................... 242,200 242,200
Other long-term liabilities, less current portion 226 488....................... 57 79
--------- ---------
Total liabilities 270,909 328,059................................................. 619,781 479,376
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity:equity (deficit):
Preferred stock, $1.00 par value; authorized 4,000,000 shares;
200,000 Series A Convertible shares called for redemption and
classified as a current liability at
December 31, 2000reserved 1,200,000 series B participating cumulative preferred
stock................................................................ -- --
Common stock, $.001 par value; authorized 120,000,000200,000,000 shares; issued
67,549,50873,573,160 and 65,818,36273,348,271 at June 30, 20012002 and December 31, 2000,2001,
respectively, outstanding 67,360,25873,383,910, and 65,767,54573,159,021 at June 30, 20012002
and December 31, 2000,2001, respectively 68 66................................. 74 73
Additional paid-in capital 289,823 283,268............................................ 345,295 341,735
Accumulated deficit (274,506) (243,808)................................................... (419,153) (346,037)
Treasury stock, at cost; 189,250 and 50,817 shares at June 30, 20012002 and
December 31, 2000, respectively2001 ................................................... (4,100) (492)(4,100)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale 5,445 4,398.................... 2,477 3,155
--------- ---------
Total stockholders' equity 16,730 43,432(deficit) .............................. (75,407) (5,174)
--------- ---------
$ 287,639544,374 $ 371,491474,202
========= =========
See accompanying notes to consolidated financial statements
2Page 1
4
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------------------------------- -------------------------
2002 2001 2000 (1)2002 2001
2000 (1)
---- -------- ---- ------------------ ---------- ---------- ----------
Revenues:
License fees and milestone revenuesrevenue (Note 7) ...... $ 1,595 $ 3,136 $ 418,258 $ 27,232 $ 122
Research and development funding and royalties ... 38 115 160688 763
326
-------- -------- -------- --------Collaborative agreement revenue (Note 7) ........ 9,932 644 21,170 3,895
---------- ---------- ---------- ----------
Total revenues 3,251 201 27,995 448
-------- -------- -------- --------................................. 11,565 3,895 30,116 31,890
========== ========== ========== ==========
Operating expenses:
Research and development 23,746 12,743 45,591 23,844......................... 38,167 24,390 75,945 49,486
Marketing, general and administrative ............ 16,479 6,223 3,78224,602 9,951
6,908
-------- -------- -------- --------Expenses associated with the amended Bristol-Myers
Squibb Company ("BMS") Commercial Agreement .... -- -- 2,250 --
---------- ---------- ---------- ----------
Total operating expenses 29,969 16,525 55,542 30,752
-------- -------- -------- --------....................... 54,646 30,613 102,797 59,437
========== ========== ========== ==========
Operating loss ..................................... (43,081) (26,718) (16,324)(72,681) (27,547)
(30,304)
-------- -------- -------- ------------------ ---------- ---------- ----------
Other:
Interest income .................................. (2,904) (3,262) (6,165)(5,168) (7,827) (9,352)
Interest expense ................................. 3,347 3,197 3,6676,839 6,510 4,888
Loss (gain) on securities and investments ........ (435) 2,850 (18)(1,236) 4,468
(16)
-------- -------- -------- ------------------ ---------- ---------- ----------
Net interest and other (income) expense ................. 8 2,785 (2,516)435 3,151
(4,480)
-------- -------- -------- --------
Loss before cumulative effect of change in accounting
policy (29,503) (13,808) (30,698) (25,824)
Cumulative effect of change in accounting policy for the
recognition of up-front non-refundable fees -- -- -- (2,596)
-------- -------- -------- ------------------ ---------- ---------- ----------
Net loss ..................................... $ (43,089) $ (29,503) (13,808)$ (73,116) $ (30,698)
(28,420)
-------- -------- -------- --------
Preferred dividends (including assumed incremental yield
attributable to beneficial conversion feature of $256
for the three months ended June 30, 2000 and $510 for
the six months ended June 30, 2000) -- 703 -- 1,405
-------- -------- -------- --------
Net loss to common stockholders $(29,503) $(14,511) $(30,698) $(29,825)
======== ======== ======== ================== ========== ========== ==========
Net loss per common share:
Basic and diluted:
Loss before cumulative effect of change in accounting
policy $ (0.44) $ (0.23) $ (0.46) $ (0.44)
Cumulative effect of change in accounting policy -- -- --
-------- -------- -------- --------
(0.05)
Basic and diluted netNet loss per common share ...................... $ (0.59) $ (0.44) $ (0.23)(1.00) $ (0.46)
$ (0.49)
======== ======== ======== ================== ========== ========== ==========
Weighted average shares outstanding ................ 73,356 67,051 62,60473,332 66,657
61,270
======== ======== ======== ================== ========== ========== ==========
(1) Restated - See note 12
See accompanying notes to consolidated financial statements
3Page 2
5
IMCLONE SYSTEMS INCORPORATED
Consolidated Statements of Cash FlowsCONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------------------------------
2002 2001
2000(1)
--------- ------------------- ----------
Cash flows from operating activities:
Net loss .................................................................. $ (73,116) $ (30,698) $ (28,420)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 4,656 1,558 1,330
Amortization of deferred financing costs ................................ 848 560848
Expense associated with issuance of options and warrants ................ 7 687 2,565
Gain on securities available for sale ................................... (1,236) (908) (16)
Write-down of investment in Valigen N.V ................................. -- 4,375 --
Write-off of convertible promissory note receivable
from A.C.T. Group, Inc. ............................................... -- 1,000 --
Changes in:
Prepaid expenses ...................................................... (1,788) (1,183)
(3,438)Amounts due from corporate partners (including amounts received from
BMS of $6,887 for the six months ended June 30, 2002) ............... (8,332) --
Note receivable - officer ............................................. -- (15) --
Other current assets .................................................. (848) 2,816 337
Other assets .......................................................... (4,135) (75) 8
Interest payable ...................................................... (4) 1 4,398
Accounts payable ...................................................... (1,972) (4,811) (453)
Accrued expenses ...................................................... 10,850 (2,026) 340
Deferred revenue (including amounts received from BMS of $140,000
for the six months ended June 30, 2002) ............................. 131,743 3,807 2,514
Fees potentially refundable to corporate partnerMerck KGaA ............................. -- (28,000)
6,000
--------- ------------------- ----------
Net cash used inprovided by (used in) operating activities ................. 56,673 (52,624)
(14,275)
--------- ------------------- ----------
Cash flows from investing activities:
Acquisitions of property and equipment .................................. (42,686) (28,196) (11,194)
Purchases of securities available for sale .............................. (241,356) (30,346) (320,282)
Sales and maturities of securities available for sale ................... 251,730 87,646 110,859
Investment in Valigen N.V ............................................... -- (2,000) (7,500)
Loan to A.C.T. Group, Inc. .............................................. -- (1,000) --
Additions to patents .................................................... (203) (431)
(22)
--------- ------------------- ----------
Net cash provided by (used in) investing activities ................. (32,515) 25,673
(228,139)
--------- ------------------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants .................... 2,745 3,744 9,462
Proceeds from issuance of common stock under the employee stock
purchase plan ......................................................... 323 348 164
Proceeds from issuance of 5 1/2% convertible subordinated notesshort-swing profit rule ................................... 486 -- 240,000
Deferred financing costs -- (8,449)
Proceeds from repayment of note receivable by officer - stockholder, including interest -- 145
Purchase of treasury stock .............................................. -- (1,830) --
Payment of preferred stock dividends .................................... -- (5,764) --
Redemption of series A preferred stock .................................. -- (20,000) --
Payments of other liabilities ........................................... (270) (357)
(482)
--------- ------------------- ----------
Net cash provided by (used in) provided by financing activities ................. 3,284 (23,859)
240,840
--------- ------------------- ----------
Net decreaseincrease (decrease) in cash and cash equivalents ................ 27,442 (50,810) (1,574)
Cash and cash equivalents at beginning of period .......................... 38,093 60,325
12,016
--------- ------------------- ----------
Cash and cash equivalents at end of period ................................ $ 65,535 $ 9,515
========== ==========
Supplemental cash flow information:
Cash paid for interest, including amounts capitalized of $780 and $1,120
for the six months ended June 30, 2002 and 2001, respectively ......... $ 10,442
========= =========6,776 $ 6,781
========== ==========
Non-cash financing activity:
Capital asset and lease obligation addition ........................... $ 58 $ --
========== ==========
(1) Restated - See note 12
See accompanying notes to consolidated financial statements
4Page 3
6
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)(UNAUDITED)
(1) BASIS OF PRESENTATIONPREPARATION
The consolidated financial statements of ImClone Systems Incorporated
("ImClone Systems" or the "Company") as of June 30, 20012002 and for the three and
six months ended June 30, 20012002 and 20002001 are unaudited. In the opinion of
management, these unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000,2001, as filed with the
Securities and Exchange Commission ("SEC").
Results for the interim periods are not necessarily indicative of results
for the full years.
Pursuant to the guidance in Emerging Issues Task Force Issue No. 01-14,
Income Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred ("EITF No. 01-14"), the Company changed its classification for
corporate partner reimbursements effective January 1, 2002 to characterize such
reimbursements received for research and development and marketing expenses
incurred as collaborative agreement revenue in the consolidated statements of
operations. Prior to January 1, 2002, the Company characterized such
reimbursements as a reduction of expenses in the consolidated statements of
operations. As prescribed in EITF No. 01-14, all comparative financial
statements for prior periods have been reclassified to comply with this
guidance.
(2) SEGMENT INFORMATIONPROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Land ......................................... $ 4,899,000 $ 2,733,000
Building and building improvements ........... 61,306,000 50,720,000
Leasehold improvements ....................... 8,367,000 8,302,000
Machinery and equipment ...................... 37,131,000 33,057,000
Furniture and fixtures ....................... 2,088,000 2,031,000
Construction in progress ..................... 58,876,000 33,080,000
------------ ------------
Total cost ............................. 172,667,000 129,923,000
Less accumulated depreciation and amortization (27,247,000) (22,675,000)
------------ ------------
Property and equipment, net .................. $145,420,000 $107,248,000
============ ============
The Company is building a biopharmaceutical company advancing oncology care by developingsecond commercial manufacturing facility
adjacent to its new product launch manufacturing facility in Somerville, New
Jersey. This new facility will be a portfoliomulti-use facility with capacity of targeted biologic treatments,up to
110,000 liters (working volume). The 250,000 square foot facility will cost
approximately $233,000,000, and is being built on land purchased in December
2000. The actual cost of the new facility may change depending upon various
factors. The Company incurred approximately $52,617,000, (included in
construction in progress above) excluding capitalized interest of approximately
$1,234,000, in conceptual design, engineering and pre-construction costs through
June 30, 2002. Through July 22, 2002, committed purchase orders totaling
approximately $40,217,000 have been placed for subcontracts and equipment
related to this project. In addition, $22,770,000 in engineering, procurement,
construction management and validation costs were committed.
In January 2002, the Company purchased real estate consisting of a
7.5-acre parcel of land located adjacent to the Company's product launch
manufacturing facility and pilot facility in Somerville, New Jersey. The real
estate includes an existing 50,000 square foot building, 40,000 square feet of
which addressis warehouse space and 10,000 square feet of which is office space. The
purchase price for the unmet medical
needsproperty and building was approximately $7,020,000, of
patientswhich approximately $1,125,000 related to the purchase of the land and
approximately $5,895,000 related to the purchase of the building. The Company
intends to use this property for warehousing and logistics for its Somerville
campus.
Page 4
On May 20, 2002, the Company purchased real estate consisting of a
6.94-acre parcel of land located across the street from the Company's product
launch manufacturing facility in Somerville, New Jersey. The real estate
includes an existing 46,000 square feet of office space. The purchase price for
the property was approximately $4,515,000, of which approximately $1,041,000 was
related to the purchase of the land and approximately $3,474,000 was related to
the purchase of the building. The Company intends to use this property as the
administrative building for the Somerville campus. As of June 30, 2002, the
Company has incurred approximately $422,000 for the retrofit of this facility.
The total cost for the retrofit will be approximately $5,187,000.
The process of preparing consolidated financial statements in accordance
with a varietyaccounting principles generally accepted in the United States of cancers.America
requires the Company to evaluate the carrying values of its long-lived assets.
The Company's three programs
include growth factor blockers, cancer vaccines and anti-angiogenesis
therapeutics. A substantial portionrecoverability of the carrying values of the Company's effortsproduct launch
manufacturing facility, its second commercial manufacturing facility and resources are
devotedits
warehousing and logistics facility will depend on (1) receiving FDA approval of
our interventional therapeutic product candidate for cancer, ERBITUX((TM)), (2)
receiving FDA approval of the manufacturing facilities and (3) the Company's
ability to research and development conductedearn sufficient returns on its own behalf and through
collaborations with corporate partners and academic research and clinical
institutions. The Company has not derived any commercial revenue from product
sales. The Company is operated as one business and is comprehensively managed by
a single management team that reports to the Chief Operating Officer. The
Company does not operate separate lines of business or separate business
entities with respect to any of its product candidates. Except for contract
services (see Note 4) and clinical trials conducted by independent investigatorsERBITUX. Based on its behalf,management's current
estimates, the Company does not conduct anyexpects to recover the carrying value of its operations outside of the
United States. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by geographic area and
does not have separately reportable segments.such assets.
(3) FOREIGN CURRENCY TRANSACTIONS
Gains and losses from foreign currency transactions, such as those resulting
from the translation and settlement of receivables and payables denominated in
foreign currencies, are included in the consolidated statement of operations.
The Company does not currently use derivative financial instruments to manage
the risks associated with foreign currency fluctuations. The Company recorded
losses on foreign currency transactions of approximately $1,000 for the three
months ended June 30, 2001 and gains of approximately $4,000 for the three
months ended June 30, 2000. The Company recorded losses on foreign currency
transactions of approximately $3,000 for the six months ended June 30, 2001 and
gains of approximately $4,000 for the six months ended June 30, 2000. Gains and
losses from foreign currency transactions are included as a component of
operating expenses.
(4)MANUFACTURING CONTRACT SERVICES
In December 1999, the Company entered into a development and manufacturing
services agreement with Lonza Biologics PLC ("Lonza"). This agreement was
amended in April 2001 to include additional services. Under the agreement, Lonza
iswas responsible for process development and scale-up to manufacture the
Company's lead interventional therapeutic product candidate for cancer,
IMC-C225.ERBITUX in
bulk form under current Good Manufacturing Practices ("cGMP") conditions. These
steps were taken to assure that itsthe manufacturing process would produce bulk
material that conforms with the Company's reference material. The Company did
not incur any costs associated with this agreement during the three months ended
June 30, 2002 and 2001. Approximately $38,000 and $3,600,000 was incurred in the
six months ended June 30, 2002 and 2001, respectively, and $5,277,000$7,068,000 from
inception through June 30, 2001
for services provided2002. As of June 30, 2002, Lonza has completed its
responsibilities under the development and manufacturing services agreement.
In September 2000, the Company entered into a three-year commercial
manufacturing services agreement with Lonza relating to IMC-C225.ERBITUX. This agreement
was amended in June 2001 and again in September 2001 to include additional
services. The total cost for services to be provided under the three-year
commercial manufacturing services agreement is approximately $87,050,000. The
Company has incurred approximately $7,410,000 and $3,075,000 in the three months
ended June 30, 2002 and 2001, respectively, and $14,528,000 and $4,875,000 in
the six months ended June 30, 2002 and 2001, respectively, and $10,275,000$24,840,000 from
inception through June 30, 20012002 for services provided under the commercial
manufacturing services agreement.
Under these twothe December 1999 and September 2000 agreements, Lonza will manufacture IMC-C225is
manufacturing ERBITUX at the 5,000 liter scale under current Good Manufacturing Practices ("cGMP")cGMP conditions and deliveris
delivering it to the Company over a term ending no later than December 2003.
The costs associated with both of these agreements are included in research and
development expenses when incurred and will continue to be so classified until
such time as IMC-C225ERBITUX may be approved for sale.sale or until the Company obtains
obligations from its corporate partners to purchase such product. In the event
of such approval or obligations from its corporate partners, the subsequent
costs associated with manufacturing IMC-C225ERBITUX for commercial sale will be
included in inventory and expensed when sold. In the event the Company
terminates the commercial manufacturing services agreement is terminated by the
Company,without cause, the
Company will be required to pay 85% of the stated costs for each of the first
ten batches
5
7 cancelled, 65% of the stated costs for each of the next ten batches
cancelled and 40% of the stated costs for any remainingeach of the next six batches
cancelled. The batch cancellation provisions for certain additional batches
that we are committed to purchase require the Company to pay 100% of the stated
costs of cancelled batches scheduled within six months of the cancellation, 85%
of the stated costs of cancelled batches scheduled between six and twelve
months following the cancellation and 65% of the stated costs of cancelled
batches scheduled between twelve and eighteen months following the
cancellation. These amounts are subject to mitigation should Lonza use its
manufacturing capacity caused by such termination for another customer. At June
30, 2002, the estimated remaining future commitments under the amended
commercial manufacturing services agreement are $38,160,000 in 2002 and
$24,050,000 in 2003.
In December 2001, the Company entered into an agreement with Lonza to
manufacture ERBITUX at the 2,000 liter scale for use in clinical trials by Merck
KGaA (the "2,000L Lonza Agreement"). The Company has built a new product launch manufacturing facility adjacent to
its pilot manufacturing facilitycosts associated with the agreement are
reimbursable by Merck KGaA and accordingly are accounted for as collaborative
agreement revenue and such costs are also included in New Jersey. This new facility contains three
10,000 liter fermentorsresearch and will be dedicated todevelopment
expenses in the commercial productionconsolidated statement of IMC-C225. The cost of this 80,000 square foot facility is approximately $53
million, excluding capitalized interest, and has been built on land purchased in
December 1999.operations. The Company has incurred
approximately $50,324,000 in
engineering, pre-construction and construction costs associated with the new
product launch manufacturing facility and has capitalized interest totaling
approximately $1,966,000. The costs incurred to date associated with the
construction of the facility have been paid from the Company's cash reserves,
which were primarily obtained through the issuance of debt and equity
securities. The necessary commissioning and validation of the new product launch
manufacturing facility is expected to be completed by the end of 2001.
(5) TRANSACTION WITH A.C.T GROUP, INC.
During the second quarter of 2001, the Company made a $1,000,000 loan to A.C.T.
Group, Inc. ("A.C.T. Group") and received its convertible promissory note and
five-year warrant to purchase its common stock as consideration. A.C.T. Group is
engaged$1,175,000 in the research and development of technologies enabling the genetic
manipulation of cells to produce transgenic animals for pharmaceutical protein
production. A.C.T. Group also is developing transgenic cloned cells and tissues
for application in cell and organ transplant therapy. The promissory note is due
November 30, 2001, does not bear interest, and is payable as follows: (i) if,
prior to November 30, 2001, A.C.T. Group sells a stated minimum amount of its
series B convertible preferred stock ("A.C.T. Group series B stock"), A.C.T.
Group will issue to ImClone Systems shares of A.C.T. Group series B stock at a
20% discount to the price at which they are sold; (ii) if, prior to November 30,
2001, A.C.T. Group has not sold the series B stock but enters into a binding
agreement with respect to a merger or other transaction in which its
stockholders receive securities of another entity with a stated minimum amount
of cash, A.C.T. Group will issue to ImClone Systems shares of its common stock
valued at $1.60 per share; and (iii) if neither of the events described in (i)
or (ii) occurs, the note will be payable on November 30, 2001 in cash, or at the
option of A.C.T. Group, common stock valued at $1.60 per share. If common stock
is used to repay the promissory note, ImClone Systems will have the right at
that time to purchase up to an additional $1,000,000 worth of A.C.T. Group
common stock at $1.60 per share.
The warrant to purchase common stock entitles ImClone Systems to buy $1,000,000
worth of A.C.T. Group common stock beginning with the earlier of November 30,
2001 or the closing of the sale, if any, of the A.C.T. Group series B stock. The
exercise prices are the same as the convertible promissory note repayment
provisions. Due to the uncertainty regarding the ultimate collection of the note
and the absence of a readily determinable market value for A.C.T. Group's common
and preferred stock, ImClone Systems recorded a $1,000,000 write-down of the
note during the quarterthree months ended June 30, 2001. The write-down is included2002, $3,525,000 in
loss
on securities and investments in the accompanying consolidated statement of
operations for the three and six months ended June 30, 2001.2002, and $6,008,000 from inception through June
30, 2002 for services provided under this agreement. Approximately $2,350,000
and $133,000 were reimbursable by Merck KGaA at June 30, 2002 and December 31,
2001, respectively, and included in amounts due from corporate partners in the
consolidated balance sheets. At June 30, 2002, the estimated remaining future
commitment by the companies under this agreement is $1,175,000 in 2002.
Page 5
In January 2002, the Company executed a letter of intent with Lonza to
enter into a long-term supply agreement. The Company's Chief
Executive Officerlong-term supply agreement would
apply to a large scale manufacturing facility that Lonza is constructing. The
Company expects such facility would be able to produce ERBITUX in 20,000 liter
batches. The Company paid Lonza $3,250,000 for the exclusive negotiating right
of a member of A.C.T.Group's Board of Directors.
(6)long-term supply agreement, which amount is included in Other assets at
June 30, 2002 in the consolidated balance sheet. Such negotiations commenced
shortly thereafter and are continuing. Under certain conditions such payment
shall be refunded to the Company. Provided the Company enters into a long-term
supply agreement, such payment shall be creditable against the 20,000 liter
batch price.
(4) INVESTMENT IN VALIGEN N.V.
In May 2000, the Company made an equity investment in ValiGen N.V.
("ValiGen"), a private biotechnology company specializing in therapeutic target
identification and validation using the tools of genomics and gene expression
analysis. The Company purchased 705,882 shares of ValiGen's series A preferred
stock and received a five-year warrant to purchase 388,235 shares of ValiGen's
common stock at an exercise price of $12.50 per share. The aggregate purchase
price was $7,500,000. The Company assigned a value of $594,000 to the warrant
based on the Black-Scholes Pricing Model. The ValiGen series A preferred stock
contains voting rights identical to holders of ValiGen's common stock. Each
share of ValiGen series A preferred stock is convertible into one share of
ValiGen common stock. The Company may elect to convert the ValiGen series A
preferred stock at any time; provided, that the ValiGen preferred stock will
automatically convert into ValiGen common stock upon the closing of an initial
public offering of ValiGen's common stock with gross proceeds of not less than
$20,000,000. The Company also received certain protective rights and customary
registration rights under this arrangement. The Company recorded this original
investment in ValiGen using the cost method of accounting. During the second
quarter of 2001, the Company purchased 160,000 shares of ValiGen's series B
preferred stock for $2,000,000. The terms of the series B preferred stock are
substantially the same as the series A preferred stock. The investment in
ValiGen representsrepresented approximately 7% of ValiGen's outstanding equity.equity at the time
of purchase. As of June 30, 2001, the Company hashad completely written-off its
investment in ValiGen. The
Company recorded write-downs of approximately $5,125,000 in December 2000,
$1,600,000 in March 2001 and $2,775,000 in June 2001 determinedValiGen based on the modified equity method of accounting.
The March 2001 and June 2001 write-downs
are includedIncluded in loss on securities and investments are write-downs of the Company's
investment in Valigen of $2,775,000 and $4,375,000 for the accompanying
consolidated statementsthree and six months
ended June 30, 2001, respectively. In the spring of operations. The investment is classified as2001, the Company also
entered into a long-term asset included in Investment in equity securities and other assets in
the December 31, 2000 consolidated balance sheet.no-cost Discovery Agreement with ValiGen to evaluate certain of
its technology. The Company's former President and Chief Executive Officer is a
member of ValiGen's Board of Directors.
6
8
(7) LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30, DECEMBER 31,
2001 2000
--------------- --------------
5-1/2% Convertible Subordinated Notes due March 1, 2005................ $ 240,000,000 $ 240,000,000
11-1/4% Industrial Development Revenue Bond due May 1, 2004............ 2,200,000 2,200,000
--------------- --------------
$ 242,200,000 $ 242,200,000
=============== ==============
In February 2000, the Company completed a private placement of $240,000,000 in
convertible subordinated notes due March 1, 2005. The Company received net
proceeds from this offering of approximately $231,500,000, after deducting
offering costs. Accrued interest on the notes was approximately $4,400,000 at
June 30, 2001 and December 31, 2000. The holders may convert all or a portion of
the notes into common stock at any time on or before March 1, 2005 at a
conversion price of $55.09 per share, subject to adjustment under certain
circumstances. The notes are subordinated to all existing and future senior
indebtedness. The Company may redeem any or all of the notes at any time prior
to March 6, 2003, at a redemption price equal to 100% of the principal amount
plus accrued and unpaid interest to the redemption date if the closing price of
the common stock has exceeded 150% of the conversion price for at least 20
trading days in any consecutive 30-trading day period, provided the Company
makes an additional payment of $152.54 per $1,000 aggregate principal amount of
notes, minus the amount of any interest actually paid thereon prior to the
redemption notice date. On or after March 6, 2003, the Company may redeem any or
all of the notes at specified redemption prices, plus accrued and unpaid
interest to the day preceding the redemption date. The Company was required to
file with the SEC and obtain the effectiveness of a shelf registration statement
covering resales of the notes and the underlying common stock. Such registration
statement was declared effective in July 2000. Upon the occurrence of a
"fundamental change" as defined in the agreement, holders of the notes may
require the Company to redeem the notes at a price equal to 100% of the
principal amount to be redeemed.
(8) TREASURY STOCK
The Company's employee stock option plans generally permit option holders to pay
for the exercise price of stock options and any related income tax withholding
with shares of the Company's common stock that have been owned by the option
holders for at least six months. During the six months ended June 30, 2001,
138,433 shares of common stock were delivered to the Company in payment of the
aggregate exercise price and related income tax withholding associated with the
exercise of stock options to purchase an aggregate of 240,000 shares of common
stock. The 138,433 shares delivered to the Company had a value of approximately
$3,608,000 determined by multiplying the closing price of the common stock on
the date of delivery by the number of shares presented for payment. These shares
have been included as treasury stock in the consolidated balance sheet at June
30, 2001.
(9)(5) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are computed based on the net
loss for the relevant period, adjusted in 2000 for cumulative series A convertible
preferred stock dividends and the assumed incremental yield attributable to the
beneficial conversion feature in the preferred stock, divided by the weighted average number of common
shares outstanding during the period. Potentially
dilutive securities, including convertible preferred stock, convertible debt,
options and warrants, have not been included in theFor purposes of thee diluted loss per
share calculation, the exercise or conversion of all potential common share computation because they are anti-dilutive.
(10)shares is
not included since their effect would be anti-dilutive for all periods
presented. As of June 30, 2002, and 2001, the Company had approximately
16,897,000 and 18,238,000, respectively, potential common shares outstanding
which represent new shares which could be issued under convertible debt, stock
options and stock warrants.
(6) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 20002002 2001
2000
---- ---- ---- ---------------- ------------ ------------ ------------
Net loss .......................................... $(43,089,000) $(29,503,000) $(13,808,000)$(73,116,000) $(30,698,000) $(28,420,000)
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during the period 277,000 17,000 (89,000)558,000 1,955,000 561,000
Less:
Reclassification adjustment for realized gain
included in net loss 926,000 18,000 908,000 16,000.......................... (435,000) (926,000) (1,236,000) (908,000)
------------ ------------ ------------ ------------
Total other comprehensive income (loss) ..... (158,000) (909,000) (107,000)(678,000) 1,047,000 545,000
------------ ------------ ------------ ------------
Total comprehensive loss $(28,594,000) $(13,915,000).......................... $(43,247,000) $(30,412,000) $(73,794,000) $(29,651,000) $(27,875,000)
============ ============ ============ ============
7(7) COLLABORATIVE AGREEMENTS
(a) MERCK KGAA
Page 6
9
(11) COLLABORATIVE AGREEMENTSEffective April 1990, the Company entered into a development and
commercialization agreement with Merck KGaA with respect to BEC2 and the
recombinant gp75 antigen. The agreement has been amended a number of times, most
recently in December 1997. The agreement grants Merck KGaA a license, with the
right to sublicense, to make, have made, use, sell, or have sold BEC2 and gp75
outside North America. The agreement also grants Merck KGaA a license, without
the right to sublicense, to use, sell, or have sold, but not to make BEC2 within
North America in conjunction with the Company. Pursuant to the terms of the
agreement the Company has retained the rights, (1) without the right to
sublicense, to make, have made, use, sell, or have sold BEC2 in North America in
conjunction with Merck KGaA and (2) with the right to sublicense, to make, have
made, use, sell, or have sold gp75 in North America. In return, the Company has
recognized research support payments totaling $4,700,000 and is entitled to no
further research support payments under the agreement. Merck KGaA is also
required to make payments of up to $22,500,000, of which $4,000,000 has been
recognized, through June 30, 2002, based on milestones achieved in the licensed
products' development. Merck KGaA is also responsible for worldwide costs of up
to DM17,000,000 associated with a multi-site, multinational phase III clinical
trial for BEC2 in limited disease small-cell lung carcinoma. This expense level
was reached during the fourth quarter of 2000 and all expenses incurred from
that point forward are being shared 60% by Merck KGaA and 40% by the Company.
Such cost sharing applies to all expenses beyond the DM17,000,000 threshold. The
Company has incurred approximately $33,000 in the three months ended June 30,
2002 and did not incur any expenses in the three months ended June 30, 2001. The
Company has incurred approximately $154,000 and $122,000 in reimbursable
research and development expenses associated with this agreement in the six
months ended June 30, 2002 and 2001, respectively. These amounts have been
recorded as research and development expenses and also as collaborative
agreement revenue in the consolidated statements of operations. Merck KGaA is
also required to pay royalties on the eventual sales of BEC2 outside of North
America, if any. Revenues from sales, if any, of BEC2 in North America will be
distributed in accordance with the terms of a co-promotion agreement to be
negotiated by the parties.
In December 1998, the Company entered into a development and license
agreement with Merck KGaA with respect to its lead interventional therapeutic product
candidate for cancer, IMC-C225.ERBITUX. In exchange for granting
Merck KGaA exclusive rights to market IMC-C225ERBITUX outside of North America (exclusive of Japan)the United States and
Canada and co-development rights in Japan, the Company has received through June 30,
2002, $30,000,000 in up-front fees and early cash-based milestone payments asbased
on the achievement of June 30, 2001.defined milestones. In March 2001, the Company satisfied a
condition relating to obtaining certain collateral license agreements associated
with the ERBITUX development and license agreement with Merck KGaA. The
satisfaction of this condition allowed for the recognition of $24,000,000 in
previously received milestone payments and initiated revenue recognition of the
$4,000,000 up-front payment received in connection with this agreement. An
additional $30,000,000 can be received, of which $5,000,000 has been received as
of June 30, 2002, assuming the achievement of further milestones for which Merck
KGaA will receive equity in the Company. The equity underlying these milestone
payments will be priced at varying premiums to the then marketthen-market price of the
common stock depending upon the timing of the achievement of the respective
milestones. If issuing shares of common stock to Merck KGaA would result in
Merck KGaA owning greater than 19.9% of our common stock, the milestone shares
will be a non-voting preferred stock, or other non-voting stock convertible into
the Company's common stock. These convertible securities will not have voting
rights. They will be convertible at a price determined in the same manner as the
purchase price for shares of the Company's common stock if shares of common
stock were to be issued. They will not be convertible into common stock if, as a
result of the conversion, Merck KGaA would own greater than 19.9% of the
Company's common stock. This 19.9% limitation is in place through December 2002.
Merck KGaA will pay the Company a royalty on future sales of IMC-C225ERBITUX outside of
North America,the United States and Canada, if any. Merck KGaA has also agreed not to own
greater than 19.9% of the Company's voting securities through December 3, 2002. This agreement may be terminated by Merck
KGaA in various instances, including (1) at its discretion on any date on which
a milestone is achieved (in which case no milestone payment will be made), or
(2) duringfor a one-year period after first commercial sale of IMC-C225ERBITUX in Merck KGaA's
territory, upon Merck KGaA's reasonable determination that the product is
economically unfeasible (in which case Merck KGaA is entitled to receive backa return of 50%
of the up-frontcash-based up front fees and cash-based milestone payments then paid to date, but
only out of revenues received by ImClone, if any, based upon a royalty rate
applied to the gross profit from IMC-C225ERBITUX sales or IMC-C225 licensea percentage of ERBITUX fees
and royalties received from a sublicensee on account of the sale of ERBITUX in
the United States and Canada). UnderIn August 2001, the Company and Merck KGaA
amended this agreement to provide, among other things, that Merck KGaA may
manufacture ERBITUX for supply in its territory and may utilize a third party to
do so upon the Company's reasonable acceptance. The amendment further released
Merck KGaA from its obligations under the agreement the
Company is entitledrelating to Merck KGaA'sproviding a
guaranty of the Company's obligations under a $30 million$30,000,000 credit facility relating to the constructionbuild-out of the
Company's product launch manufacturing facilityfacility. In addition, the amendment
provides that the companies have co-exclusive rights to ERBITUX in Japan,
including the right to sublicense, and that Merck KGaA has waived its right of
first offer in the case of a proposed sublicense by the Company of ERBITUX in
the Company's territory. In consideration for the commercial productionamendment, the Company agreed
to a reduction in royalties payable by Merck KGaA on sales of IMC-C225. To date,ERBITUX in Merck
KGaA's territory.
In conjunction with Merck KGaA, the Company has not utilizedexpanded the trial of
ERBITUX plus radiotherapy in squamous cell carcinoma of the head and neck into
Europe, South Africa, Israel, Australia and New Zealand. In order to support
these clinical trials, Merck KGaA has agreed to purchase from the Company
ERBITUX manufactured by the Company and also by Lonza
Page 7
under the development and manufacturing services agreement and the 2000L Lonza
Agreement for use in this guaranty.and other trials and further agreed to reimburse the
Company for one-half of the outside contract service costs incurred with respect
to this Phase III clinical trial of ERBITUX for the treatment of head and neck
cancer in combination with radiation. Amounts due from Merck KGaA related to
these arrangements totaled approximately $8,372,000 and $1,503,000 at June 30,
2002 and December 31, 2001, respectively, and are included in amounts due from
corporate partners in the consolidated balance sheets. The Company recorded
collaborative agreement revenue related to these arrangements in the
consolidated statements of operations totaling approximately $7,200,000 and
$461,000 in the three months ended June 30, 2002, and 2001, respectively and
$12,222,000 and $3,590,000 in the six months ended June 30, 2002, and 2001,
respectively. Of these amounts, $6,544,000 and $10,853,000 in the three and six
months ended June 30, 2002, respectively, and $393,000 and $1,423,000 in the
three and six months ended June 30, 2001, respectively, related to reimbursable
costs associated with supplying ERBITUX to Merck KGaA for use in clinical
trials. A portion of the ERBITUX sold to Merck KGaA was produced in prior
periods and the related manufacturing costs have been expensed in prior periods
when the related raw materials were purchased and the associated direct labor
and overhead was consumed or, in the case of contract manufacturing, when such
services were performed. These costs totaled $3,713,000 and $6,214,000 for the
three and six months ended June 30, 2002, respectively. Reimbursable research
and development expenses were incurred and totaled approximately $656,000 and
$1,369,000 in the three and six months ended June 30, 2002 and $68,000 and
$2,167,000 in the three and six months ended June 30, 2001. These amounts have
been recorded as research and development expenses and also as collaborative
agreement revenue in the consolidated statements of operations.
(b) BRISTOL-MYERS SQUIBB COMPANY
On September 19, 2001, the Company entered into an acquisition agreement
(the "Acquisition Agreement") with BMS and Bristol-Myers Squibb Biologics
Company, a Delaware corporation ("BMS Biologics"), which is a wholly-owned
subsidiary of BMS, providing for the tender offer by BMS Biologics to purchase
up to 14,392,003 shares of the Company's common stock for $70.00 per share, net
to the seller in cash. In connection with the Acquisition Agreement, the Company
entered into a stockholder agreement with BMS and BMS Biologics, dated as of
September 19, 2001 (the "Stockholder Agreement"), pursuant to which all parties
agreed to various arrangements regarding the respective rights and obligations
of each party with respect to, among other things, the ownership of shares of
the Company's common stock by BMS and BMS Biologics. Concurrent with the
execution of the Acquisition Agreement and the Stockholder Agreement, the
Company entered into a development, distribution and supply agreement (the
"Commercial Agreement") with BMS and its wholly-owned subsidiary E.R. Squibb &
Sons, L.L.C. ("E.R. Squibb"), relating to ERBITUX, pursuant to which, among
other things, the Company is co-developing and co-promoting ERBITUX in the
United States and Canada, and co-developing ERBITUX (together with Merck KGaA)
in Japan.
On October 29, 2001, pursuant to the Acquisition Agreement, BMS Biologics
accepted for payment pursuant to the tender offer 14,392,003 shares of the
Company's common stock on a pro rata basis from all tendering shareholders and
those conditionally exercising stock options.
On March 5, 2002, the Company amended the Commercial Agreement with E.R.
Squibb and BMS. The amendment changed certain economics of the Commercial
Agreement and has expanded the clinical and strategic roles of BMS in the
ERBITUX development program. One of the principal economic changes to the
Commercial Agreement is that the Company received $140,000,000 on March 7, 2002
and an additional payment of $60,000,000 is payable on March 5, 2003. Such
payments are in lieu of the $300,000,000 milestone payment the Company would
have received under the original terms of the agreement upon acceptance by the
FDA of the ERBITUX rolling Biologic License Application submitted for marketing
approval to treat irinotecan-refractory colorectal cancer. In addition, the
Company agreed to resume construction of its second commercial manufacturing
facility as soon as reasonably practicable after the execution of the amendment.
In exchange for the rights granted to BMS under the amended Commercial
Agreement, the Company can receive up-front and milestone payments totaling
$900,000,000 in the aggregate, of which $200,000,000 was received on September
19, 2001, $140,000,000 was received on March 7, 2002, $60,000,000 is payable on
March 5, 2003, $250,000,000 is payable upon receipt of marketing approval from
the FDA with respect to an initial indication for ERBITUX and $250,000,000 is
payable upon receipt of marketing approval from the FDA with respect to a second
indication for ERBITUX. All such payments are non-refundable and non-creditable.
Payments received under the amended Commercial Agreement with BMS and E.R.
Squibb are being deferred and recognized as revenue based on the percentage of
actual product research and development costs incurred to date by both BMS and
the Company to the estimated total of such costs to be incurred over the term of
the agreement. Except for the Company's expenses incurred pursuant to a
co-promotion option, E.R. Squibb is also responsible for 100% of the
distribution, sales and marketing costs in the United States and Canada, and as
between the Company and E.R. Squibb, each party will be responsible for 50% of
the distribution, sales, and marketing costs and other related costs and
expenses in Japan. The Commercial Agreement provides that E.R. Squibb shall pay
the Company a 39% distribution fee on net sales of ERBITUX by
Page 8
E.R. Squibb in the United States and Canada. The Commercial Agreement also
provides that the distribution fees for the sale of ERBITUX in Japan by E.R.
Squibb or the Company shall be equal to 50% of operating profit or loss with
respect to such sales for any calendar month. In the event of terminationan operating
profit, E.R. Squibb will pay the Company the amount of the
agreement,such distribution fee,
and in the event of an operating loss, the guaranty is utilized,Company will credit E.R. Squibb the
amount of such distribution fee. The Commercial Agreement provides that the
Company will be requiredresponsible for the manufacture and supply of all requirements
of ERBITUX in bulk form for clinical and commercial use in the United States,
Canada and Japan and that E.R. Squibb will purchase all of its requirements of
ERBITUX in bulk form for commercial use from the Company. The Company will
supply ERBITUX for clinical use at the Company's fully burdened manufacturing
cost, and will supply ERBITUX for commercial use at the Company's fully burdened
manufacturing cost plus a mark-up of 10%. In addition to use its best reasonable efforts to cause the release of Merck KGaA
as guarantor. Of the cash basedup-front and
milestone payments, received through June 30,
2001, $2,000,000 was receivedthe distribution fees for the United States, Canada and
recognized as revenueJapan and the 10% mark-up on the commercial supply of ERBITUX, E.R. Squibb is
also responsible for 100% of the cost of all clinical studies other than those
studies undertaken post-launch which are not pursuant to an Investigational New
Drug Application ("INDA") (e.g., phase IV studies), the cost of which will be
shared equally between E.R. Squibb and the Company. As between E.R. Squibb and
the Company, each will be responsible for 50% of the cost of all clinical
studies in Japan.
Unless earlier terminated pursuant to the termination rights discussed
below, the Commercial Agreement expires with regard to the Product in each
country in the quarter ended
June 30, 2001. A totalTerritory on the later of $28,000,000 was receivedSeptember 19, 2018 and the date on
which the sale of the Product ceases to be covered by a validly issued or
pending patent in such country. The Commercial Agreement may also be terminated
prior to March 31, 2001 and
originally recordedsuch expiration as fees potentially refundable to corporate partner and not
as revenue due to the fact that they were refundable to Merck KGaAfollows:
- by either party, in the event that the other party materially
breaches any of its material obligations under the Commercial
Agreement and has not cured such breach within 60 days after notice;
- by E.R. Squibb, if the joint executive committee (the "JEC") formed
by BMS and the Company determines that there exists a condition relating to obtaining certain collateral license agreements wassignificant
concern regarding a regulatory or patient safety issue that would
seriously impact the long-term viability of all products; or
- by either party, in the event that the JEC does not satisfied. In March 2001, this condition was satisfied and $24,000,000 in
milestone payments was recognized as revenueapprove
additional clinical studies that are required by the FDA in
connection with the submission of the initial regulatory filing with
the FDA within 90 days of receiving the formal recommendation of the
product development committee concerning such additional clinical
studies.
The Company incurred approximately $2,250,000 during the three months
ended March 31, 2001. The remaining $4,000,000 represents the up-front
payment2002 in advisor fees associated with the amendment to the
Commercial Agreement with BMS and affiliates, which have been expensed and
included as a separate line item in operating expenses in the consolidated
statement of operations.
Amounts due from BMS related to this agreement totaled approximately
$8,157,000 and has$6,714,000 at June 30, 2002 and December 31, 2001, respectively,
and are included in amounts due from corporate partners in the consolidated
balance sheets. The Company recorded collaborative agreement revenue related to
this agreement in the consolidated statements of operations totaling
approximately $2,426,000 and $8,521,000 in the three and six months ended June
30, 2002, respectively. Of these amounts, $1,960,000 and $3,810,000 in the three
and six months ended June 30, 2002, respectively, related to reimbursable costs
associated with supplying ERBITUX for use in clinical trials associated with
this agreement. The related manufacturing costs have been expensed in prior
periods when the related raw materials were purchased and the associated
manufacturing direct labor and overhead was consumed or, in the case of contract
manufacturing, when such services were performed. Reimbursable research and
development and marketing expenses were incurred and totaled approximately
$466,000 and $4,711,000 in the three and six months ended June 30, 2002. These
amounts have been recorded as deferred revenue.research and development and marketing, general
and administrative expenses and also as collaborative agreement revenue in the
consolidated statements of operations.
In June 2002, the Company and BMS agreed that certain reimbursable ERBITUX
clinical trial costs would in fact be borne by the Company. This amount is being recognized as revenue over an 18-year period, which
representsresulted in the
patent livesissuance of IMC-C225. The Company recognized approximately
$55,000 of the up-front payment as revenuecredit memos to BMS during the three months ended June 30, 2002
totaling approximately $2,949,000, which ultimately reduced collaborative
agreement revenue and license fee revenue in the three and six months ended June
30, 2002.
License fees and milestone revenues consist of the following:
Page 9
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
BMS ERBITUX license fee revenue ............... $ 1,499,000 $ -- $ 8,066,000 $ --
Merck KGaA ERBITUX milestone revenue .......... -- 2,000,000 -- 26,000,000
Merck KGaA BEC2 milestone revenue ............. -- 1,000,000 -- 1,000,000
Merck KGaA ERBITUX and BEC2 license fee revenue 96,000 96,000 192,000 192,000
Other ......................................... -- 40,000 -- 40,000
------------ ------------ ------------ ------------
Total license fees and milestone revenues . $ 1,595,000 $ 3,136,000 $ 8,258,000 $ 27,232,000
============ ============ ============ ============
Collaborative agreement revenue (see note 1) from corporate partners
consists of the following:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
BMS, reimbursable ERBITUX research and
development expenses ......................... $ 1,740,000 $ -- $ 7,692,000 $ --
BMS, reimbursable ERBITUX marketing expenses ... 686,000 -- 829,000 --
Merck KGaA, reimbursable ERBITUX
research and development expenses ............ 656,000 68,000 1,369,000 2,167,000
Merck KGaA, reimbursable ERBITUX product
costs for use in clinical trials ............. 6,544,000 393,000 10,853,000 1,423,000
Merck KGaA, reimbursable administrative expenses 273,000 183,000 273,000 183,000
Merck KGaA, reimbursable BEC2 research
and development expenses ..................... 33,000 -- 154,000 122,000
------------ ------------ ------------ ------------
Total collaborative agreement revenue ...... $ 9,932,000 $ 644,000 $ 21,170,000 $ 3,895,000
============ ============ ============ ============
Amounts due from corporate partners consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
Due from BMS, ERBITUX research and development and marketing expenses ...... $ 8,157,000 $ 6,714,000
Due from Merck KGaA, ERBITUX research and development and administrative
expenses ................................................................. 1,604,000 666,000
Due from Merck KGaA, reimbursement of ERBITUX manufacturing costs for use in
clinical trials .......................................................... 6,768,000 837,000
Due from Merck KGaA, BEC2 research and development expenses ................ 33,000 13,000
------------ ------------
Total amounts due from corporate partners .............................. $ 16,562,000 $ 8,230,000
============ ============
Deferred revenue consists of the following:
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
BMS, ERBITUX Commercial Agreement ............................ $329,382,000 $197,447,000
Merck KGaA, ERBITUX development and
license agreement .......................................... 3,667,000 3,778,000
Merck KGaA, BEC2 development and commercialization agreement . 2,190,000 2,271,000
------------ ------------
335,239,000 203,496,000
Less: current portion ........................................ (36,627,000) (20,683,000)
------------ ------------
$298,612,000 $182,813,000
============ ============
Page 10
(8) CONTINGENCIES
The Company and certain of its officers and directors are named as
defendants in a number of complaints filed beginning in January 2002 on behalf
of purported classes of its stockholders asserting claims under Section 10(b) of
the Securities and Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5
promulgated thereunder and Section 20(a) of the Exchange Act. By order dated
June 4, 2002 these actions were consolidated under the caption of the
first-filed of these actions, Irvine v. Imclone Systems Incorporated et at., No.
02 Civ. 0109(RO). The original complaints in these actions allege generally that
various public statements made by the Company or its senior officers during 2001
and $111,000early 2002 regarding the prospects for FDA approval of ERBITUX were false or
misleading when made, that various Company insiders were aware of material,
non-public information regarding the actual prospects for ERBITUX at the time
that those insiders engaged in transactions in the Company's common stock and
that members of the up-front paymentpurported shareholder class suffered damages when the market
price of the Company's common stock declined following disclosure of the
information that allegedly had not been previously disclosed. On December 28,
2001, the Company disclosed that it had received a "refusal to file" letter from
the FDA relating to its biologics license application for ERBITUX. Thereafter,
various news articles purported to describe the contents of the FDA's "refusal
to file" letter. During this period, the market price of the Company's common
stock declined. The complaints in the various actions seek to proceed on behalf
of a class of the Company's present and former stockholders, other than
defendants or persons affiliated with the defendants, seek monetary damages in
an unspecified amount and seek recovery of plaintiffs' costs and attorneys'
fees. A consolidated amended complaint is expected to be filed shortly.
Beginning on January 13, 2002 and continuing thereafter, eight separate
purported stockholders derivative actions have been filed against the members of
its board of directors and the Company, as revenuenominal defendant, making allegations
similar to the allegations in the federal securities class action complaints.
All of these actions assert claims, purportedly on the Company's behalf, for
breach of fiduciary duty by certain members of the board of directors based on
the allegation that certain directors engaged in transactions in the Company's
common stock while in possession of material, non-public information concerning
the regulatory and marketing prospects for ERBITUX. Another complaint,
purportedly asserting direct claims on behalf of a class of the Company's
shareholders but in fact asserting derivative claims that are similar to those
asserted in these eight cases, was filed in the U.S. District Court for the
Southern District of New York on February 13, 2002, styled Dunlap v. Waksal, et
al., No. 02 Civ. 1154 (RO). The Dunlap complaint asserts claims against the
board of directors for breach of fiduciary duty purportedly on behalf of all
persons who purchased shares of the Company's common stock prior to June 28,
2001 and then held those shares through December 6, 2001. It alleges that the
members of the purported class suffered damages as a result of holding their
shares based on allegedly false information about the financial prospects of the
Company that was disseminated during this period.
All of these actions are in their earliest stages and a reserve has not
been established in the accompanying consolidated financial statements because
the Company does not believe at this time that a loss is probable or estimable.
The Company intends to contest vigorously the claims asserted in these actions.
The Company has received subpoenas and requests for information in
connection with investigations by the Securities and Exchange Commission, the
Subcommittee on Oversight and Investigations of the U.S. House of
Representatives Committee on Energy and Commerce and the U.S. Department of
Justice relating to the circumstances surrounding the disclosure of the FDA
letter dated December 28, 2001 and trading in the Company's securities by
certain Company insiders in 2001. The Company is cooperating with all of these
inquiries and intends to continue to do so.
On June 19, 2002, the Company received a written "Wells Notice" from the
staff of the Securities and Exchange Commission, indicating that the staff is
considering recommending the Commission bring an action against the Company
relating to the Company's disclosure immediately following its receipt of a
Refusal-to-File letter from the FDA on December 28, 2001 for its biologics
license application for ERBITUX. The Company filed a Wells submission on July
12, 2002 in response to the staff's Wells Notice. The Company has also received
permission from the Commission to file a supplemental Wells submission, and the
Company anticipates that it will make this submission in September of this year.
The Company has incurred legal fees associated with these matters totaling
approximately $5,724,000 during the six months ended June 30, 2001.
(12) REVENUE RECOGNITION2002. In December 1999, the staff of the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company adopted
SAB 101 in the fourth quarter of its fiscal year ended December 31, 2000,
implementing a change in accounting policy effective January 1, 2000 with
respect to revenue recognition associated with non-refundable fees received upon
entering into research and licensing arrangements. Beginning January 1, 2000,
non-refundable fees received upon entering into license and other collaborative
agreements whereaddition,
the Company has continuing involvement areestimated and recorded as deferred
revenue and recognized ratably over the estimated service period. In previous
years, prior to SAB 101, non-refundable upfront fees from licensing and other
collaborative agreements were recognized as revenue when received, provided all
contractual obligations of the Company relating to such fees had been fulfilled.
Amounts originally reporteda receivable totaling $2,350,000 for the second quarter and first half of 2000 have
been restated herein to reflect the adoption of SAB 101.
The adoption of SAB 101 resulted in a non-cash cumulative effect of a change in
accounting policy related to nonrefundable upfront licensing fees received in
connection with the development and commercialization agreement with Merck KGaA
with respect to its principal cancer vaccine product candidate BEC2. The
cumulative effect represents revenues originally recorded upon receipt of such
payments that now are recorded as deferred revenue and will be recognized over
the life of the related patent(s). The Company recognized revenue of $41,000
associated with this change in accounting policy in the three months ended June
30, 2001 and $82,000 in the six months ended June 30, 2001. During the three
months ended June 30, 2000, the impact of the change in accounting policy
decreased net loss by $41,000. This amount represented a
portion of deferred
revenuethe above mentioned legal fees that was recognized during the period as a result of the change in
accounting policy. During the six months ended June 30, 2000, the impact of the
change in accounting policy increased net loss by $2,514,000, or $0.04 per
share, comprising the $2,596,000 cumulative effect of the change described
above, net of $82,000 of related deferred revenue that was recognized during the
period.
In March 2001, the Company satisfied a condition relating to obtaining certain
collateral license agreements associated with the IMC-
8
10
C225 development and license agreement with Merck KGaA. The satisfaction of this
condition allowed for the recognition of $24,000,000believes are
recoverable from its insurance carriers. This receivable is included in previously received
milestone payments and initiated revenue recognition, as prescribed under SAB
101, of the $4,000,000 up-front payment receivedOther
current assets in connection with this
agreement over the patent lives of IMC-C225. The Company recognized
approximately $55,000 of revenue associated with the up-front payment during the
three months ended June 30, 2001 and approximately $111,000 of revenue during
the six months ended June 30, 2001.
As of June 30, 2001, the Company had approximately $6,241,000 in deferred
revenue recorded on the consolidated balance sheet. This included $2,352,000
associated with the BEC2 development and commercialization agreement and
$3,889,000 related to the IMC-C225 development and license agreement with Merck
KGaA.
(13)sheet at June 30, 2002.
(9) CERTAIN RELATED PARTY TRANSACTIONS
TheIn September 2001 and February 2002, the Company accepted from itsentered into employment
agreements with six senior executive officers, including the then President and
Chief Executive Officer and the then Chief Operating Officer. The then President
and Chief Executive Officer resigned in May 2002 and the then Chief Operating
Officer was appointed to President and Chief Executive Officer. The September
agreements each have three-year terms and the February agreement has a full
recourse, unsecured promissory note datedone-year
term. The February 2002 agreement was amended in April 2002. The term of
employment for the present CEO will be automatically extended for one additional
day each day during the term of employment unless either the Company or the
Executive otherwise gives notice. The employment agreements provide for stated
base salaries, and minimum bonuses and benefits aggregating $3,765,000 annually.
Page 11
Certain transactions engaged in by the Company's former President and
Chief Executive Officer, Dr. Samuel Waksal, in securities of the Company were
deemed to have resulted in "short-swing profits" under Section 16 of the
Securities Exchange Act of 1934 (the "Exchange Act"). In accordance with Section
16(b) of the Exchange Act, Dr. Waksal has paid the Company an aggregate amount
of approximately $486,000, in March 2002, and an additional amount of
approximately $79,000 in July 2002, as disgorgement of December 21, 2000"short-swing profits" he
was deemed to have realized. The amount received in March 2002 was recorded as
an increase to additional paid-in capital.
(10) STOCKHOLDER RIGHTS PLAN
On February 15, 2002, the Company's Board of Directors approved a
Stockholder Rights Plan and declared a dividend of one right for each share of
its common stock outstanding at the close of business on February 19, 2002. In
connection with the Board of Directors' approval of the Stockholders Rights
Plan, Series B Participating Cumulative Preferred Stock was created. Under
certain conditions, each right entitles the holder to purchase from the Company
one-hundredth of a share of series B Participating Cumulative Preferred Stock at
an initial purchase price of $175 per share. The Stockholder Rights Plan is
designed to enhance the Board's ability to protect stockholders against, among
other things, unsolicited attempts to acquire control of the Company that do not
offer an adequate price to all of the Company's stockholders or are otherwise
not in the principal amountbest interests of $282,200. The note was payable upon the earlier of June 21,
2001 or demand by the Company and bore interest at 10.5% (the prime lending rate
plus 1%its stockholders.
Subject to certain exceptions, rights become exercisable (i) on the datetenth
day after public announcement that any person, entity, or group of persons or
entities has acquired ownership of 15% or more of the note) forCompany's outstanding
common stock, or (ii) 10 business days following the periodcommencement of a tender
offer or exchange offer by any person that would, if consummated, result in such
person acquiring ownership of 15% or more of the loan is outstanding.Company's outstanding common
stock, (collectively an "Acquiring Person").
In such event, each right holder will have the right to receive the number
of shares of common stock having a then current market value equal to two times
the aggregate exercise price of such rights. If the Company were to enter into
certain business combination or disposition transactions with an Acquiring
Person, each right holder will have the right to receive shares of common stock
of the acquiring company having a value equal to two times the aggregate
exercise price of the rights.
The Company extended the termmay redeem these rights in whole at a price of the note to December 21, 2001.$.001 per
right. The total amount
due the Company, including interest, was approximately $297,000 at June 30,
2001.
(14) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes new accounting and
reporting guidelines for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS No. 133
was subsequently amended by SFAS Nos. 137 and 138. SFAS No. 133 requires the
recognition of all derivative financial instruments as either assets or
liabilities in the consolidated balance sheet and measurement of those
derivatives at fair value. The Company has reviewed SFAS No. 133 as amended and
its operations relative thereto and concluded that it does not have or use
derivative instruments. Accordingly, the adoption of SFAS No. 133 did not have
an effectrights expire on the results of operations or the financial position of the Company.
(15) SUBSEQUENT EVENTS
In July 2001,February 15, 2012.
(11) SEPARATION AGREEMENT
On May 22, 2002, the Company accepted a promissory note from eachthe resignation of its President and
Chief Executive Officer, Executive Vice PresidentDr. Samuel D. Waksal. In connection with the
resignation, on May 24, 2002 the Company and Chief Operating
OfficerDr. Waksal executed a separation
agreement whereby Dr. Waksal received a lump sum payment totaling $7,000,000 and
Chairmanis entitled to receive for defined periods of time the continuation of certain
benefits including health care and life insurance coverage with an estimated
cost of $283,000. The related expense of $7,283,000 is included in Marketing,
general and administrative expenses in the consolidated statement of operations
for the three and six months ended June 30, 2002. In addition, 1,250,000 stock
option awards granted to Dr. Waksal on September 19, 2001 which were exercisable
at a per share exercise price of $50.01 and constituted all outstanding stock
option awards held by Dr. Waksal, were deemed amended such that the unvested
portion vested immediately as of the Board, anddate of termination. The amended stock
option awards can be exercised at any time until the end of the term of such
awards. No compensation expense was recorded because the fair market value of
the Company's common stock was below the $50.01 exercise price on the date the
option award was amended. On August 7, 2002, a federal grand jury indicted Dr.
Samuel D. Waksal. The Company has recently learned that Dr. Waksal, in
contravention of Company policy, directed the destruction of certain documents
that were, or could be perceived to be, material to the pending government
investigations. Accordingly, on August 200114, 2002, the Company acceptedfiled an action
against Dr. Waksal in New York State Supreme Court seeking repayment of amounts
paid to him by the Company pursuant to the separation agreement, cancellation or
recovery of other benefits provided under that agreement (including cancellation
of all stock options that vested as a promissory note from a member of its Board of Directors, in paymentresult of the aggregate exercise price associated withagreement), disgorgement of
amounts previously advanced by the exerciseCompany on behalf of Dr. Waksal for his legal
fees and expenses, and repayment of certain amounts paid under Dr. Waksal's
previous employment agreement. The action is in its earliest stages.
(12) 2002 STOCK OPTION PLAN
In June 2002, the shareholders approved and the Company adopted the 2002
Stock Option Plan. The plan provides for the granting of both incentive stock
options and warrants they heldnon-qualified stock options to purchase a total of approximately 4,473,0003,300,000 shares of the
Company's common stock. The Presidentstock to employees, directors, consultants and Chief Executive Officer's promissory
note was in the amount of $18,178,750; the Executive Vice President and Chief
Operating Officer's promissory note was in the amount of $15,747,550; the
Chairmanadvisors of the
Board's promissory note was inCompany. Options granted under the amount of $1,228,065;plan generally vest over one to five year
periods and the
Board member's promissory note was in the amount of $87,000. The unsecured
promissory notes are full-recourse and are payable on theunless earlier of one yearterminated, expire ten years from the date of grant.
Incentive stock options granted under the notes or on demand by2002 stock option plan may not exceed
825,000 shares of common stock, may not be granted at a price less than the Company and bear interestfair
market value of the stock at the
prime lending rate plus 1% (7.75% on the date of the note). Interest is payable
quarterlygrant and the interest rate adjusts quarterly during the term of each notemay not be granted to
the then current prime lending rate plus 1%.non-employees.
Page 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.OPERATIONS
The following discussion and analysis by our management is provided to
identify certain significant factors that affected our financial position and
operating results during the periods included in the accompanying financial
statements.
CRITICAL ACCOUNTING POLICIES
During January 2002, the Securities and Exchange Commission ("SEC")
published a Commission Statement in the form of Financial Reporting Release No.
61, which requested that all registrants discuss their most "critical accounting
policies" in management's discussion and analysis of financial condition and
results of operations. The SEC has defined critical accounting policies as those
that are both important to the portrayal of a company's financial condition and
results, and that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. While our significant accounting policies
are summarized in Note 2 to our consolidated financial statements included in
Form 10-K for the fiscal year ended December 31, 2001, we believe the following
accounting policies to be critical:
Revenue - We adopted Staff Accounting Bulletin No. 101 ("SAB 101") in the
fourth quarter of 2000 with an effective date of January 1, 2000, implementing a
change in accounting policy with respect to revenue recognition. Beginning
January 1, 2000, non-refundable fees received upon entering into collaborative
agreements in which the Company has continuing involvement are recorded as
deferred revenue and recognized over the estimated service period. See Note 7.
Payments received under the development, promotion, distribution and
supply agreement (the "Commercial Agreement") dated September 19, 2001 and as
amended on March 5, 2002 with Bristol-Myers Squibb Company ("BMS") and E.R.
Squibb & Sons, L.L.C., a Delaware limited liability company and a wholly-owned
subsidiary of BMS ("E.R. Squibb"), relating to ERBITUX, are being deferred and
recognized as revenue based upon the actual product research and development
costs incurred to date by BMS, E.R. Squibb and ImClone Systems as a percentage
of the estimated total of such costs to be incurred over the term of the
agreement. Of the $340,000,000 in upfront payments we received from BMS through
June 30, 2002, approximately $8,066,000 was recognized as revenue during the six
months ended June 30, 2002 and $10,618,000 from the commencement of the
agreement through June 30, 2002.
The methodology used to recognize revenue deferred involves a number of
estimates and judgments, such as the estimate of total product research and
development costs to be incurred under the Commercial Agreement. Changes in
these estimates and judgments can have a significant effect on the size and
timing of revenue recognition.
Non-refundable milestone payments, which represent the achievement of a
significant step in the research and development process, pursuant to
collaborative agreements other than the Commercial Agreement with BMS, are
recognized as revenue upon the achievement of the specified milestone.
Production Costs - The costs associated with the manufacture of ERBITUX
are included in research and development expenses when incurred and will
continue to be so classified until such time as ERBITUX may be approved for sale
or until we obtain obligations from our corporate partners for supply of such
product. In the event of such approval or obligations from our corporate
partners, the subsequent costs associated with manufacturing ERBITUX for
commercial sale will be included in inventory and expensed as cost of goods sold
when sold. If ERBITUX is approved by the United States Food and Drug
Administration ("FDA"), any subsequent sale of this inventory, previously
expensed, will result in revenue from product sales with no corresponding cost
of goods sold.
Litigation - We are currently involved in certain legal proceedings as
discussed in "Contingencies" Note 8 to the financial statements. In accordance
with Statement of Financial Accounting Standards No. 5, no legal reserve has
been established in our financial statements for these matters because we do not
believe at this time that a loss is probable or estimable. However, if in a
future period, we deem it probable that an unfavorable ruling in any such legal
proceeding will occur and such amount is estimable, there exists the possibility
of a material adverse impact on the operating results of that period.
Long-Lived Assets - We review long-lived assets for impairment when events
or changes in business conditions indicate that their full carrying value may
not be recovered. Assets are considered to be impaired and written down to fair
value if expected associated undiscounted cash flows are less than carrying
amounts. Fair value is generally determined as the present value of the expected
associated cash flows. We recently built a product launch manufacturing facility
and are building a second commercial manufacturing facility and a logistics and
warehousing facility, which are summarized in Note 2 to the financial
statements. The product launch manufacturing facility is dedicated to the
clinical and commercial production of ERBITUX and the second commercial
manufacturing facility will be a multi-use production facility. ERBITUX is
currently being produced for clinical trials and potential commercialization.
The logistics and warehousing facility will be the primary storage location for
ERBITUX. We believe that ERBITUX will ultimately be approved for
commercialization. As such, we believe that the full carrying value of both the
product launch manufacturing facility and the second commercial manufacturing
facility and the logistics and warehouse facility will be recovered. Changes in
business conditions in the future could change our judgments about the carrying
value of these facilities, which could result in the recognition of material
impairment losses.
Page 13
Manufacturing Contracts - As summarized under "Manufacturing Contract
Services," Note 3 to the financial statements, we have entered into certain
development and manufacturing services agreements with Lonza Biologics plc
("Lonza") for the clinical and commercial production of ERBITUX. We have
commitments from Lonza to manufacture ERBITUX at the 5,000 liter scale through
December 2003. On June 30, 2002, the estimated remaining future commitments
under the amended commercial manufacturing services agreement with Lonza were
$38,160,000 in 2002 and $24,050,000 in 2003. If ERBITUX were not to receive
regulatory approval when anticipated, it is possible that a liability would need
to be recognized for any remaining commitments to Lonza.
Valuation of Stock Options - We apply APB Opinion No. 25 and related
interpretations in accounting for our stock options and warrants. Accordingly,
compensation expense is recorded on the date of grant of an option to an
employee or member of the Board of Directors only if the fair market value of
the underlying stock at the time of grant exceeds the exercise price. In
addition, we have granted options to certain Scientific Advisory Board members
and outside consultants, which are required to be measured at fair value and
recognized as compensation expense in our consolidated statement of operations.
Estimating the fair value of stock options and warrants involves a number of
judgments and variables that are subject to significant change. A change in the
fair value estimate could have a significant effect on the amount of
compensation expense recognized.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 20012002 AND 2000
REVENUES.2001.
REVENUES
Revenues for the six months ended June 30, 2002 and 2001 were $30,116,000
and 2000 were $27,995,000$31,890,000, respectively, a decrease of $1,774,000, or 6% in 2002. Revenues
for the six months ended June 30, 2002 primarily included $8,066,000 in license
fee revenue and $448,000, respectively,$8,521,000 in collaborative agreement revenue from our amended
ERBITUX Commercial Agreement with BMS and its wholly-owned subsidiary, E.R.
Squibb. The Collaborative Agreement revenue represents certain research and
development and marketing expenses that have been incurred by us and are
reimbursable by BMS as provided for in the amended Commercial Agreement. License
fee revenue from payments under this agreement (of which $140,000,000 was
received in 2002 and $200,000,000 was received in 2001) are being recognized as
revenue over the product research and development life of ERBITUX. An additional
$60,000,000 is payable on March 5, 2003, $250,000,000 is payable upon receipt of
marketing approval from the FDA with respect to an increaseinitial indication for
ERBITUX and $250,000,000 is payable upon receipt of $27,547,000.marketing approval from the
FDA with respect to a second indication for ERBITUX. All such payments are
non-refundable and non-creditable. We also recognized $12,495,000 in
collaborative agreement revenue from our ERBITUX development and license
agreement with Merck KGaA. In addition, we recognized $111,000 of the $4,000,000
up-front payment received upon entering into the ERBITUX development and license
agreement with Merck KGaA. This revenue is being recognized ratably over the
anticipated life of the agreement. Revenues for the six months ended June 30,
2002 also included $688,000 in royalty revenue from our strategic corporate
alliance with Abbott Laboratories ("Abbott") in diagnostics and $81,000 in
license fee revenue and $154,000 in collaborative agreement revenue from our
strategic corporate alliance with Merck KGaA for our principal cancer vaccine
product candidate, BEC2. Revenues for the six months ended June 30, 2001
primarily included $26,000,000 in milestone revenue and $3,773,000 in
collaborative agreement revenue from our ERBITUX development and
9
11 license
agreement with Merck KGaA for IMC-C225. We received a $2,000,000 cash
milestone payment in June 2001. The remaining $24,000,000 of theseKGaA. These milestone payments were received in prior
periods and were originally recorded as fees potentially refundable to corporate
partner because they were refundable in the event a condition relating to
obtaining certain collateral license agreements was not satisfied. This
condition was satisfied in March 2001. In addition, we recognized $111,000 of
the $4,000,000 up-front payment received upon entering into this agreement. This
revenue is being recognized ratably over the patent
livesanticipated life of IMC-C225. Under this agreement, an additional $30,000,000 in
equity-based milestones may be received upon the achievement of additional
milestones, $5,000,000 of which both parties agreed have recently been attained.
As of August 13, 2001, we have not received the $5,000,000 milestone payment or
issued the common stock associated with the milestone.agreement.
Revenues for the six months ended June 30, 2001 also included $763,000 in
royalty revenue from our strategic corporate alliance with Abbott Laboratories ("Abbott") in diagnostics
and $1,000,000 in milestone revenues and $81,000 in license fee revenue from our
strategic corporate alliance with Merck KGaA for our principal cancer vaccine
product candidate, BEC2. Revenues for the six months ended June 30, 2000
primarily included (1) $326,000 in royalty revenue from our strategic alliance
with Abbott in diagnosticsrevenues and
(2) $81,000 in license fee$122,000 of collaborative agreement revenue from our strategic corporate
alliance with Merck KGaA for BEC2.
The license fee revenue
related to the BEC2 agreement has been recognized in both periods as a direct
result of a change in accounting policy with respect to revenue recognition.Page 14
OPERATING EXPENSESEXPENSES:
Total operating expenses for the six months ended June 30, 2002 and 2001
were $102,797,000 and 2000 were
$55,542,000 and $30,752,000,$59,437,000, respectively, an increase of $24,790,000,$43,360,000, or
81%.73% in 2002. Operating expenses for the six months ended June 30, 2002 included
a $2,250,000 advisor fee associated with completing the amended Commercial
Agreement.
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT.DEVELOPMENT
Research and development expenses for the six months ended June 30, 2002
and 2001 were $75,945,000 and 2000 were $45,591,000 and $23,844,000,$49,486,000, respectively, an increase of
$21,747,000$26,459,000 or 91%. Such amounts53% in 2002. Research and development expenses for the six months
ended June 30, 2002 and 2001 and 2000 represented
82% and 78%, respectively,as a percentage of total operating expenses.expenses,
excluding the advisor fee associated with the amended Commercial Agreement in
the six months ended June 30, 2002, were 76% and 83%, respectively. Research and
development expenses include costs associated with our in-house and
collaborative research programs, product and process development expenses, costs
to manufacture our product candidates, particularly IMC-C225,ERBITUX, prior to any
approval that we may obtain of a product candidate for commercial sale or
obligations of our corporate partners to acquire product from us, quality
assurance and quality control costs, and costs to conduct our clinical trials
and associated regulatory activities. Research and development expenses for the six months ended June 30,
2001 and 2000 have been reduced by $3,712,000 and $1,514,000, respectively, for
clinical trial and contract manufacturinginclude
costs that are reimbursable by Merck
KGaA.our corporate partners. The increase in research
and development expenses for the six months ended June 30, 20012002 was primarily
attributable to (1) the costs associated with newly
initiated and ongoing clinical trials of IMC-C225,full scale production at our
product launch manufacturing facility, (2) costs related to the manufacturing
services agreements with Lonza, (3) expenditures in the functional areas of
product development manufacturing, clinical and regulatory affairspilot plant manufacturing associated with IMC-C225ERBITUX and
our antibody-based angiogenesis inhibitor product candidate for the treatment of
cancer, IMC-2C6 and (4) increased expenditures associated with discovery
research. We expect research and development costs to increase in future periods
as we continue to manufacture IMC-C225ERBITUX prior to any approval of the product that
we may obtain for commercial sale. Shoulduse or until we receive committed purchase
obligations of our corporate partners. In the event of such approval be
obtained,or
committed purchase obligations from our corporate partners, the subsequent costs
associated with manufacturing IMC-C225ERBITUX for supply to E.R. Squibb for commercial
saleuse will be included in inventory and expensed as cost of goods sold when sold.
We expect research and development costs associated with discovery research and
product development and clinical trials also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND ADMINISTRATIVE.ADMINISTRATIVE
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. SuchMarketing, general and administrative expenses include amounts
reimbursable from our corporate partners. Marketing, general and administrative
expenses for the six months ended June 30, 2002 and 2001 were $24,602,000 and
2000 were
$9,951,000, and $6,908,000, respectively, an increase of $3,043,000,$14,651,000, or 44%.147% in 2002. The
increase in marketing, general and administrative expenses primarily reflected
(1) the separation compensation and other post-employment benefits associated
with the resignation of the Company's former President and Chief Executive
Officer (2) legal expenses associated with the pending class action lawsuits,
shareholder derivative lawsuits and investigations by the SEC, the Subcommittee
on Oversight and Investigation of the U.S. House of Representatives Committee
on Energy and Commerce and the U.S. Department of Justice, (3) costs associated
with our marketing efforts, (2)(4) additional administrative staffing required to
support our commercialization efforts of IMC-C225for ERBITUX and (3)(5) expenses associated
with general corporate activities. WeOther than the legal expenses component
discussed in (2) above and related costs, whose level in the future is
uncertain because it depends upon the manner in which these investigations and
proceedings progress, we expect marketing, general and administrative expenses
to increase in future periods to support our continued commercialization
efforts of IMC-C225.for ERBITUX.
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE.EXPENSE
Interest income was $5,168,000 for the six months ended June 30, 2002
compared with $7,827,000 for the six months ended June 30, 2001, compared
with $9,352,000 for the six months ended June 30, 2000, a decrease of
$1,525,000,$2,659,000, or 16%.34% in 2002. The decrease was primarily attributable to (1) a
decrease in interest rates associated with our portfolio of debt securities as well as (2) a
lower average portfolio balance during the six months ended June 30, 2001 when
compared with the six months ended June 30, 2000.securities.
Interest expense was $6,510,000$6,839,000 and $4,888,000$6,510,000 for the six months ended June 30,
20012002 and 10
12
2000,2001, respectively, an increase of $1,622,000$329,000 or 33%. The increase was primarily
attributable to the convertible subordinated notes issued5% in February 2001.2002. Interest
expense for the six months ended June 30, 2002 and 2001 and 2000 werewas offset by capitalizingthe
capitalization of interest costs of $1,120,000$780,000 and $307,000,$1,120,000, respectively,
during the construction period of the Company's newour product launch manufacturing facility.facility and
a second commercial manufacturing facility for which design, engineering, and
pre-construction costs have been incurred. Interest expense for both periods
included (1) interest on the 5 -1/2% convertible subordinated notes due March 1,
2005 (the "Convertible Subordinated Notes") issued in February 2000, (2)
interest on an outstanding Industrial Development Revenue Bond issued in 1990
(the "1990 IDA Bond") with a principal amount of $2,200,000 and (3) interest
recorded on various capital lease obligations under a 1996 financing agreement
and a 1998 financing
Page 15
agreement with Finova Technology Finance, Inc. ("Finova"). We recorded lossesgains on
securities and investmentinvestments of $1,236,000 and losses of $4,467,000 for the six
months ended June 30, 2002 and 2001, in the amount of $4,468,000 as compared with
gains of $16,000 for the six months ended June 30, 2000.respectively. The net losses on securities and
investments for the six months ended June 30, 2001 included $4,375,000 in
write-downs of our investment in ValiGen N.V. and a $1,000,000 write-off of our
convertible promissory note from A.C.T. Group, Inc..Inc.
NET LOSSES.LOSSES
We had a net loss to common stockholdersof $73,116,000 or $1.00 per share for the six months
ended June 30, 2002, compared with a net loss of $30,698,000 or $0.46 per share
for the six months ended June 30, 2001 compared with $29,825,000 or $0.49 per share
for the six months ended June 30, 2000. Included in the loss for the six months
ended June 30, 2000 was a non-cash charge of $2,596,000 related to the
cumulative effect of a change in accounting policy (see note 12 to the
accompanying consolidated financial statements). Excluding the effect of this
change in accounting policy, the net loss to common stockholders for the six
months ended June 30, 2000 would have been $27,229,000 or $0.44 per share.2001. The increase in the net losses and per
share net loss to common stockholders was due to the factors noted above.
THREE MONTHS ENDED JUNE 30, 20012002 AND 2000
REVENUES.2001.
REVENUES
Revenues for the three months ended June 30, 2002 and 2001 were
$11,565,000 and 2000 were $3,251,000 and
$201,000,$3,895,000, respectively, an increase of $3,050,000.$7,670,000, or 197% in
2002. Revenues for the three months ended June 30, 2002 primarily included
$1,499,000 in license fee revenue and $2,426,000 in collaborative agreement
revenue from our amended Commercial Agreement with BMS and its wholly-owned
subsidiary, E.R. Squibb. The Collaborative Agreement revenue represents certain
research and development and marketing expenses that have been incurred by us
and are reimbursable by BMS as provided for in the amended Commercial Agreement.
License fee revenue from payments under this agreement (of which $140,000,000
was received in 2002 and $200,000,000 was received in 2001) are being recognized
over the product research and development life of ERBITUX. We also recognized
$7,473,000 in collaborative agreement revenue from our ERBITUX development and
license agreement with Merck KGaA. In addition, we recognized $55,000 of the
$4,000,000 up-front payment received upon entering into the ERBITUX development
and license agreement with Merck KGaA. This revenue is being recognized ratably
over the anticipated life of the agreement. Revenues for the three months ended
June 30, 2002 also included $38,000 in royalty revenue from our strategic
corporate alliance with Abbott in diagnostics and $41,000 in license fee revenue
and $33,000 in collaborative agreement revenue from our strategic corporate
alliance with Merck KGaA for BEC2. Revenues for the three months ended June 30,
2001 primarily included a $2,000,000 cashin milestone paymentrevenue and $644,000 in
collaborative agreement revenue from our ERBITUX development and license
agreement with Merck KGaA for IMC-C225.KGaA. These milestone payments were received in prior
periods and were originally recorded as fees potentially refundable to corporate
partner because they were refundable in the event a condition relating to
obtaining certain collateral license agreements was not satisfied. This
condition was satisfied in March 2001. In addition, we recognized $55,000 of the
$4,000,000 up-front payment received upon entering into this agreement. This
revenue is being recognized ratably over the patent
livesanticipated life of IMC-C225. Under this agreement, an additional $30,000,000 in
equity-based milestones may be received upon the achievement of additional
milestones, $5,000,000 of which both parties agreed have recently been attained.
As of August 13, 2001, we have not received the $5,000,000 milestone payment or
issued the common stock associated with the milestone.agreement.
Revenues for the three months ended June 30, 2001 also included $115,000 in
royalty revenue from our strategic corporate alliance with Abbott in diagnostics
and $1,000,000 in milestone revenues and $41,000 in license fee revenuerevenues from
our strategic corporate alliance with Merck KGaA for BEC2.
Revenues for the three months ended
June 30, 2000 included (1) $160,000 in royalty revenue from our strategic
alliance with Abbott in diagnostics and (2) $41,000 in license fee revenue from
our strategic corporate alliance with Merck KGaA for BEC2. The license fee
revenue related to the BEC2 agreement has been recognized in both periods as a
direct result of a change in accounting policy with respect to revenue
recognition.
OPERATING EXPENSESEXPENSES:
Total operating expenses for the three months ended June 30, 2002 and 2001
were $54,646,000 and 2000 were
$29,969,000 and $16,525,000,$30,613,000, respectively, an increase of $13,444,000,$24,033,000, or
81%.79% in 2002.
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT.DEVELOPMENT
Research and development expenses for the three months ended June 30, 2002
and 2001 were $38,167,000 and 2000 were $23,746,000 and $12,743,000,$24,390,000, respectively, an increase of
$11,003,000$13,777,000 or 86%.56% in 2002. Such amounts for the three months ended June 30,
2002 and 2001 represented 70% and 2000
represented 79% and 77%80%, respectively, of total operating
expenses. Research and development expenses include costs associated with our
in-house and collaborative research programs, product and process development
expenses, costs to manufacture our product candidates, particularly IMC-C225,ERBITUX,
prior to any approval that we may obtain of a product candidate for commercial
sale or obligations of our corporate partners to acquire product from us,
quality assurance and quality control costs, and costs to conduct our clinical
trials and associated regulatory activities. Research and development expenses
for the
three months ended June 30, 2001 and 2000 have been reduced by $460,000 and
$689,000, respectively, for clinical trial and contract manufacturinginclude costs that are reimbursable by Merck KGaA.our corporate partners. The increase in
research and development expenses for the three months ended June 30, 20012002 was
primarily attributable to (1) the costs associated with newly initiated and ongoing clinical trials of
IMC-C225,full scale production at
our product launch manufacturing facility, (2) costs related to the
manufacturing services agreements with Lonza, (3) expenditures in the functional
areas of product development manufacturing,
clinical and regulatory affairspilot plant manufacturing associated with
IMC-C225ERBITUX and IMC-2C6 and (4) increased expenditures associated with
11
13 discovery
research. We expect research and development costs to increase in future periods
as we continue to manufacture
IMC-C225Page 16
ERBITUX prior to any approval of the product that we may obtain for commercial
sale. Shoulduse or until we receive committed purchase obligations of our corporate
partners. In the event of such approval be
obtained,or committed purchase obligations from
our corporate partners, the subsequent costs associated with manufacturing
IMC-C225ERBITUX for supply to E.R. Squibb for commercial saleuse will be included in
inventory and expensed as cost of goods sold when sold. We expect research and
development costs associated with discovery research and product development and clinical trials
also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND ADMINISTRATIVE.ADMINISTRATIVE
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. SuchMarketing, general and administrative expenses include amounts
reimbursable from our corporate partner. Marketing, general and administrative
expenses for the three months ended June 30, 2002 and 2001 were $16,479,000 and
2000 were
$6,223,000, and $3,782,000, respectively, an increase of $2,441,000,$10,256,000, or 65%.165% in 2002. The
increase in marketing, general and administrative expenses primarily reflected
(1) the separation compensation and other post-employment benefits associated
with the resignation of the Company's former President and Chief Executive
Officer (2) legal expenses associated with the pending class action lawsuits,
shareholder derivative lawsuits and investigations by the SEC, the Subcommittee
on Oversight and Investigation of the U.S. House of Representatives Committee
on Energy and Commerce and the U.S. Department of Justice, (3) costs associated
with our marketing efforts, (2)(4) additional administrative staffing required to
support our commercialization efforts of IMC-C225for ERBITUX and (3)(5) expenses associated
with general corporate activities. WeOther than the legal expenses component
discussed in (2) above and related costs, whose level in the future is
uncertain because it depends upon the in which these investigations and
proceedings progress, we expect marketing, general and administrative expenses
to increase in future periods to support our continued commercialization
efforts of IMC-C225.for ERBITUX.
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE.EXPENSE
Interest income was $2,904,000 for the three months ended June 30, 2002
compared with $3,262,000 for the three months ended June 30, 2001, compared
with $6,165,000 for the three months ended June 31, 2000, a decrease of
$2,903,000,$358,000, or 47%.11% in 2002. The decrease was primarily attributable to (1) a decrease
in interest rates onassociated with our portfolio of debt securities as well as (2) a lower
average portfolio balance during the three months ended June 30, 2001 when
compared with the three months ended June 30, 2000.securities. Interest
expense was $3,197,000$3,347,000 and $3,667,000$3,197,000 for the three months ended June 30, 2002
and 2001, and 2000,
respectively, a decreasean increase of $470,000$150,000 or 13%. The decrease5% in interest expense
was attributable to a greater amount of capitalized interest in the three months
ended June 30 2001 as compared with the three months ended June 30, 2000.2002. Interest expense
for the three months ended June 31,30, 2002 and 2001 and 2000 werewas offset by capitalizingthe
capitalization of interest costs of $626,000$481,000 and $153,000,$626,000, respectively, during
the construction period of the Company's newour product launch manufacturing facility.facility and a
second commercial manufacturing facility for which design, engineering, and
pre-construction costs have been incurred. Interest expense for both periods
included (1) interest on the convertible subordinated notes,Convertible Subordinated Notes issued in February
2000, (2) interest on thean outstanding 1990 IDA Bond with a principal amount of
$2,200,000 and (3) interest recorded on various capital lease obligations under
a 1996 financing agreement and a 1998 financing agreement with Finova. We
recorded lossesgains on securities and investmentinvestments of $435,000 and losses of
$2,850,000 for the three months ended June 30, 2002 and 2001, in the amount of $2,850,000 as compared with
gains of $18,000 for the three months ended June 30, 2000.respectively. The net
losses on securities and investments for the three months ended June 30, 2001
included a $2,775,000 write-down of our investment in ValiGen N.V.N.V and a
$1,000,000 write-off of our convertible promissory note from A.C.T. Group, Inc..Inc.
NET LOSSES.LOSSES
We had a net loss to common stockholdersof $43,089,000 or $0.59 per share for the three months
ended June 30, 2002, compared with a net loss of $29,503,000 or $0.44 per share
for the three months ended June 30, 2001 compared with $14,511,000 or $0.23 per
share for the three months ended June 30, 2000.2001. The increase in the net losslosses and per
share net loss to common stockholders was due to the factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001,2002, our principal sources of liquidity consisted of cash and
cash equivalents and securities available for sale of approximately
$191,014,000.$352,000,000. From our inception on April 26, 1984 through June 30, 20012002, we
have financed our operations primarily through the following means:
- Public and private sales of equity securities and convertible notes
in financing transactions have raised approximately $489,400,000$492,652,000 in
net proceeds
- We have earned approximately $61,800,000$109,531,000 from license fees,
contract research and development fees, reimbursements from our
corporate partners and royalties from collaborative partners.
Additionally, we have
Page 17
approximately $6,241,000$335,239,000 in deferred revenue related to up-front
payments received from our amended Commercial Agreement for ERBITUX
with BMS, our ERBITUX development and license agreement with Merck
KGaA and our BEC2 development and commercialization
agreement and our IMC-C225 development and license agreement with
Merck KGaA. These amounts are being recognized as revenue over the
respective patentexpected lives of the product candidates
(see note 12 of the consolidated financial statements)respective agreements
- We have earned approximately $39,951,000$52,282,000 in interest income
12
14
- The sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an
aggregate of $6,300,000, the proceeds of which have been used for
the acquisition, construction and installation of our research and
development facility in New York City, and of which $2,200,000 is
outstanding
We may, from time to time, consider a number of strategic alternatives
designed to increase shareholder value, which could include joint ventures,
acquisitions and other forms of alliances, as well as the sale of all or part of
the Company.
The 1990 IDA BondUntil September 19, 2006, or earlier upon the occurrence of certain
specified events, we may not take any action that constitutes a prohibited
action under our stockholder agreement with BMS and Bristol-Myers Squibb
Biologics Company, a Delaware corporation ("BMS Biologics"), which is a
wholly-owned subsidiary of BMS, without the consent of the BMS directors. Such
prohibited actions include (i) issuing additional shares or securities
convertible into shares in excess of 21,473,002 shares of our common stock in
the outstandingaggregate, subject to certain exceptions; (ii) incurring additional
indebtedness if the total of the principal amount of $2,200,000 becomes duesuch indebtedness incurred
since September 19, 2001 and then-outstanding, and the net proceeds from the
issuance of any redeemable preferred stock then-outstanding, would exceed the
amount of indebtedness outstanding as of September 19, 2001 by more than $500
million; (iii) acquiring any business if the aggregate consideration for such
acquisition, when taken together with the aggregate consideration for all other
acquisitions consummated during the previous twelve months, is in 2004.excess of 25%
of the aggregate value of the Company at the time we enter into the binding
agreement relating to such acquisition; (iv) disposing of all or any substantial
portion of our non-cash assets; (v) issuing capital stock with more than one
vote per share.
In September 2001, we entered into the ERBITUX Commercial Agreement with
BMS and E.R. Squibb, pursuant to which, among other things, together with E.R
Squibb we are (a) co-developing and co-promoting ERBITUX in the United States
and Canada, and (b) co-developing ERBITUX (together with Merck KGaA) in Japan.
The Commercial Agreement was amended on March 5, 2002 to change certain
economics of the agreement and has expanded the clinical and strategic roles of
BMS in the ERBITUX development program. Pursuant to the amended Commercial
Agreement, we can receive up-front and milestone payments totaling $900,000,000
in the aggregate, of which $200,000,000 was received upon the signing of the
agreement. The remaining $700,000,000 in payments comprises $140,000,000 paid on
March 7, 2002, $60,000,000 payable on March 5, 2003, $250,000,000 payable upon
receipt of marketing approval from the FDA with respect to an initial indication
for ERBITUX and $250,000,000 payable upon receipt of marketing approval from the
FDA with respect to a second indication for ERBITUX. All such payments are
non-refundable and non-creditable. Except for our expenses incurred pursuant to
the co-promotion option, E.R. Squibb is responsible for 100% of the
distribution, sales and marketing costs in the United States and Canada, and
E.R. Squibb and the Company, each will be responsible for 50% of the
distribution, sales, marketing costs and other related costs and expenses in
Japan. The Commercial Agreement provides that E.R. Squibb shall pay us
distribution fees based on a percentage of annual sales of ERBITUX by E.R.
Squibb in the United States and Canada. The distribution fee is 39% of net sales
in the United States and Canada. The Commercial Agreement also provides that the
distribution fees for the sale of ERBITUX in Japan by E.R. Squibb or us shall be
equal to 50% of operating profit or loss with respect to such sales for any
calendar month. In the event of an operating profit, E.R. Squibb will pay us the
amount of such distribution fee, and in the event of an operating loss, we will
credit E.R. Squibb the amount of such distribution fee. The Commercial Agreement
provides that we will be responsible for the manufacture and supply of all
requirements of ERBITUX in bulk form for clinical and commercial use in the
United States, Canada and Japan and that E.R. Squibb will purchase all of its
requirements of ERBITUX in bulk form for commercial use from us. We incur annual interestwill supply
ERBITUX for clinical use at our fully burdened manufacturing cost, and will
supply ERBITUX for commercial use at our fully burdened manufacturing cost plus
a mark-up of 10%. In addition to the up-front and milestone payments, the
distribution fees for the United States, Canada and Japan and the 10% mark-up on
the 1990 IDA Bond aggregating $248,000. In
ordercommercial supply of ERBITUX, E.R. Squibb is also responsible for 100% of
the cost of all clinical studies other than those studies undertaken
post-launch, which are not pursuant to secure our obligations toan Investigational New Drug Application
("INDA") (e.g., phase IV studies), the New York Industrial Development Agency
("NYIDA") undercost of which will be shared equally
between E.R. Squibb and ImClone Systems. As between E.R. Squibb and the 1990 IDA Bond, we have grantedCompany,
each will be responsible for 50% of the NYIDA a security interestcost of all clinical studies in facility equipment purchased with the bond proceeds.Japan.
In February 2000, we completed a private placement of $240,000,000 in 5
1/- -1/2% convertible subordinated notes due March 1, 2005. We received net proceeds
of approximately $231,500,000, after deducting offering expenses.expenses associated with the
offering.
Page 18
Accrued interest on the notes was approximately $4,400,000 at June 30, 2001.2002. A
holder may convert all or a portion of a note into common stock at any time on
or before March 1, 2005 at a conversion price of $55.09 per share, subject to
adjustment under certain circumstances. We may redeem some or all of the notes
prior to March 6, 2003 if specified common stock price thresholds are met. On or
after March 6, 2003, we may redeem some or all of the notes at specified
redemption prices.
In December 1999, we entered into a development and manufacturing services
agreement with Lonza. This agreement was amended in April 2001 to include
additional services. Under the agreement, Lonza is responsible for process
development and scale-up to manufacture IMC-C225.ERBITUX in bulk form under cGMP
conditions. These steps were taken to assure that itsthe manufacturing process
would produce bulk material that conforms with our reference material.material and to
support in part, our regulatory filing with the FDA. As of June 30, 2001, we had incurred approximately
$5,277,000 for services provided2002, Lonza
has completed its responsibilities under the development and manufacturing
service agreement. We had incurred approximately $7,068,000 for services
agreement.provided under this agreement through June 30, 2002. In September 2000, we
entered into a three-year commercial manufacturing services agreement with Lonza
relating to IMC-C225.ERBITUX. This agreement was amended in June 2001 and again in
September 2001 to include additional services. As of June 30, 2001,2002, we had
incurred approximately $10,275,000$24,840,000 for services provided under the commercial
manufacturing services agreement. Under these two agreements, Lonza is
manufacturing IMC-C225ERBITUX at the 5,000 liter scale under cGMP conditions and is
delivering it to us over a term ending no later than December 2003. The costs
associated with both of these agreements are included in research and
development expenses when incurred and will continue to be so classified until
such time as IMC-C225ERBITUX may be approved for sale.sale or until we obtain obligations
from our corporate partners for supply of such product. In the event of such
approval or obligations from our corporate partners, the subsequent costs
associated with manufacturing IMC-C225ERBITUX for commercial sale will be included in
inventory and expensed as cost of goods sold when sold. In the event we
terminate (i.e., the cancellation of batches of bulk product) the commercial
manufacturing services agreement is terminated by us,without cause, we will be required to pay 85%
of the stated costs for each of the first ten batches cancelled, 65% of the
stated costs for each of the next ten batches cancelled and 40% of the stated
costs for any remainingeach of the next six batches cancelled. The batch cancellation
provisions for certain additional batches that we are committed to purchase
require us to pay 100% of the stated costs of cancelled batches scheduled within
six months of the cancellation, 85% of the stated costs of cancelled batches
scheduled between six and twelve months following the cancellation and 65% of
the stated costs of cancelled batches scheduled between twelve and eighteen
months following the cancellation. These amounts are subject to mitigation
should Lonza use its manufacturing capacity caused by such termination for
another customer. At June 30, 2002, the estimated remaining future commitments
under the amended commercial manufacturing services agreement are $38,160,000 in
2002 and $24,050,000 in 2003.
In December 2001, we entered into an agreement with Lonza to manufacture
ERBITUX at the 2,000 liter scale for use in clinical trials by Merck KGaA. We
had incurred approximately $6,008,000 for services provided under this
agreement, of which $3,658,000 was reimbursed by Merck KGaA. The remaining
$2,350,000 that is due from Merck KGaA is included in Amounts due from corporate
partners in the consolidated balance sheet at June 30, 2002. At June 30, 2002,
the estimated remaining future commitments under this agreement is $1,175,000 in
2002.
On January 2, 2002 we executed a letter of intent with Lonza to enter into
a long-term supply agreement. The long-term supply agreement would apply to a
large scale manufacturing facility that Lonza is constructing. We expect such
facility would be able to produce ERBITUX in 20,000 liter batches. We paid Lonza
$3,250,000 for the exclusive rights to reserve and negotiate a long-term supply
agreement for a portion of the new facility's overall capacity. Such
negotiations commenced shortly thereafter and are continuing. Under certain
conditions, such payment shall be refunded to us. If we enter into a long-term
supply agreement, such payment will be creditable to us against the 20,000 liter
batch price, such credit to be spread evenly over the batches manufactured each
year of the initial term of the long-term supply agreement.
We cannot be certain that we will be able to enter into agreements for
commercial supply with other third-partythird party manufacturers on terms acceptable to us. Even
if we are able to enter into such agreements, we cannot be certain that we will
be able to produce or obtain sufficient quantities for commercial sale of our
products. Any delays in producing or obtaining commercial quantities of our
products could have a material adverse effect on our business, financial
condition and results of operations.
Effective April 1990, we entered into a development and commercialization
agreement with Merck KGaA with respect to BEC2 and the recombinant gp75 antigen.
The agreement has been amended a number of times, most recently in December
1997. The agreement grants Merck KGaA a license, with the right to sublicense,
to make, have made, use, sell, or have sold BEC2 and gp75 outside North America.
The agreement also grants Merck KGaA a license, without the right to sublicense,
to use, sell, or have sold, but not to make BEC2 within North America in
conjunction with ImClone Systems. Pursuant to the terms of the agreement we have
retained the rights, (1) without the right to sublicense, to make, have made,
use, sell, or have sold BEC2 in North America in conjunction with Merck KGaA and
(2) with the right to sublicense, to make, have made, use, sell, or have sold
Page 19
gp75 in North America. In return, we have recognized research support payments
totaling $4,700,000 and are entitled to no further research support payments
under the agreement. Merck KGaA is also required to make payments of up to
$22,500,000, of which $4,000,000 has been recognized, based on milestones
achieved in the licensed products' development. Merck KGaA is also responsible
for worldwide costs of up to DM17,000,000 associated with a multi-site,
multinational phase III clinical trial for BEC2 in limited disease small-cell
lung carcinoma. This expense level was reached during the fourth quarter of 2000
and all expenses incurred from that point forward are being shared 60% by Merck
KGaA and 40% by ImClone Systems. Such cost sharing applies to all expenses
beyond the DM17,000,000 threshold. Merck KGaA is also required to pay royalties
on the eventual sales of BEC2 outside of North America, if any. Revenues from
sales, if any, of BEC2 in North America will be distributed in accordance with
the terms of a co-promotion agreement to be negotiated by the parties.
In December 1998, we entered into a development and license agreement with
Merck KGaA with respect to ERBITUX. In exchange for granting Merck KGaA
exclusive rights to market ERBITUX outside of the United States and Canada and
co-development rights in Japan, we received through June 30, 2002, $30,000,000
in up-front fees and early cash-based milestone payments based on the
achievement of defined milestones. An additional $30,000,000 can be received, of
which $5,000,000 has been received as of June 30, 2002, assuming the achievement
of further milestones for which Merck KGaA will receive equity in ImClone
Systems. The equity underlying these milestone payments will be priced at
varying premiums to the then-market price of the common stock depending upon the
timing of the achievement of the respective milestones. If issuing shares of
common stock to Merck KGaA would result in Merck KGaA owning greater than 19.9%
of our common stock, the milestone shares will be a non-voting preferred stock,
or other non-voting stock convertible into our common stock. These convertible
securities will not have voting rights. They will be convertible at a price
determined in the same manner as the purchase price for shares of our common
stock if shares of common stock were to be issued. They will not be convertible
into common stock if, as a result of the conversion, Merck KGaA would own
greater than 19.9% of our common stock. This 19.9% limitation is in place
through December 2002. Merck KGaA will pay us a royalty on future sales of
ERBITUX outside of the United States and Canada, if any. This agreement may be
terminated by Merck KGaA in various instances, including (1) at its discretion
on any date on which a milestone is achieved (in which case no milestone payment
will be made), or (2) for a one-year period after first commercial sale of
ERBITUX in Merck KGaA's territory, upon Merck KGaA's reasonable determination
that the product is economically unfeasible (in which case Merck KGaA is
entitled to a return of 50% of the cash-based up front fees and milestone
payments then paid to date, but only out of revenues received, if any, based
upon a royalty rate applied to the gross profit from ERBITUX sales or a
percentage of ERBITUX fees and royalties from a sublicensee on account of the
sale of ERBITUX in the United States and Canada). In August 2001, ImClone
Systems and Merck KGaA amended this agreement to provide, among other things,
that Merck KGaA may manufacture ERBITUX for supply in its territory and may
utilize a third party to do so upon ImClone Systems' reasonable acceptance. The
amendment further released Merck KGaA from its obligations under the agreement
relating to providing a guaranty under a $30,000,000 credit facility relating to
the build-out of the product launch manufacturing facility. In addition, the
amendment provides that the companies have co-exclusive rights to ERBITUX in
Japan, including the right to sublicense and Merck KGaA waived its right of
first offer in the case of a proposed sublicense by ImClone Systems of ERBITUX
in ImClone Systems' territory. In consideration for the amendment, we agreed to
a reduction in royalties payable by Merck KGaA on sales of ERBITUX in Merck
KGaA's territory.
We have obligations under various capital leases for certain laboratory,
office and computer equipment and also certain building improvements, primarily
under 1996 anda 1998 financing agreementsagreement with Finova. These agreementsThis agreement allowed us to
finance the lease of equipment and make certain building and leasehold
improvements to existing facilities. Each lease has a fair market value purchase
option at the expiration of its 42- or 48-month term. We have entered into twelvesix
individual leases under the financing agreements aggregating a totalagreement with an aggregate cost of
$3,695,000. These$1,942,000. This financing arrangements arearrangement is now expired.
We rent our current New York corporate headquarters and research facility
under an operating lease that expires in December 2004. In 20012000 we completed
renovations of the facility to better suit our needs, at a cost of approximately
$2,800,000.
UnderIn October 2001, we entered into a sublease for a four-story building in
downtown New York to serve as our IMC-C225 agreementfuture corporate headquarters and research
facility. The space, to be designed and improved in the future, includes between
75,000 and 100,000 square feet of usable space, depending on design, and
includes possible additional expansion space. The sublease has a term of 22
years, followed by two five-year renewal option periods. The future minimum
lease payments are approximately $50,625,000 over the term of the sublease. In
order to induce the sublandlord to enter into the sublease, we made a loan to
and accepted from the sublandlord a $10,000,000 note receivable. The note is
secured by a leasehold mortgage on the prime lease as well as a collateral
assignment of rents by the sublandlord. The note receivable is payable by the
sublandlord over 20 years and bears interest at 5 -1/2% in years one through
five, 6 -1/2% in years six through ten, 7 -1/2% in years eleven through fifteen
and 8 -1/2% in years sixteen through twenty. In addition, we paid the owner a
consent fee in the amount of $500,000.
Page 20
On May 1, 2001, we entered into a lease for an approximately 4,000 square
foot portion of a 15,000 square foot building known as 710 Parkside Avenue,
Brooklyn, New York and we have leased an adjacent 6,250 square foot building
known as 313-315 Clarkson Avenue, Brooklyn, New York, (collectively "the
premises") to serve as our new chemistry and high throughput screening facility.
The term of the lease is for five years with Merck KGaA,five successive one-year
extensions. As of June 30, 2002, we developed in consultation with
Merck KGaA,have incurred approximately $3,778,000,
excluding capitalized interest of approximately $83,000 for the retrofit of this
facility to better fit our needs. The total cost for the retrofit will be
approximately $4,300,000.
We built a production concept for our new 80,000 square foot product launch manufacturing facility
adjacent to the pilot facility in Somerville, New Jersey. The product launch
manufacturing facility was built on a 5.7 acre parcel of land we purchased in
December 1999 for approximately $700,000. The product launch manufacturing
facility contains three 10,000 liter (working volume) fermenters and is
dedicated to the clinical and commercial production of IMC-C225.ERBITUX. The agreement providescost of the
facility was approximately $53,000,000, excluding capitalized interest of
approximately $1,966,000. The cost for the facility has come from our cash
reserves, which were primarily obtained through the issuance of debt and equity
securities. The product launch manufacturing facility was ready for its intended
use and put in operation in July 2001 and we commenced depreciation at that
Merck KGaAtime.
We have completed conceptual design and preliminary engineering plans and
are currently reviewing detailed design plans for, and proceeding with
construction of, the second commercial manufacturing facility. The second
commercial manufacturing facility will be a multi-use facility of approximately
250,000 square feet and will contain up to 10 fermenters with a total capacity
of up to 110,000 liters (working volume). The facility will be built on a 7.12
acre parcel of land that we purchased in July 2000 for approximately $950,000.
The cost of this facility, consisting of two completely fitted out suites and a
third suite with utilities only, is expected to provide us, subjectbe approximately $233,000,000,
excluding capitalized interest. The actual cost of the new facility may change
depending upon various factors. We have incurred approximately $52,617,000,
excluding capitalized interest of approximately $1,234,000, in conceptual
design, engineering, equipment and construction costs through June 30, 2002.
On January 31, 2002 we purchased a 7.5 acre parcel of land located
adjacent to certain conditions, a guarantythe Company's product launch manufacturing facility and pilot
facility in Somerville, New Jersey. The real estate includes an existing 50,000
square foot building, 40,000 square feet of which is warehouse space and 10,000
square feet of which is office space. The purchase price for the property and
building was approximately $7,020,000, of which approximately $1,125,000 was
related to the purchase of the land and approximately $5,895,000 was related to
the purchase of the building. We intend to use this property for warehousing and
logistics for our Somerville campus.
On May 20, 2002, we purchased real estate consisting of a $30,000,000 credit facility for6.94 acre parcel
of land located across the build-out of this facility. As of August 10,
2001, this guaranty has not been provided, and we are exploring ways in which we
might alter that portion ofstreet from the agreement. This facility has been erected
adjacent to our pilot manufacturing facility in New Jersey, which supplies
IMC-C225 to support our clinical trials. We broke ground on the newCompany's product launch
manufacturing facility in January 2000Somerville, New Jersey. The real estate includes an
existing 46,000 square feet of office space. The purchase price for the property
was approximately $4,515,000, of which approximately $1,041,000 was related to
the purchase of the land and estimate thatapproximately $3,474,000 was related to the
purchase of the building. We intend to use this property as the administrative
building for the Somerville campus. As of June 30, 2002, we have incurred
approximately $422,000 for the retrofit of this facility. The total cost for the
retrofit will be approximately $53,000,000, excluding capitalized interest. We have
incurred approximately $50,324,000 in engineering, pre-construction and
construction costs associated with the product launch manufacturing facility
through June 30, 2001. We also capitalized interest totaling approximately
13
15
$1,966,000 through June 30, 2001. We are funding the cost of this facility
through a combination of cash on hand and, if advisable, equipment financing
transactions.$5,187,000.
Total capital expenditures made during the six months ended June 30, 20012002
were $28,196,000 of which (1) $1,081,000$42,686,000 and primarily included $1,579,000 related to the purchase of
equipment for and leasehold improvement costs associated with our corporate
office and research laboratories in our New York facility; (2) $16,822,000
related to engineering, construction and capitalized interest costs of the
product launch manufacturing facility; (3) $6,612,000facility, $23,437,000 related
to the conceptual design, and preliminary engineering plans, capitalized interest
costs and construction costs for a second commercial manufacturing facility,
which we may build in$1,125,000 and $5,895,000 for the future on land purchased in 2000; (4)
$3,069,000and building, respectively, for the
warehousing and logistics building, $1,041,000 and $3,474,000 for the land and
building, respectively, for the purchase of and $422,000 for the retrofit of the
central operations building, $3,198,000 for the retrofit of the Brooklyn
chemistry lab, $725,000 related to improving and equipping our product launch
manufacturing facility, and $1,031,000 related to improving and equipping our
pilot manufacturing facility;
and (5) the remaining $612,000 related to the purchase of land adjacent to the
existing pilot manufacturing facility.
To prepare for the marketing and sale of IMC-C225 in the U.S. and Canada we
hired a Vice President of Marketing and Sales in 1998 and have hired directors
of marketing, field sales and sales operations, each with experience in the
commercial launch of a monoclonal antibody cancer therapeutic. We expect to hire
regional sales managers and to arrange for the hiring or contracting of a sales
force prior to the commencement of IMC-C225 sales, if any.
We believe that our existing cash on hand, marketable securities and
amounts to which we are entitled
subject to the negotiation of a final credit facility, should enable us to maintain our current and
planned operations through at least 2002.2003. We are also entitled to reimbursement for
certain marketing and research and development expenditures and certain other
payments, some of which are payable upon the achievement of research and
development milestones,milestones. Such amounts include $560,000,000 in cash-based payments
of which $60,000,000 is payable on March 5, 2003, as well as up to certain
milestone payments. Such payments include $30,000,000$25,000,000
in equity-based milestone payments under our IMC-C225ERBITUX development and license
agreement with Merck KGaA $5,000,000 of which both parties agreed have recently been attained. As of
August 13, 2001, we have not received the $5,000,000and up to $18,500,000 in cash-based milestone payment or issued
the common stock associatedpayments
under our BEC2 development agreement with the milestone.Merck KGaA. There can be no assurance
that we will achieve the unachievedthese milestones. Our future working capital and capital
requirements will depend upon numerous factors, including, but not limited to:
- progress and cost of our research and development programs,
pre-clinical testing and clinical trials
Page 21
- our corporate partners fulfilling their obligations to us
- timing and cost of seeking and obtaining regulatory approvals
- timing and cost of manufacturing scale-up and effective
commercialization activities and arrangements
- level of resources that we devote to the development of marketing
and sales capabilities
- costs involved in filing, prosecuting and enforcing patent claims
- technological advances
- legal costs and the outcome of outstanding legal proceedings and
investigations
- status of competitorscompetition
- our ability to maintain existing corporate collaborations and
establish new collaborative arrangements with other companies to
provide funding to support these activities
In order to fund our capital needs after 2002,2003, we will require significant
levels of additional capital whichand we intend to raise the capital through
additional arrangements with corporate partners, equity or debt financings, or
from other sources, including the proceeds of product sales, if any. There is no
assurance that we will be successful in consummating any such arrangements or product
sales.arrangements. If
adequate funds are not available, we may be required to significantly curtail
our planned operations.
At December 31, 2000, we hadBelow is a table that presents our contractual obligations and commercial
commitments as of June 30, 2002:
PAYMENTS DUE BY YEAR
----------------------------------------------------------------------------
2005 AND
TOTAL 2002 2003 2004 THEREAFTER
------------ ------------ ------------ ------------ ------------
Long-term debt ................... $242,200,000 $ -- $ -- $ 2,200,000 $240,000,000
Capital lease obligations
including interest ............ 299,000 170,000 76,000 15,000 38,000
Operating leases ................. 54,637,000 1,020,000 3,024,000 3,521,000 47,072,000
Construction commitments ......... 62,987,000 23,208,000 38,287,000 1,492,000 --
Lonza ............................ 63,385,000 39,335,000 24,050,000 -- --
------------ ------------ ------------ ------------ ------------
Total contractual cash obligations $423,508,000 $ 63,733,000 $ 65,437,000 $ 7,228,000 $287,110,000
============ ============ ============ ============ ============
New Jersey State Tax Law Changes
In July 2002, the State of New Jersey (""NJ'') enacted various income tax
law changes, which are retroactive to January 1, 2002. One of the provisions of
the new law is the suspension of the utilization of net operating losses for
2002 and 2003. This provision would negatively affect the Company if it
generates NJ taxable income in 2002 and 2003 because it would not be able to
utilize its NJ net operating loss carryforwardscarryover to offset such taxable income.
Page 22
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On August 17, 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for United States
federal income tax purposesAsset Retirement Obligations" was issued and will be effective
for the Company in the first quarter of approximately $303,000,000, which expire at
various dates from 2001 through 2020. Atthe year ended December 31, 2000 we had research
credit carryforwards2003. The
new rule requires the fair value of approximately $8,000,000,a liability for an asset retirement
obligation to be recognized in the period in which expire at various dates
from 2009 through 2020. Under Section 382it is incurred. When the
liability is initially recorded, a cost is capitalized by increasing the
carrying amount of the Internal Revenue Coderelated long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of 1986,
as amended,the related asset. To settle the liability,
the obligation for its recorded amount is paid or a corporation's abilitygain or loss upon settlement
is incurred. Management will be analyzing this requirement to use net operating lossdetermine the
effect on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Restructuring
Costs. SFAS 146 applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Those activities can
include eliminating or reducing product lines, terminating employees and
research
credit carryforwards maycontracts, and relocating plant facilities or personnel. Under SFAS 146, a
company will record a liability for a cost associated with an exit or disposal
activity when that liability is incurred and can be limited ifmeasured at fair value. SFAS
146 will require a company to disclose information about its exit and disposal
activities, the corporation experiences a changerelated costs, and changes in ownership of more than 50 percentage points within a three-year period. Since
1986, we have experienced two such ownership changes. As a result, we are only
permittedthose costs in the notes to usethe
interim and annual financial statements that include the period in which an exit
activity is initiated and in any one year approximately $5,200,000subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. Under SFAS
146, a company may not restate its previously issued financial statements and
the new Statement grandfathers the accounting for liabilities that a company had
previously recorded under Emerging Issues Task Force Issue 94-3. The Company is
currently evaluating the impact of our available net
operating loss carryforwards that relate to periods before these ownership
changes. Similarly, we are limited in using our research
14
16
credit carryforwards. We have determined that our November 1999 public stock
offering and February 2000 private placementadoption of convertible subordinated notes
did not cause an additional ownership change that would further limit the use of
our net operating losses and research credit carryforwards.this statement.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS--SAFE HARBOR STATEMENT
Those statements contained herein that do not relate to historical
information are forward-looking statements. There can be no assurance that the
future results covered by such forward-looking statements will be achieved.
Actual results may differ materially due to the risks and uncertainties inherent
in the
Company'sour business, including without limitation, the risks and uncertainties
associated with completing pre-clinical and clinical trials of the Company'sour compounds
that demonstrate such compounds' safety and effectiveness; obtaining additional
financing to support the Company'sour operations; obtaining and maintaining regulatory
approval for such compounds and complying with other governmental regulations
applicable to the Company'sour business; obtaining the raw materials necessary in the
development of such compounds; consummating collaborative arrangements with
corporate partners for product development; achieving milestones under
collaborative arrangements with corporate partners; developing the capacity and
ability to manufacture, as well as market and sell the Company'sour products, either directly
or with collaborative partners; developing market demand for and acceptance of
such products; competing effectively with other pharmaceutical and
biotechnological products; obtaining adequate reimbursement from third-party
payors; attracting and retaining key personnel; obtaining and protecting
proprietary rights; legal costs and the outcome of outstanding legal proceedings
and investigations; and those other factors set forth in "Risk Factors" in the
Company's most recent Registration Statement and Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our holdings of financial instruments comprise a mix of U.S. dollar
denominated securities that may include U.S. corporate debt, foreign corporate
debt, U.S. government debt, foreign government/agency debt or guaranteed debt and
commercial paper. All such instruments are classified as securities available
for sale. Generally, we do not invest in portfolio equity securities,
or commodities, foreign exchange contacts or use financial derivatives for trading
purposes. Our debt security portfolio represents funds held temporarily pending
use in our business and operations. We manage these funds accordingly. We seek
reasonable assuredness of the safety of principal and market liquidity by
investing in investment grade fixed income securities while at the same time
seeking to achieve a favorable rate of return. Our market risk exposure consists
principally of exposure to changes in interest rates. Our holdings are also
exposed to the risks of changes in the credit quality of issuers. We invest in
securities that have a range of maturity dates. Typically, those with a
short-term maturity are fixed-rate, highly liquid, debt instruments and those
with longer-term maturities are highly liquid debt instruments with fixed
interest rates or with periodic interest rate adjustments. We also have
certain foreign exchange currency risk. See note 3 of the consolidated financial
statements. The table below
presents the principal amounts and related weighted average interest rates by
year of maturity for our investment portfolio as of June 30, 2001:2002.
2006 AND
2001
2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
---- ----------- -------- -----------
------------ ------------ ------------ ------------
Fixed Rate .......... $ 5,831,000 $ 248,000 $ -- $ --
Average Interest Rate 6.37% 6.00% -- --
Variable Rate ....... 12,003,000(1) -- 15,603,000(1) 12,994,000(1)
Average Interest Rate 1.99% -- 4.60% 2.21%
------------ ------------ ------------ ------------
$ 17,834,000 $ 248,000 $ 15,603,000 $ 12,994,000
============ ============ ============ ============
2007 AND
2006 THEREAFTER TOTAL FAIR VALUE
------------ ------------ ------------ ------------
Fixed Rate .......... $ -- $ 104,000 $244,000 -- --14,506,000 $ 76,407,000 $76,755,00020,585,000 $ 81,374,00021,782,000
Average Interest Rate -- 5.38% 6.00% -- -- 6.36% 6.36%6.18% 6.23% --
Variable Rate -- -- -- $11,875,000(1) $ 19,194,000(1) $ 68,230,000(1) $99,299,000 $100,125,000....... 4,799,000(1) 217,616,000(1) 263,015,000 264,295,000
Average Interest Rate 2.31% 2.82% 2.85% -- -- -- 5.28% 4.86% 4.90% 4.94% --
-- ----------- -------- ----------- -----------
------------ ------------ ------------ --------------
$ 104,000 $244,000 $11,875,000 $19,194,000 $144,637,000 $176,054,000 $181,499,000
== =========== ======== =========== ===========4,799,000 $232,122,000 $283,600,000 $286,077,000
============ ============ ============ ============
Page 23
(1) These holdings consist of U.S. corporate and foreign corporatecorte floating
rate notes. Interest on the securities is adjusted monthly, quarterly or
semi-annually, depending on the instrument, using prevailing interest
rates. These holdings are highly liquid and we consider the potential for
loss of principal to be minimal.
Our 5 1/-1/2% convertible subordinated notes in the principal amount of
$240,000,000 due March 1, 2005 and other long-term debt have fixed interest
rates. The subordinated notes are convertible into our common stock at a
conversion price of $55.09 per share. The fair value of fixed interest rate
instruments isare affected by changes in interest rates and in the case of the
convertible notes by changes in the price of the Company'sour common stock. The fair value of
the 5 1/-1/2% convertible subordinated notes (which have a carrying value of
$240,000,000) was approximately $276,400,000$168,300,000 at June 29, 2001.28, 2002.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
A. LITIGATION
1. FEDERAL SECURITIES CLASS ACTIONS
A number of complaints asserting claims under Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 promulgated
thereunder and Section 20(a) of the Exchange Act were filed beginning in January
2002 in the U.S. District Court for the Southern District of New York against us
and certain of our directors and officers on behalf of purported classes of our
shareholders. By order dated June 4, 2002 these actions were consolidated under
the caption of the first-filed of these actions, Irvine v. ImClone Systems
Incorporated et at., No. 02 Civ. 0109(RO). The original complaints in these
actions allege generally that various public statements made by us or our senior
officers during 2001 and early 2002 regarding the prospects for FDA approval of
ERBITUX were false or misleading when made, that various Company insiders were
aware of material, non-public information regarding the actual prospects for
ERBITUX at the time that those insiders engaged in transactions in our common
stock and that members of the purported shareholder class suffered damages when
the market price of our common stock declined following disclosure of the
information that allegedly had not been previously disclosed. On December 28,
2001, we disclosed that we had received a "refusal to file" letter from the FDA
relating to our biologics license application for ERBITUX. Thereafter, various
news articles purported to describe the contents of the FDA's "refusal to file"
letter. During this period, the market price of our common stock declined. The
complaints in the various actions seek to proceed on behalf of a class of our
present and former shareholders, other than defendants or persons affiliated
with the defendants, seek monetary damages in an unspecified amount and seek
recovery of plaintiffs' costs and attorneys' fees. A consolidated amended
complaint is expected to be filed shortly.
2. DERIVATIVE ACTIONS
Beginning on January 13, 2002 and continuing thereafter, eight separate
purported shareholder derivative actions have been filed against the members of
our Board of Directors and the Company, as nominal defendant, advancing claims
based on allegations similar to the allegations in the federal securities class
action complaints. Three of these derivative cases were filed in the Delaware
Court of Chancery and have been consolidated in that court under the caption In
re ImClone Systems Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC.
An additional case has been filed in the Delaware Court of Chancery, styled Krim
v. Waksal, et al., C.A. No. 19528-NC, which likely will be consolidated with the
other actions pending in that court. In addition, two purported derivative
actions have been filed in the U.S. District Court for the Southern District of
New York, styled Lefanto v. Waksal, et al., No. 02 Civ. 0163 (LLS), and Forbes
v. Barth, et al., No. 02 Civ. 1400 (RO), and two purported derivative actions
have been filed in New York State Supreme Court in Manhattan, styled Boghosian
v. Barth, et al., Index No. 100759/02 and Johnson v. Barth, et al., Index No.
601304/02. All of these actions assert claims, purportedly on our behalf, for
breach of fiduciary duty by certain members of the Board of Directors based on
the allegation, among others, that certain directors engaged in transactions in
our common stock while in possession of material, non-public information
concerning the regulatory and marketing prospects for ERBITUX. Another
complaint, purportedly asserting direct claims on behalf of a class of the
Company's shareholders but in fact asserting derivative claims that are similar
to those asserted in these eight cases, was filed in the U.S. District Court for
the Southern District of New York on February 13, 2002, styled Dunlap v. Waksal,
et al., No. 02 Civ. 1154 (RO). The Dunlap complaint asserts claims against the
Board of Directors for breach of fiduciary duty purportedly on behalf of all
persons who purchased shares of the Company's common stock prior to June 28,
2001 and then held those shares through December 6, 2001. It alleges that the
members of the purported class suffered damages as a result of holding their
shares based on allegedly false information about the financial prospects of the
Company that was disseminated during this period.
Page 24
All of these actions are in their earliest stages. We intend to contest
vigorously the claims asserted in these actions.
B. GOVERNMENT INQUIRIES AND INVESTIGATIONS
As previously reported, we have received subpoenas and requests for
information in connection with investigations by the Securities and Exchange
Commission, the Subcommittee on Oversight and Investigations of the U.S. House
of Representatives Committee on Energy and Commerce and the U.S. Department of
Justice relating to the circumstances surrounding the disclosure of the FDA
letter dated December 28, 2001 and trading in our securities by certain Company
insiders in 2001. We are cooperating with all of these inquiries and intend to
continue to do so.
On June 19, 2002, we received a written "Wells Notice" from the staff of
the Securities and Exchange Commission, indicating that the staff is considering
recommending the Commission bring an action against us relating to our
disclosure immediately following the receipt of a Refusal-to-File letter from
the FDA on December 28, 2001 for our biologics license application for ERBITUX.
We filed a Wells submission on July 12, 2002 in response to the staff's Wells
Notice. We have also received permission from the Commission to file a
supplemental Wells submission, and we anticipate that we will make this
submission in September of this year.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
15
17
(a) An annual meeting of stockholders was held on May 24, 2001June 11, 2002 (the
"Annual Meeting").
(b) The directors elected at the Annual Meeting were Richard Barth,Andrew G. Bodnar,
Vincent T. DeVita, Jr., Robert F. Goldhammer, David M. Kies, Paul B.
Kopperl, Arnold Levine, John Mendelsohn, William R. Miller, Peter S.
Ringrose and Harlan W. Waksal and Samuel
D. Waksal. Such persons are all of the directors
of the Company whose term of office as a director continued after
the Annual Meeting.
(c) The matters voted upon at the Annual Meeting and the results of the
voting are set forth below. Broker non-votes were not applicable.
16
18
(i) Election of directors
NAME IN FAVOR WITHHELD
- ---- -------- ------------------ ---------
Richard Barth 55,338,014 130,304
Arnold Levine 55,279,081 189,237
Andrew G. Bodnar ........ 54,276,035 8,728,530
Vincent T. DeVita, Jr 55,340,858 127,460... 54,279,942 8,724,623
Robert F. Goldhammer 55,347,138 121,180.... 54,238,633 8,765,932
Paul B. Kopperl ......... 54,280,272 8,724,293
David M. Kies 55,347,952 120,366
Paul B. Kopperl 55,348,292 120,026........... 54,284,503 8,720,062
Arnold Levine ........... 54,283,391 8,721,174
John Mendelsohn 55,178,655 289,663......... 53,912,661 9,091,904
William R. Miller 55,343,703 124,615....... 54,278,940 8,725,625
Peter S. Ringrose ....... 54,281,356 8,723,209
Harlan W. Waksal 53,408,897 2,059,421
Samuel D. Waksal 55,341,966 126,352........ 53,860,561 9,144,004
(ii) The stockholders approved the Company's 2002 Stock Option
Plan. The stockholders voted 45,617,936 shares in favor and
17,268,070 shares against. 118,559 shares abstained from
voting.
(iii) The stockholders approved a proposal to amend the Company's
certificate of incorporation to increase the total number of
shares of common stock the Company is authorized to issue from
120,000,000 shares to 200,000,000 shares. The stockholders
voted 61,580,428 shares in favor and 1,337,270 shares against.
86,867 shares abstained from voting.
(iv) The stockholders ratified the appointment by the Board of
Directors of KPMG LLP as the Company's independent certified
public accountants for the fiscal year ending December 31,
2001.2002. The stockholders voted 55,240,59962,207,089 shares in favor and
163,154404,703 shares against. 64,565392,773 shares abstained
Page 25
from voting.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
10.77 Stock Purchase Agreement between the Company and Valigen N. V.
dated May 31, 2001
Exhibit No. Description
----------- -----------
3.1C Amendment dated August 9, 2002 to the Company's
Certificate of Incorporation, as amended
10.90 Employment Agreement dated as of February 1, 2002
between the Company and Clifford R. Saffron, as amended
by letter agreement dated as of April 18, 2002
10.91 Separation Agreement dated as of May 22, 2002 between
the Company and Samuel D. Waksal
10.92 Agreement of Sale and Purchase between 4/33 Building
Associates, LP and ImClone Systems Incorporated
pertaining to 33 Chubb Way, Branchburg, New Jersey
executed as of March 1, 2002
99.8 ImClone Systems Incorporated 2002 Stock Option Plan.
99.9 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
99.10 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
None.
17On June 26, 2002, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission reporting events under Item 5.
Page 26
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMCLONE SYSTEMS INCORPORATED
(Registrant)
Date: August 13, 200114, 2002 By /s/ Samuel D. WaksalHARLAN W. WAKSAL
-------------------------------------
Samuel D.Harlan W. Waksal
President and Chief Executive Officer
Date: August 13, 200114, 2002 By /s/ DANIEL S. LYNCH
-------------------------------------
Daniel S. Lynch
-------------------------------------
Daniel S. LynchSenior Vice President, Finance and
Chief Financial Officer
18Page 27