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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X]|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2002
[ ]| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR 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) identification no.)
180 VARICK STREET, NEW YORK, NY 10014
(Address of principal executive offices) (Zip code)
(212) 645-1405
Registrant's telephone number, including area code
NOT 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 AUGUSTNOVEMBER 13, 2002
----- --------------------------------------------------------------------
Common Stock, par value $.001 73,385,23573,631,262 Shares
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IMCLONE SYSTEMS INCORPORATED
INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - JuneSeptember 30, 2002 (unaudited) and December 31, 2001 .......2001......... 1
Unaudited Consolidated Statements of Operations - Three and sixnine months ended
JuneSeptember 30, 2002 and 2001 ..............................................................2001................................................................ 2
Unaudited Consolidated Statements of Cash Flows - SixNine months ended
JuneSeptember 30, 2002 and 2001 ..............................................................2001................................................................ 3
Notes to Consolidated Financial Statements ..........................................Statements................................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13Operations...... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 23Risk................................. 26
Item 4. Controls and Procedures.................................................................... 27
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 ................................. 25Proceedings.......................................................................... 27
Item 6. Exhibits and Reports on Form 8-K .................................................... 268-K........................................................... 29
Signatures ........................................................................................... 30
Section 302 Certifications............................................................................. 31
PART 1I - FINANCIAL INFORMATION
ITEM 1 -1. FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
JUNESEPTEMBER 30, DECEMBER 31,
2002 2001
--------- -----------
(unaudited)------------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................................................................................... $ 65,53552,432 $ 38,093
Securities available for sale ......................................... 286,077.......................................................... 240,649 295,893
Prepaid expenses ...................................................... 5,679....................................................................... 4,272 3,891
Amounts due from corporate partners (Note 7) .......................... 16,562........................................... 16,870 8,230
Other current assets .................................................. 4,395................................................................... 9,066 3,547
--------- ---------
Total current assets .............................................. 378,248............................................................... 323,289 349,654
--------- ---------
Property and equipment, net ............................................. 145,420.............................................................. 160,604 107,248
Patent costs, net ....................................................... 1,632........................................................................ 1,623 1,513
Deferred financing costs, net ........................................... 4,556............................................................ 4,125 5,404
Note receivable ................................................................................................................................... 10,000 10,000
Other assets ............................................................ 4,518............................................................................. 1,018 383
--------- ---------
$ 544,374500,659 $ 474,202
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................................................................................................. $ 14,94718,011 $ 16,919
Accrued expenses ...................................................... 22,660(including $2,270 due to Bristol-Myers Squibb Company ("BMS") at
September 30, 2002) ................................................................. 25,810 11,810
Interest payable ...................................................... 4,442....................................................................... 1,204 4,446
Income taxes payable ................................................................... 550 --
Current portion of deferred revenue (Note 7) .......................... 36,627........................................... 37,494 20,683
Current portion of long-term liabilities .............................. 236............................................... 150 426
--------- ---------
Total current liabilities ......................................... 78,912.......................................................... 83,219 54,284
--------- ---------
Deferred revenue, less current portion (Note 7) ......................... 298,612.......................................... 292,806 182,813
Long-term debt ..................................................................................................................................... 242,200 242,200
Other long-term liabilities, less current portion ....................... 57........................................ 55 79
--------- ---------
Total liabilities ................................................. 619,781.................................................................. 618,280 479,376
--------- ---------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
Preferred stock, $1.00 par value; authorized 4,000,000 shares; reserved 1,200,000
series B participating cumulative preferred stock................................................................stock ..................................... -- --
Common stock, $.001 par value; authorized 200,000,000 shares; issued 73,573,16073,588,383 and
73,348,271 at JuneSeptember 30, 2002 and December 31, 2001, respectively, outstanding
73,383,910,73,399,133, and 73,159,021 at JuneSeptember 30, 2002 and December 31, 2001, respectively ................................... 74 73
Additional paid-in capital ............................................ 345,295............................................................. 345,474 341,735
Accumulated deficit ................................................... (419,153).................................................................... (461,152) (346,037)
Treasury stock, at cost; 189,250 shares at JuneSeptember 30, 2002 and December 31, 2001 ....................................................... (4,100) (4,100)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale .................... 2,477..................................... 2,083 3,155
--------- ---------
Total stockholders' equity (deficit) .............................. (75,407)............................................... (117,621) (5,174)
--------- ---------
$ 544,374500,659 $ 474,202
========= =========
See accompanying notes to consolidated financial statements
Page 1
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
------------------------- ---------------------------------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ------------------ -------- --------- ---------
Revenues:
License fees and milestone revenue (Note 7) ........................... $ 1,5954,996 $ 3,1362,244 $ 8,25813,254 $ 27,23229,476
Research and development funding and royalties ... 38 115 688 763.................. 622 667 1,310 1,430
Collaborative agreement revenue (Note 7) ........ 9,932 644 21,170 3,895
---------- ---------- ---------- ----------........................ 9,416 2,818 30,586 6,713
-------- -------- --------- ---------
Total revenues ................................. 11,565 3,895 30,116 31,890
========== ========== ========== ==========................................................ 15,034 5,729 45,150 37,619
-------- -------- --------- ---------
Operating expenses:
Research and development ......................... 38,167 24,390 75,945 49,486........................................ 43,504 26,664 119,449 76,150
Marketing, general and administrative ............ 16,479 6,223 24,602 9,951........................... 12,341 5,599 36,943 15,550
Expenses associated with the BMS acquisition, stockholder and
amended Bristol-Myers
Squibb Company ("BMS") Commercial Agreement ....commercial agreements .................................. -- --16,050 2,250 --
---------- ---------- ---------- ----------16,050
-------- -------- --------- ---------
Total operating expenses ....................... 54,646 30,613 102,797 59,437
========== ========== ========== ==========...................................... 55,845 48,313 158,642 107,750
-------- -------- --------- ---------
Operating loss ..................................... (43,081) (26,718) (72,681) (27,547)
---------- ---------- ---------- ----------.................................................... (40,811) (42,584) (113,492) (70,131)
-------- -------- --------- ---------
Other:
Interest income .................................. (2,904) (3,262) (5,168) (7,827)................................................. (2,259) (3,244) (7,427) (11,071)
Interest expense ................................. 3,347 3,197 6,839 6,510................................................ 3,161 3,532 10,000 10,042
Loss (gain) on securities and investments ........ (435) 2,850 (1,236) 4,468
---------- ---------- ---------- ----------....................... (264) (1,800) (1,500) 2,668
-------- -------- --------- ---------
Net interest and other expense ................. 8 2,785 435 3,151
---------- ---------- ---------- ----------(income) ....................... 638 (1,512) 1,073 1,639
-------- -------- --------- ---------
Loss before income taxes ...................................... (41,449) (41,072) (114,565) (71,770)
Income taxes .................................................. 550 -- 550 --
-------- -------- --------- ---------
Net loss .......................................................................................... $(41,999) $(41,072) $(115,115) $ (43,089) $ (29,503) $ (73,116) $ (30,698)
========== ========== ========== ==========(71,770)
======== ======== ========= =========
Net loss per common share:
Basic and diluted:
Net loss per common share ........................................................... $ (0.59)(0.57) $ (0.44)(0.57) $ (1.00)(1.57) $ (0.46)
========== ========== ========== ==========(1.05)
======== ======== ========= =========
Weighted average shares outstanding ................ 73,356 67,051 73,332 66,657
========== ========== ========== ==========............................... 73,385 71,534 73,350 68,301
======== ======== ========= =========
See accompanying notes to consolidated financial statements
Page 2
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)(IN THOUSANDS)
(UNAUDITED)
SIXNINE MONTHS ENDED
JUNESEPTEMBER 30,
------------------------------------------------
2002 2001
---------- ------------------- ---------
Cash flows from operating activities:
Net loss ................................................................................................................................................... $(115,115) $ (73,116) $ (30,698)(71,770)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 4,656 1,558.......................................................... 7,000 3,517
Amortization of deferred financing costs ................................ 848 848............................................... 1,279 1,279
Expense associated with issuance of options and warrants ................ 7 687............................... 11 952
Gain on securities available for sale ................................... (1,236) (908).................................................. (1,500) (2,707)
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
Accrued interest on note receivable - officer .......................................... -- (24)
Accrued interest on notes receivable - officers and directors .......................... -- (606)
Changes in:
Prepaid expenses ...................................................... (1,788) (1,183)..................................................................... (381) (2,776)
Amounts due from corporate partners (including amounts received from BMS of $6,887$8,377
for the sixnine months ended JuneSeptember 30, 2002) ............... (8,332)....................................... (8,640) --
Note receivable - officer ............................................. -- (15)
Other current assets .................................................. (848) 2,816................................................................. (5,519) 163
Other assets .......................................................... (4,135) (75)......................................................................... (635) (81)
Interest payable ...................................................... (4) 1..................................................................... (3,242) (3,237)
Accounts payable ...................................................... (1,972) (4,811)..................................................................... 1,092 (2,244)
Accrued expenses ...................................................... 10,850 (2,026)..................................................................... 14,000 10,306
Income taxes payable ................................................................. 550 --
Deferred revenue (including amounts received from BMS of $140,000 and $200,000
for the sixnine months ended JuneSeptember 30, 2002) ............................. 131,743 3,8072002 and 2001, respectively) ................ 126,804 203,325
Fees potentially refundable to Merck KGaA ......................................................................... -- (28,000)
---------- ------------------- ---------
Net cash provided by (used in) operating activities ................. 56,673 (52,624)
---------- ----------........................................... 15,704 113,472
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment .................................. (42,686) (28,196)................................................. (60,165) (44,591)
Purchases of securities available for sale .............................. (241,356) (30,346)............................................. (327,470) (158,497)
Sales and maturities of securities available for sale ................... 251,730 87,646.................................. 383,142 130,449
Investment in Valigen N.V ............................................................................................................. -- (2,000)
Loan to A.C.T. Group, Inc. ........................................................................................................... -- (1,000)
Additions to patents .................................................... (203) (431)
---------- ----------................................................................... (243) (593)
--------- ---------
Net cash provided by (used in)used in investing activities ................. (32,515) 25,673
---------- ----------............................................... (4,736) (76,232)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants .................... 2,745 3,744................................... 2,751 7,333
Proceeds from issuance of common stock under the employee stock purchase plan ......................................................... 323 348.......... 413 531
Proceeds from short-swing profit rule .................................................. 565 --
Proceeds from issuance of common stock to Merck KGaA ................................... 486 -- 3,240
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)
---------- ----------.......................................................... (358) (487)
--------- ---------
Net cash provided by (used in) financing activities ................. 3,284 (23,859)
---------- ----------................................. 3,371 (16,977)
--------- ---------
Net increase (decrease) in cash and cash equivalents ................ 27,442 (50,810)........................................... 14,339 20,263
Cash and cash equivalents at beginning of period ................................................................... 38,093 60,325
---------- ------------------- ---------
Cash and cash equivalents at end of period ............................................................................... $ 65,53552,432 $ 9,515
========== ==========80,588
========= =========
Supplemental cash flow information:
Cash paid for interest, including amounts capitalized of $780$1,441 and $1,120$1,398
for the sixnine months ended JuneSeptember 30, 2002 and 2001, respectively ......................... $ 6,77613,403 $ 6,781
========== ==========13,397
========= =========
Non-cash financing activity:
Capital asset and lease obligation addition .................................................................... $ 58 $ --
========== =================== =========
See accompanying notes to consolidated financial statements
Page 3
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PREPARATION
The consolidated financial statements of ImClone Systems Incorporated
("ImClone Systems" or the "Company") as of JuneSeptember 30, 2002 and for the three
and sixnine months ended JuneSeptember 30, 2002 and 2001 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, 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) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and consist of the following:
JUNESEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------------------- -------------
Land ...................................................................................... $ 4,899,000 $ 2,733,000
Building and building improvements ........... 61,306,000............... 61,420,000 50,720,000
Leasehold improvements ....................... 8,367,000........................... 8,370,000 8,302,000
Machinery and equipment ...................... 37,131,000.......................... 38,359,000 33,057,000
Furniture and fixtures ....................... 2,088,000........................... 2,096,000 2,031,000
Construction in progress ..................... 58,876,000......................... 75,002,000 33,080,000
------------ ------------------------- -------------
Total cost ............................. 172,667,000................................. 190,146,000 129,923,000
Less accumulated depreciation and amortization (27,247,000)... (29,542,000) (22,675,000)
------------ ------------------------- -------------
Property and equipment, net .................. $145,420,000 $107,248,000
============ ============...................... $ 160,604,000 $ 107,248,000
============= =============
The Company is building a second commercial manufacturing facility
adjacent to its new product launch manufacturing facility in Somerville (Branchburg
Township), New Jersey.Jersey . This new facility will be a multi-use facility with
capacity of up to 110,000 liters (working(production volume). The 250,000 square foot
facility will cost approximately $233,000,000,$234,000,000, and is being built on land
purchased in DecemberJuly 2000. The actual cost of the new facility may change
depending upon various factors. The Company incurred approximately $52,617,000,$64,693,000
(included in construction in progress above), excluding capitalized interest of
approximately $1,234,000,$1,831,000, in conceptual design, engineering and
pre-construction costs through JuneSeptember 30, 2002. Through July 22,October 24, 2002,
committed purchase orders totaling approximately $40,217,000$44,593,000 have been placed
for subcontracts and equipment related to this project. In addition,
$22,770,000$21,306,000 in engineering, procurement, construction management and validation
costs were committed. During August 2002, the Company executed an escrow
agreement with Branchburg Township (the "Township"). The agreement required the
Company to deposit $5,040,000 in an escrow account until the Company supplies
the Township with certain New Jersey Department of Environmental Protection
permits and also certain water and sewer permits related to the construction
of this facility. The escrow agreement requires the permits to be supplied to
the Township by July 1, 2003 at which time the Company will receive back the
escrow deposit. Interest that accures on the escrow deposit is allocated
two-thirds to the Company and one-third to the Township. The escrow deposit
was requested by the Township to insure that funds would be available to
restore the site to its original condition should the Company fail to obtain
such permits required for contruction at the site. The escrow deposit,
including the Company's portion of the interest, totaled $5,052,000 at
September 30, 2002 and is included in Other current assets in the consolidated
balance sheet.
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 is warehouse space and 10,000 square feet of which is
Page 4
office space. The purchase price for the property and building was approximately
$7,020,000, of which 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 material logistics for
its Somerville campus. Page 4
As of September 30, 2002, the Company has incurred
approximately $326,000 (included in construction in progress above), excluding
capitalized interest of approximately $2,000, for the retrofit of this facility.
The total cost for the retrofit will be approximately $635,000.
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 building with 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 theits
Somerville campus. As of JuneSeptember 30, 2002, the Company has incurred
approximately $422,000$2,857,000 (included in construction in progress above), excluding
capitalized interest of approximately $7,000, 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 accounting principles generally accepted in the United States of America
requires the Company to evaluate the carrying values of its long-lived assets.
The recoverability of the carrying values of the Company's product launch
manufacturing facility, its second commercial manufacturing facility and its
warehousing and material logistics facility will depend on (1) receiving FDAFood
and Drug Administration ("FDA") approval of our interventional therapeutic
product candidate for cancer, ERBITUX((TM))ERBITUX(TM), (2) receiving FDA approval of the
manufacturing facilities and (3) the Company's ability to earn sufficient
returns on ERBITUX. Based on management's current estimates, the Company expects
to recover the carrying value of such assets.
(3) CONTRACT 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
was responsible for process development and scale-up to manufacture ERBITUX in
bulk form under current Good Manufacturing Practices ("cGMP") conditions.. These steps were
taken to assure that the 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 JuneSeptember 30,
2002 and $1,535,000 was incurred during the three months ended September 30,
2001. Approximately $38,000 and $3,600,000$5,135,000 was incurred in the sixnine months ended
JuneSeptember 30, 2002 and 2001, respectively, and $7,068,000 from inception through
JuneSeptember 30, 2002. As of JuneSeptember 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 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$15,578,000 in the three months ended
JuneSeptember 30, 2002 and a reduction to expenses of $2,475,000 in the three months
ended September 30 2001, as a result of reductions to prior billings. The
Company has incurred $30,105,000 and $2,400,000 in the nine months ended
September 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 $24,840,000$40,418,000 from inception
through JuneSeptember 30, 2002 for services provided under the commercial
manufacturing services agreement.
Under the December 1999 and September 2000 agreements, Lonza is
manufacturing ERBITUX at the 5,000 liter scale under cGMP conditions and is 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 ERBITUX may be approved for 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 ERBITUX for commercial sale will be included
in inventory and expensed when sold. In the event the Company terminates the
commercial manufacturing services agreement without cause, the Company 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 each 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 JuneSeptember 30, 2002, the
estimated remaining
Page 5
future commitments under the amended commercial manufacturing services agreement
are $38,160,000$26,283,000 in 2002 and $24,050,000$20,350,000 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 costs 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 research and development
expenses in the consolidated statement of operations. The Company has incurred
approximately $1,175,000 and $1,763,000 in the three months ended June 30, 2002, $3,525,000 in
the six months ended JuneSeptember 30,
2002 and $6,008,0002001, respectively, and $4,700,000 and $1,763,000 in the nine months
ended September 30, 2002 and 2001, respectively, and $7,183,000 from inception
through JuneSeptember 30, 2002 for services provided under this agreement.
Approximately $2,350,000$588,000 and $133,000 were reimbursable by Merck KGaA at JuneSeptember
30, 2002 and December 31, 2001, respectively, and included in amounts due from
corporate partners in the consolidated balance sheets. At JuneAs of September 30, 2002,
Lonza has completed its responsibilities under the estimated remaining future
commitment by the companies under this agreement is $1,175,000 in 2002.
Page 5
2,000L Lonza Agreement.
In January 2002, the Company 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. The
Company expects such facilityconstructing, which
would be able to produce ERBITUX in 20,000 liter batches. The Company paid Lonza
$3,250,000 upon execution of the letter of intent for the exclusive negotiating right ofto
negotiate a long-term supply agreement which amountfor a portion of the facility's
manufacturing capacity. During September 2002, the Company wrote-off the deposit
because the exclusive negotiation period ended on September 30, 2002, although
negotiations continued thereafter. The $3,250,000 is included in Other assets at
JuneMarketing,
general and administrative expenses on the Consolidated Statement of Operations
for the three and nine months ended September 30, 2002, inrespectively. The
Company is currently negotiating with Lonza and a third party with the consolidated balance sheet. Such negotiations commenced
shortly thereafter and are continuing. Under certain conditions such payment
shall be refundedintention
of assigning to the Company. Providedthird party any remaining rights the Company entershas under this
letter of intent in return for the third party's agreement to reimburse the
Company the $3,250,000 upon execution of a binding agreement with Lonza for
supply of biologics on similar terms to those negotiated with Lonza by the
Company. The Company cannot be certain that it will enter into a long-term
supply agreement, such payment shall be creditable against the 20,000 liter
batch price.this arrangement.
(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 represented approximately 7% of ValiGen's outstanding equity at the time
of purchase. As of June 30, 2001, the Company had completely written-off its
investment in ValiGen based on the modified equity method of accounting.
Included 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 three and sixnine months ended JuneSeptember 30,
2001, respectively.2001. In the spring of 2001, the Company also entered into a no-cost Discovery
Agreement with ValiGen to evaluate certain of its technology. TheAfter the Company
made its investment in Valigen, the Company's former President and Chief
Executive Officer isbecame a member of ValiGen's Board of Directors.
(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, divided by the weighted average number of common
shares outstanding during the period. For purposes of theethe diluted loss per share
calculation, the exercise or conversion of all potential common shares is not
included since their effect would be anti-dilutive for all periods presented.
As of JuneFor the three and nine months ended September 30, 2002 and 2001, the Company had
approximately 16,897,00017,937,000 and 18,238,000,16,037,000, respectively, potential common shares
outstanding which represent new shares which could be issued under convertible
debt, stock options and stock warrants.
Page 6
(6) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
----------------------------- -----------------------------------------------------------
2002 2001 2002 2001
------------ ------------ ------------------------- ------------
Net loss .......................................... $(43,089,000) $(29,503,000) $(73,116,000) $(30,698,000).............................................. $(41,999,000) $(41,072,000) $(115,115,000) $(71,770,000)
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during the
period 277,000 17,000 558,000 1,955,000............................................. (130,000) 1,473,000 428,000 3,427,000
Reclassification adjustment for realized gain
included in net loss .......................... (435,000) (926,000) (1,236,000) (908,000)............................... (264,000) (1,800,000) (1,500,000) (2,707,000)
------------ ------------ ------------------------- ------------
Total other comprehensive income (loss) ..... (158,000) (909,000) (678,000) 1,047,000.......... (394,000) (327,000) (1,072,000) 720,000
------------ ------------ ------------------------- ------------
Total comprehensive loss .......................... $(43,247,000) $(30,412,000) $(73,794,000) $(29,651,000).............................. $(42,393,000) $(41,399,000) $(116,187,000) $(71,050,000)
============ ============ ========================= ============
(7) COLLABORATIVE AGREEMENTS
(a) MERCK KGAA
Page 6
Effective 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 JuneSeptember 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$27,000 and $8,000 in the
three months ended JuneSeptember 30, 2002 and did not incur any expenses2001, respectively, and approximately
$181,000 and $130,000 in the threenine months ended JuneSeptember 30, 2001. The
Company has incurred approximately $154,0002002 and $122,0002001,
respectively, in reimbursable research and development expenses associated with
this agreement in the six
months ended June 30, 2002 and 2001, respectively.agreement. 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 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, the Company received through
JuneSeptember 30, 2002, $30,000,000 in up-front fees and early cash-based milestone
payments based on the achievement of 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 JuneSeptember 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-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 ERBITUX outside of the United States and Canada, if
any. This agreement may be terminated by
Page 7
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 by ImClone, if any, based upon a royalty rate
applied to the gross profit from ERBITUX sales or a percentage of ERBITUX fees
and royalties received from a sublicensee on account of the sale of ERBITUX in
the United States and Canada). In 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.so. 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 Company's 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
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 amendment, the Company agreed to a reduction in royalties
payable by Merck KGaA on sales of ERBITUX in Merck KGaA's territory.
In conjunction with Merck KGaA, the Company has expanded 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 andvarious manufacturing services agreement and the 2000Lservice
agreements with Lonza
Agreement for use in this 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. In September
2002, the Company entered into a binding term sheet, effective as of April 15,
2002, for the supply of ERBITUX to Merck KGaA, which replaces previous supply
arrangements. The term sheet provides for Merck KGaA to purchase bulk and
finished ERBITUX ordered from the Company during the term of the December 1998
development and license agreement at a price equal to the Company's fully
loaded manufacturing costs. The term sheet also provides for Merck KGaA to use
reasonable efforts to enter into its own contract manufacturing agreements for
supply of ERBITUX by 2004 and obligates Merck KGaA to reimburse the Company for
costs associated with transferring technology and any other services requested
by Merck KGaA relating to establishing its own manufacturing or contract
manufacturing capacity. Amounts due from Merck KGaA related to these
arrangements totaled approximately $8,372,000$2,704,000 and $1,503,000 at JuneSeptember 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$1,997,000 and
$461,000$2,616,000 in the three months ended JuneSeptember 30, 2002, and 2001, respectively
and $12,222,000$14,219,000 and $3,590,000$6,206,000 in the sixnine months ended JuneSeptember 30, 2002, and
2001, respectively. Of these amounts, $6,544,000$1,470,000 and $10,853,000$1,170,000 in the three
and six
months ended JuneSeptember 30, 2002, respectively, and $393,0002001, and $1,423,000$12,323,000 and $2,593,000 in
the three and sixnine months ended JuneSeptember 30, 2002, and 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$704,000
and $6,214,000$1,061,000 for the three and six months ended JuneSeptember 30, 2002 and 2001,
respectively and $7,051,000 and $2,464,000 for the nine months ended September
30, 2002 and 2001, respectively. Reimbursable research and development expenses
were incurred and totaled approximately $656,000$527,000 and $1,369,000$1,446,000 in the three
and six months ended JuneSeptember 30, 2002 and $68,0002001, respectively, and $2,167,000$1,896,000 and
$3,613,000 in the three and sixnine months ended JuneSeptember 30, 2001.2002 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.
(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, promotion, distribution and supply agreement
(the "Commercial Agreement") with BMS and its
Page 8
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 resumeand has in fact, resumed 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.Commercial 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 an operating profit, E.R. Squibb will pay
the Company the amount of such distribution fee, and in the event of an
operating loss, the Company will credit E.R. Squibb the amount of such
distribution fee. The Commercial Agreement provides that the Company 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 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 the up-front and milestone payments, the
distribution fees for the United States, Canada and Japan 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 ProductERBITUX in each country inof the
TerritoryUnited States, Canada and Japan on the later of September 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 such expiration as follows:
- 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 significant
concern regarding a regulatory or patient safety issue that would
seriously impact the long-term viability of all products; or
Page 9
- by either party, in the event that the JEC does not approve
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 threenine months ended
March 31,September 30, 2002 in advisor fees associated with the amendment to the
Commercial Agreement with BMS and affiliates, and $16,050,000 during the nine
months ended September 30, 2001, in advisor fees associated with consummating
the acquisition agreement, the stockholder agreement and 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$14,106,000 and $6,714,000 at JuneSeptember 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$7,248,000 and $8,521,000$15,769,000 in the three and sixnine months
ended JuneSeptember 30, 2002, respectively. Of these amounts, $1,960,000$2,477,000 and
$3,810,000$6,286,000 in the three and sixnine months ended JuneSeptember 30, 2002, respectively,
related to reimbursable costs associated with supplying ERBITUX for use in
clinical trials associated with this agreement. TheA portion of the ERBITUX sold to
BMS 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 manufacturing direct labor and overhead was consumed or, in the case of contract
manufacturing, when such services were performed. These costs totaled $462,000
and $4,271,000 for the three and nine months ended September 30, 2002,
respectively. Reimbursable research and development and marketing expenses were
incurred and totaled approximately $466,000$4,771,000 and $4,711,000$9,483,000 in the three and
sixnine months ended JuneSeptember 30, 2002. These amounts have been recorded as
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 resulted in the issuance
of credit memos to BMS during the threenine months ended JuneSeptember 30, 2002 totaling
approximately $2,949,000, which ultimately reduced collaborative agreement
revenue and license fee revenue in the three and sixnine months ended JuneSeptember 30, 2002.
License fees and milestone revenues consist of the following:
Page 9
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
---------------------------- ---------------------------------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ---------------------- ---------- ----------- -----------
BMS ERBITUX license fee revenue ......................................... $4,841,000 $ 1,499,000387,000 $12,907,000 $ -- $ 8,066,000 $ --387,000
Merck KGaA ERBITUX milestone revenue ............................... -- 2,000,0001,760,000 -- 26,000,00027,760,000
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.......... 97,000 97,000 289,000 289,000
Other ............................................................................................. 58,000 -- 58,000 40,000
-- 40,000
------------ ------------ ------------ ---------------------- ---------- ----------- -----------
Total license fees and milestone revenues . $ 1,595,000 $ 3,136,000 $ 8,258,000 $ 27,232,000
============ ============ ============ ============............ $4,996,000 $2,244,000 $13,254,000 $29,476,000
========== ========== =========== ===========
Collaborative agreement revenue (see note 1) from corporate partners
consists of the following:
THREE MONTHS ENDED SIXNINE MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
---------------------------- ---------------------------------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ---------------------- ---------- ----------- -----------
BMS, reimbursable ERBITUX research and development
expenses ......................... $ 1,740,000............................................... $7,152,000 $ -- $ 7,692,000$14,844,000 $ --
BMS, reimbursable ERBITUX marketing expenses ... 686,000............. 96,000 -- 829,000925,000 --
Merck KGaA, reimbursable ERBITUX research and
development expenses ............ 656,000 68,000 1,369,000 2,167,000................................... 527,000 1,446,000 1,896,000 3,613,000
Merck KGaA, reimbursable ERBITUX product costs for use
in clinical trials ............. 6,544,000 393,000 10,853,000 1,423,000..................................... 1,470,000 1,170,000 12,323,000 2,593,000
Merck KGaA, reimbursable administrative expenses 273,000 183,000 273,000 183,000......... 144,000 194,000 417,000 377,000
Merck KGaA, reimbursable BEC2 research and
development expenses ..................... 33,000 -- 154,000 122,000
------------ ------------ ------------ ------------................................... 27,000 8,000 181,000 130,000
---------- ---------- ----------- -----------
Total collaborative agreement revenue ...................... $9,416,000 $2,818,000 $30,586,000 $ 9,932,000 $ 644,000 $ 21,170,000 $ 3,895,000
============ ============ ============ ============6,713,000
========== ========== =========== ===========
Page 10
Amounts due from corporate partners consist of the following:
JUNESEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------------------- -------------
Due from BMS, ERBITUX research and development and marketing expenses ......................... $ 8,157,00014,106,000 $ 6,714,000
Due from Merck KGaA, ERBITUX research and development and administrative expenses ................................................................. 1,604,000....... 1,233,000 666,000
Due from Merck KGaA, reimbursement of ERBITUX manufacturing costs for use in clinical
trials .......................................................... 6,768,000................................................................................ 1,471,000 837,000
Due from Merck KGaA, BEC2 research and development expenses ................ 33,000............................. 60,000 13,000
------------ ------------------------- -------------
Total amounts due from corporate partners ......................................................................... $ 16,562,00016,870,000 $ 8,230,000
============ ========================= =============
Deferred revenue consists of the following:
JUNESEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------------------- -------------
BMS, ERBITUX Commercial Agreement ............................ $329,382,000 $197,447,000....................................................... $ 324,539,000 $ 197,447,000
Merck KGaA, ERBITUX development and license agreement .......................................... 3,667,000................................... 3,611,000 3,778,000
Merck KGaA, BEC2 development and commercialization agreement . 2,190,000............................ 2,150,000 2,271,000
------------ ------------
335,239,000------------- -------------
330,300,000 203,496,000
Less: current portion ........................................ (36,627,000)................................................................... (37,494,000) (20,683,000)
------------ ------------
$298,612,000 $182,813,000
============ ============------------- -------------
$ 292,806,000 $ 182,813,000
============= =============
Page 10
(8) CONTINGENCIES
TheBeginning in January 2002, a number of complaints asserting claims under
the federal securities laws against the Company and certain of its directors and
officers and directors are named as
defendantswere filed in a numberthe U.S. District Court for the Southern District 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 theseNew
York. Those actions were consolidated under the caption of the
first-filed of these actions, Irvine v. ImcloneImClone
Systems Incorporated et at.al., No. 02 Civ. 0109(RO).0109 (RO), and on September 16, 2002, a
consolidated amended complaint was filed in that consolidated action, which
plaintiffs corrected in limited respects on October 22, 2002. The original complaints in these actions allegecorrected
consolidated amended complaint names as defendants the Company, its former chief
executive officer Dr. Samuel D. Waksal, its current chief executive officer Dr.
Harlan W. Waksal, the chairman of its board of directors Robert Goldhammer,
current or former directors Richard Barth, David Kies, Paul Kopperl, John
Mendelsohn and William Miller, the Company's former general counsel John Landes,
and its vice president for marketing and sales, Ronald Martell. The complaint
asserts claims for securities fraud under sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 ("the Exchange Act") and SEC Rule 10b-5, on
behalf of a purported class of persons who purchased the Company's publicly
traded securities between March 27, 2001 and January 25, 2002. The complaint
also asserts claims against Dr. Samuel D. Waksal under section 20A of the
Exchange Act on behalf of a separate purported sub-class of purchasers of the
Company's securities between December 27, 2001 and December 28, 2001. The
complaint generally alleges that various public statements made by or on behalf
of the Company or its senior officersthe other defendants during 2001 and early 2002 regarding the
prospects for FDA approval of ERBITUX were false or misleading when made, that
various Company insidersthe individual defendants were allegedly aware of material non-public
information regarding the actual prospects for ERBITUX at the time that those insidersthey
engaged in transactions in the Company's common stock and that members of the
purported shareholderstockholder 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 seekcomplaint seeks to proceed on
behalf of athe alleged class of the Company's present and former stockholders, other than
defendants or persons affiliated with the defendants, seekdescribed above, seeks monetary damages in an
unspecified amount and seekseeks recovery of plaintiffs' costs and attorneys' fees.
AUnder the existing schedule in that action, defendants' response to the
consolidated amended complaint is expecteddue in late November 2002.
Separately, on September 17, 2002 an individual purchaser of the Company's
common stock filed an action on his own behalf asserting claims against the
Company, Dr. Samuel D. Waksal and Dr. Harlan W. Waksal under sections 10(b) and
20(a) of the Exchange Act and SEC Rule 10b-5. That action is styled Flynn v.
ImClone Systems Incorporated, et al., No. 02 Civ. 7499. Plaintiff alleges that
he purchased shares on various dates in late 2001, that various public
statements made by the Company or the other defendants during 2001 regarding the
prospects for FDA approval of ERBITUX were false or misleading when made and
that plaintiff relied on such allegedly false and misleading information in
making his purchases. Plaintiff seeks compensatory damages of not less than
$180,000 and punitive damages of $5 million, together with interest, costs and
attorneys' fees. Defendants' response to be filed shortly.the complaint is due in late November
2002.
Page 11
Beginning on January 13, 2002 and continuing thereafter, eightnine separate
purported stockholdersshareholder derivative actions have been filed against the members of
its boardthe Board of directorsDirectors and the Company, as nominal defendant, makingadvancing claims
based on allegations similar to the allegations in the federal securities class
action complaints. Four 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.
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 three purported derivative actions have been filed in New York State
Supreme Court in Manhattan, styled Boghosian v. Barth, et al., Index No.
100759/02, Johnson v. Barth, et al., Index No. 601304/02 and Henshall v. Bodnar,
et al., Index No. 603121/02. All of these actions assert claims, purportedly on
behalf of the Company's behalf,Company, for breach of fiduciary duty by certain members of the
boardBoard of directorsDirectors based on the allegation, among others, that certain directors
engaged in transactions in the Company'sour common stock while in possession of material,
non-public information concerning the regulatory and marketing prospects for
ERBITUX.ERBITUX or improperly disclosed such information to others. 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 eightnine 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
boardBoard of directorsDirectors 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 ofThe Company intends to vigorously defend itself against the claims
asserted in these actions, which are in their earliest stages and a reserve has not
been established instages. The Company is
unable to predict the accompanying consolidated financial statements becauseoutcome of these actions at this time. Because the Company
does not believe at this time that a loss is probable, or estimable.
The Company intends to contest vigorouslyno legal reserve has been established.
As previously reported, 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'sour securities by certain Company
insiders in 2001. The Company has also received subpoenas and requests for
information pertaining to document retention issues in 2001 and 2002 and to
certain communications regarding ERBITUX in 2000. The Company is cooperating in
connection 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, ("the Commission") indicating
that the staffStaff of the Commission is considering recommending that the Commission
bring an action against the Company relating to the Company's disclosureits disclosures immediately
following itsthe receipt of a Refusal-to-File letter from the FDA on December 28,
2001 for its biologics license application for ERBITUX. The CompanyWe filed a Wells submission"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 Septemberby the end of this year.
On August 7, 2002, a federal grand jury in the Southern District of New
York returned an indictment charging Dr. Samuel D. Waksal with, inter alia,
securities fraud and conspiracy to commit securities fraud. On October 15, 2002,
Dr. Samuel D. Waksal entered a plea of guilty to several counts in that
indictment, including that on December 27, 2001 he directed a family member to
sell shares of the Company's common stock and attempted to sell shares that he
owned in advance of an expected announcement that the FDA had issued a "refusal
to file" letter with respect to the Company's application for approval of
ERBITUX. The Company received such a "refusal to file" letter from the FDA on
December 28, 2001 and announced its receipt of that letter following the close
of trading.
On August 14, 2002, after the federal grand jury indictment of Dr. Samuel
D. Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to
certain counts of that indictment, the Company filed an action in New York State
Supreme Court seeking recovery of certain compensation, including advancement of
certain defense costs, that the Company had paid to or on behalf of Dr. Samuel
D. Waksal. That action, styled ImClone Systems Incorporated v. Samuel D. Waksal,
Index No. 02/602996, is in its earliest stages.
The Company has incurred legal fees associated with these matters totaling
approximately $5,724,000$9,249,000 during the sixnine months ended JuneSeptember 30, 2002. In
addition, the Company has estimated and recorded a receivable totaling
$2,350,000$2,593,000 for a portion of the above mentioned legal fees that the Company
believes are recoverable from its insurance carriers. This receivable is
included in Other current assets in the consolidated balance sheet at JuneSeptember
30, 2002. In November 2002, the
Page 12
Company received a letter from counsel for its primary insurance carrier
asserting that Dr. Samuel D. Waksal's guilty plea gives rise to an exclusion
from insurance coverage for the Company. The Company intends to contest this
assertion.
(9) CERTAIN RELATED PARTY TRANSACTIONS
In September 2001 and February 2002, the Company entered into employment
agreements with six senior executive officers, including, in September 2001, 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 one-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
In October 2002, the Company accepted the resignation of an executive
officer who held one of the aforementioned employment agreements. The Company
and the officer executed a separation agreement whereby the officer will receive
his stated base salary from the date of termination through October 2003 and
certain benefits including healthcare and life insurance coverage through
December 2002.
In August 2002 and September 2002, the Company entered into one-year
agreements with two executive officers. The employment agreements provide for a
stated base salary aggregating $390,000.
Certain transactions engaged in by the Company's former President and
Chief Executive Officer, Dr. Samuel D. 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. Samuel D. 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 "short-swing
profits" he was deemed to have realized. The amountamounts received in March 2002 waswere 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 StockholdersStockholder 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 best interests of the Company and its stockholders.
Subject to certain exceptions, rights become exercisable (i) on the tenth
day after public announcement that any person, entity, or group of persons or
entities has acquired ownership of 15% or more of the Company's outstanding
common stock, or (ii) 10 business days following the commencement 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 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 may redeem these rights in whole at a price of $.001 per
right. The rights expire on February 15, 2012.
(11) SEPARATION AGREEMENT
On May 22, 2002, the Company accepted the resignation of its President and
Chief Executive Officer, Dr. Samuel D. Waksal. In connection with the
resignation, on May 24, 2002 the Company and Dr. Samuel D. Waksal executed a
separation agreement whereby Dr. Samuel D. Waksal received a lump sum payment
totaling $7,000,000 and iswas 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
Page 13
in the consolidated statement of operations for the three and sixnine months ended JuneSeptember
30, 2002. In addition, 1,250,000 stock option awards granted to Dr. Samuel D.
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.
Samuel D. Waksal, were deemed amended such that the unvested portion vested
immediately as of the date 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. Samuel D. Waksal, in contravention of
Company policy, directed the destruction of certain documentsof his personal records that
were, or could be perceived to be materialrelevant to the pending government
investigations. Accordingly, on August 14, 2002, the Company filed an action
against Dr. Samuel D. 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 result of the
agreement), disgorgement of amounts previously advanced by the Company on behalf
of Dr. Samuel D. Waksal for his legal fees and expenses, and repayment of
certain amounts paid under Dr. Samuel D. Waksal's previous employment agreement.
The action, styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No.
02/602996, 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 non-qualified stock options to purchase 3,300,000 shares of the
Company's common stock to employees, directors, consultants and advisors of the
Company. Options granted under the plan generally vest over one to five year
periods and unless earlier terminated, expire ten years from the date of grant.
Incentive stock options granted under the 2002 stock option plan may not exceed
825,000 shares of common stock, may not be granted at a price less than the fair
market value of the stock at the date of grant and may not be granted to
non-employees.
Page 1214
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 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
JuneSeptember 30, 2002, approximately $8,066,000$12,907,000 was recognized as revenue during
the sixnine months ended JuneSeptember 30, 2002 and $10,618,000$15,461,000 from the commencement
of the agreementCommercial Agreement through JuneSeptember 30, 2002.
The methodology used to recognize deferred 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 matterslegal proceedings because
we dothe Company does not believe at this time that a loss is probable or estimable.probable. However, if in a future
period, we deem it probable that an unfavorable rulingevents in any such legal proceedingproceedings render it probable that a loss
will occurbe incurred and if such amountloss is reasonably estimable there existsat that time, the
possibility ofexists for 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 material
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
Page 15
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 material logistics and warehousing facility
will be the primarya 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 material 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"Contract Manufacturing
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 JuneSeptember 30, 2002, the estimated remaining future commitments
under the amended commercial manufacturing services agreement with Lonza were
$38,160,000$26,283,000 in 2002 and $24,050,000$20,350,000 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
SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2002 AND 2001.
REVENUES
Revenues for the sixnine months ended JuneSeptember 30, 2002 and 2001 were
$30,116,000$45,150,000 and $31,890,000,$37,619,000, respectively, a decreasean increase of $1,774,000,$7,531,000, or 6%20% in
2002. Revenues for the sixnine months ended JuneSeptember 30, 2002 primarily included
$8,066,000$12,907,000 in license fee revenue and $8,521,000$15,769,000 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
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. We also recognized
$12,495,000$14,636,000 in collaborative agreement revenue from our ERBITUX development and
license agreement with Merck KGaA. In addition, we recognized $111,000$167,000 of the
$4,000,000 up-front payment received upon entering into the ERBITUX development and licensethis agreement with
Merck KGaA. This revenue is being recognized ratably over the anticipated life
of the agreement. Revenues for the sixnine months ended JuneSeptember 30, 2002 also
included $688,000$1,308,000 in royalty revenue from our strategic corporate alliance
with Abbott Laboratories ("Abbott") in diagnostics and $81,000$122,000 in license fee
revenue and $154,000$181,000 in collaborative agreement revenue from our strategic
corporate alliance with Merck KGaA for our principal cancer vaccine product
candidate, BEC2. Revenues for the sixnine months ended JuneSeptember 30, 2001 primarily
included $26,000,000$27,760,000 in milestone revenue and $3,773,000$6,583,000 in collaborative
agreement revenue from our ERBITUX development and license agreement with Merck
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 $111,000$167,000 of the $4,000,000 up-front
payment received upon entering into this agreement. This revenue is being
recognized ratably over the anticipated life of the agreement. Revenues for the
sixnine months ended JuneSeptember 30, 2001 also included $763,000$1,428,000 in royalty revenue
from our strategic corporate alliance with Abbott in diagnostics and $1,000,000
in milestone revenues, and $81,000$122,000 in license fee revenues and $122,000$130,000 of
collaborative agreement revenue from our strategic corporate alliance with Merck
KGaA for BEC2. Finally, revenues for the nine months ended September 30, 2001
also included $387,000 in license fee revenue from our ERBITUX Commercial
Agreement with BMS and its wholly-owned subsidiary, E.R. Squibb.
Page 1416
OPERATING EXPENSES:
Total operating expenses for the sixnine months ended JuneSeptember 30, 2002 and
2001 were $102,797,000$158,642,000 and $59,437,000,$107,750,000, respectively, an increase of
$43,360,000,$50,892,000, or 73%47% in 2002. Operating expenses forin the sixnine months ended
JuneSeptember 30, 2002 included a $2,250,000 in advisor feefees associated with
completing the amended Commercial Agreement.Agreement with BMS and E.R. Squibb, operating
expenses in the nine months ended September 30, 2001 included $16,050,000, in
advisor fees associated with consummating the acquisition agreement, the
stockholder agreement and the commercial agreement (the "BMS agreements") with
BMS and affiliates.
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT
Research and development expenses for the sixnine months ended JuneSeptember 30,
2002 and 2001 were $75,945,000$119,449,000 and $49,486,000,$76,150,000, respectively, an increase of
$26,459,000$43,299,000 or 53%57% in 2002. Research and development expenses for the sixnine
months ended JuneSeptember 30, 2002 and 2001 as a percentage of total operating
expenses, excluding the advisor feefees associated with the amended Commercial
Agreement and the original BMS agreements, in the sixnine months ended JuneSeptember
30, 2002 and 2001, 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 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 include costs that are
reimbursable by our corporate partners. The increase in research and development
expenses for the sixnine months ended JuneSeptember 30, 2002 was primarily attributable
to (1) the costs associated with 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 and pilot plant manufacturing associated with ERBITUX and
our antibody-based angiogenesis inhibitor product candidate for the treatment of
cancer, IMC-2C6other monoclonal
antibodies and (4) increased expenditures associated with discovery research. We
expect research and development costs to increase in future periods as we
continue to manufacture ERBITUX prior to any approval of the product that we may
obtain for commercial use or until we receive committed purchase obligations
offrom our corporate partners. In the event of such approval or committed purchase
obligations from our corporate partners, the subsequent costs associated with
manufacturing ERBITUX for supply to E.R. Squibbcorporate partners for commercial use 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 also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND 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. Marketing, general and administrative expenses also include amounts
reimbursable from our corporate partners. Marketing, general and administrative
expenses for the sixnine months ended JuneSeptember 30, 2002 and 2001 were $24,602,000$36,943,000
and $9,951,000,$15,550,000, respectively, an increase of $14,651,000,$21,393,000, or 147%138% 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'sour 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) costsexpenses associated with our marketing efforts,higher
public relations costs due to the factors noted in (2) above, (4) additional administrative staffing requiredexpenses
associated with higher insurance premiums with the respect to support our commercialization efforts for ERBITUXdirector and
officer liability insurance, (5) the write-off of an expired negotiating right
with Lonza and (6) expenses associated with general corporate activities. Other
than the legal expenses componentand public relations expenses components discussed in
(2) and (3) 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 for
ERBITUX.
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE
Interest income was $5,168,000$7,427,000 for the sixnine months ended JuneSeptember 30,
2002 compared with $7,827,000$11,071,000 for the sixnine months ended JuneSeptember 30, 2001, a
decrease of $2,659,000,$3,644,000, or 34%33% in 2002. The decrease was primarily attributable
to a decrease in interest rates associated with our portfolio of debt
securities. Interest expense was $6,839,000$10,000,000 and $6,510,000$10,042,000 for the sixnine months
ended JuneSeptember 30, 2002 and 2001, respectively, an increasea decrease of $329,000 or 5%$42,000 in 2002.
Interest expense for the six months ended June 30, 2002 and 2001 was offset by the capitalization of interest costs of
$780,000$1,441,000, during the construction period of our second commercial
manufacturing facility, our administration facility and $1,120,000, respectively,our material logistics
facility in Somerville, New Jersey, and our
Page 17
chemistry facility in Brooklyn, New York, in the nine months ended September 30,
2002, and $1,398,000 during the construction period of our product launch
manufacturing facility and aour second commercial manufacturing facility for which design, engineering, and
pre-construction costs have been incurred.in the
nine months ended September 30, 2001. Interest expense for both periods included
(1) interest on the 5 -1/5-1/2% 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
gains on securities and investments of $1,236,000$1,500,000 and losses of $4,467,000$2,668,000 for
the sixnine months ended JuneSeptember 30, 2002 and 2001, respectively. The losses on
securities and investments for the sixnine months ended JuneSeptember 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.
INCOME TAXES
Income taxes of $550,000 for the nine months ended September 30, 2002
and are the result of various tax law changes in the State of New Jersey, one of
which is the establishment of the Alternative Minimum Assessment tax ("AMA") to
which we are subject.
NET LOSSES
We had a net loss of $73,116,000$115,115,000 or $1.00$1.57 per share for the sixnine months
ended JuneSeptember 30, 2002, compared with a net loss of $30,698,000$71,770,000 or $0.46$1.05 per
share for the sixnine months ended JuneSeptember 30, 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 JUNESEPTEMBER 30, 2002 AND 2001.
REVENUES
Revenues for the three months ended JuneSeptember 30, 2002 and 2001 were
$11,565,000$15,034,000 and $3,895,000,$5,729,000, respectively, an increase of $7,670,000,$9,305,000, or 197%162% in
2002. Revenues for the three months ended JuneSeptember 30, 2002 primarily included
$1,499,000$4,841,000 in license fee revenue and $2,426,000$7,248,000 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 agreementthe Commercial 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$2,141,000 in collaborative agreement revenue from our ERBITUX
development and license agreement with Merck KGaA. In addition, we recognized
$55,000$56,000 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 JuneSeptember 30, 2002 also included $38,000$620,000 in royalty revenue
from our strategic corporate alliance with Abbott in diagnostics and $41,000 in
license fee revenue and $33,000$27,000 in collaborative agreement revenue from our
strategic corporate alliance with Merck KGaA for BEC2. Revenues for the three
months ended JuneSeptember 30, 2001 primarily included $2,000,000$1,760,000 in milestone
revenue and $644,000$2,810,000 in collaborative agreement revenue from our ERBITUX
development and license agreement with Merck 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$56,000 of the $4,000,000 up-front payment received upon entering into this
agreement. This revenue is being recognized ratably over the anticipated life of
the agreement. Revenues for the three months ended JuneSeptember 30, 2001 also
included $115,000$667,000 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 revenues from our strategic
corporate alliance with Merck KGaA for BEC2. Finally, revenues for the three
months ended September 30, 2001 also included $387,000 in license fee revenue
from our ERBITUX Commercial Agreement with BMS and its wholly-owned subsidiary,
E.R. Squibb.
OPERATING EXPENSES:
Total operating expenses for the three months ended JuneSeptember 30, 2002 and
2001 were $54,646,000$55,845,000 and $30,613,000,$48,313,000, respectively, an increase of $24,033,000,$7,532,000,
or 79%16% in 2002. Operating expenses for the three months ended September 30, 2001
included $16,050,000 in advisor fees associated with consummating the BMS
agreements with BMS and its affiliates.
Page 18
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT
Research and development expenses for the three months ended JuneSeptember 30,
2002 and 2001 were $38,167,000$43,504,000 and $24,390,000,$26,664,000, respectively, an increase of
$13,777,000$16,840,000 or 56%63% in 2002. Such amountsResearch and development expenses for the three
months ended JuneSeptember 30, 2002 and 2001 represented 70% and 80%, respectively,as a percentage of total operating
expenses.expenses, excluding the advisor fees associated with the BMS agreements, in the
three months ended September 30, 2001, were 78% 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 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 include
costs that are reimbursable by our corporate partners. The increase in research
and development expenses for the three months ended JuneSeptember 30, 2002 was
primarily attributable to (1) the costs associated with 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 and pilot plant manufacturing associated with ERBITUX and IMC-2C6other
monoclonal antibodies and (4) increased expenditures associated with discovery
research. We expect research and development costs to increase in future periods
as we continue to manufacture Page 16
ERBITUX prior to any approval of the product that
we may obtain for commercial use or until we receive committed purchase
obligations offrom our corporate partners. In the event of such approval or
committed purchase obligations from our corporate partners, the subsequent costs
associated with manufacturing ERBITUX for supply to E.R. Squibbcorporate partners for
commercial use 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 also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND 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. Marketing, general and administrative expenses also include amounts
reimbursable from our corporate partner.partners. Marketing, general and administrative
expenses for the three months ended JuneSeptember 30, 2002 and 2001 were $16,479,000$12,341,000
and $6,223,000,$5,599,000, respectively, an increase of $10,256,000,$6,742,000, or 165%120% 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(2) expenses associated
with our marketing efforts,higher public relations costs due to the factors noted in (1) above, (3)
expenses associated with higher insurance premiums with respect to director and
officer liability insurance, (4) additional administrative staffing required to
support our commercialization efforts for ERBITUXthe write-off of an expired negotiating right
with Lonza and (5) expenses associated with general corporate activities. Other
than the legal expenses and public relations expenses component discussed in (1)
and (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 for
ERBITUX.
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE
Interest income was $2,904,000$2,259,000 for the three months ended JuneSeptember 30,
2002 compared with $3,262,000$3,244,000 for the three months ended JuneSeptember 30, 2001, a
decrease of $358,000,$985,000, or 11%30% in 2002. The decrease was primarily attributable to
a decrease in interest rates associated with our portfolio of debt securities.
Interest expense was $3,347,000$3,161,000 and $3,197,000$3,532,000 for the three months ended
JuneSeptember 30, 2002 and 2001, respectively, an increasea decrease of $150,000$371,000 or 5%11% in
2002. Interest expense
for the three months ended June 30, 2002 and 2001 was offset by the capitalization of interest costs of
$481,000 and $626,000, respectively,$660,000 during the construction period of our product launch manufacturing facility and a
second commercial manufacturing
facility, for which design, engineering,our administration facility and pre-construction costs have been incurred.our material logistics facility in
Somerville, New Jersey, and our chemistry facility in Brooklyn, New York, in the
three months ended September 30, 2002, and $278,000 during the construction
period of our second commercial facility in the three months ended September 30,
2001. Interest expense for both periods included (1) interest on the Convertible
Subordinated Notes issued in February 2000, (2) interest on an 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 gains on securities and investments of $435,000$264,000 and losses of
$2,850,000$1,800,000 for
the three months ended JuneSeptember 30, 2002 and 2001, respectively.
The
losses on securities and investmentsINCOME TAXES
Income taxes of $550,000 for the three months ended JuneSeptember 30, 2001
included a $2,775,000 write-down2002
and are the result of our investmentvarious tax law changes in ValiGen N.V and a
$1,000,000 write-offthe State of our convertible promissory note from A.C.T. Group, Inc.New Jersey, one of
which is the establishment of the AMA to which we are subject.
Page 19
NET LOSSES
We had a net loss of $43,089,000$41,999,000 or $0.59$0.57 per share for the three months
ended JuneSeptember 30, 2002, compared with a net loss of $29,503,000$41,072,000 or $0.44$0.57 per
share for the three months ended JuneSeptember 30, 2001. The increasedecrease in the net
losses and per share net loss to common stockholders was due to the factors
noted above.
LIQUIDITY AND CAPITAL RESOURCES
At JuneSeptember 30, 2002, our principal sources of liquidity consisted of
cash and cash equivalents and securities available for sale of approximately
$352,000,000.$293,000,000. From our inception on April 26, 1984 through JuneSeptember 30, 2002,
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 $492,652,000 in
net proceeds
- We have earned approximately $109,531,000$124,565,000 from license fees,
contract research and development fees, reimbursements from our
corporate partners and royalties from collaborative partners.
Additionally, we have Page 17
approximately $335,239,000$330,300,000 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 with Merck KGaA. These amounts are being
recognized as revenue over the expected lives of the respective
agreements
- We have earned approximately $52,282,000$54,541,000 in interest income
- 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 and due May 2004
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.
Until 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 aggregate, subject to certain exceptions; (ii) incurring additional
indebtedness if the total of the principal amount of such 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 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
Page 20
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 will 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 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
ImClone Systems. As between E.R. Squibb and the Company, each will be
responsible for 50% of the cost of all clinical studies in Japan.
In February 2000, we completed a private placement of $240,000,000 in 5
- -1/2% convertible subordinated notes due March 1, 2005. We received net proceeds
of approximately $231,500,000, after deducting expenses associated with the
offering. Page 18
Accrued interest on the notes was approximately $4,400,000$1,100,000 at
JuneSeptember 30, 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 ERBITUX in bulk form under cGMP
conditions.cGMP. These
steps were taken to assure that the manufacturing process would produce bulk
material that conforms with our reference material and to support in part, our
regulatory filing with the FDA. As of JuneWe incurred approximately $7,068,000 for
services provided under this agreement through September 30, 2002,2002. Lonza has
completed its responsibilities under the development and manufacturing service
agreement. We had incurred approximately $7,068,000 for services
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 ERBITUX. This agreement
was amended in June 2001 and again in September 2001 to include additional
services. As of JuneSeptember 30, 2002, we had
incurred approximately $24,840,000$40,418,000 for
services provided under the commercial manufacturing services agreement. Under these two agreements, Lonza
is currently manufacturing ERBITUX 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 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. In the event we
terminate (i.e., the cancellation of batches of bulk product) the commercial
manufacturing services agreement 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 each 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 JuneSeptember 30, 2002, the estimated remaining future
commitments under the amended commercial manufacturing services agreement are
$38,160,000$26,283,000 in 2002 and $24,050,000$20,350,000 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$7,183,000 for services provided under this
agreement, of which $3,658,000$6,595,000 was reimbursed by Merck KGaA. The remaining
$2,350,000$588,000 that is due from Merck KGaA is included in Amounts due from corporate
partners in the consolidated balance sheet at JuneSeptember 30, 2002. At JuneSeptember
30, 2002, the estimatedthere are no remaining future commitments under this agreement is $1,175,000 in
2002.agreement.
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. WeUpon
execution of the letter of intent, we paid Lonza $3,250,000 for the exclusive
rightsright to reserve and negotiate a long-term supply agreement for a portion of the new facility's
overallmanufacturing capacity. SuchDuring September 2002, we wrote-off the deposit because
the exclusive negotiation period ended on September 30, 2002, although
negotiations commenced shortly thereaftercontinued thereafter. The $3,250,000 is included in Marketing,
general and administrative expenses on the Consolidated Statement of Operations
for the three and nine months ended September 30, 2002, respectively. We are
continuing. UnderPage 21
currently negotiating with Lonza and a third party with the intention of
assigning to the third party any remaining rights we have under this letter of
intent in return for the third party's agreement to reimburse us the $3,250,000
upon execution of a binding agreement with Lonza for supply of biologics on
similar terms to those we have negotiated with Lonza. We cannot be certain conditions, such payment shall be refunded to us. Ifthat
we will 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.this arrangement.
We cannot be certain that we will be able to enter into agreements for
commercial supply with third 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 JuneSeptember 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 JuneSeptember 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.so. 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 a 1998 financing agreement with Finova. This 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
Page 22
value purchase option at the expiration of its 48-month term. We have entered
into six individual leases under the financing agreement with an aggregate cost
of $1,942,000. This financing arrangement is now expired.
We rent our current New York corporate headquarters and research facility
under an operating lease that expires in December 2004. In 2000 we completed
renovations of the facility to better suit our needs, at a cost of approximately $2,800,000.
In October 2001, we entered into a sublease for a four-story building in
downtown New York to serve as our future 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$50,475,000 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 in the principal amount of a $10,000,000 note receivable.$10,000,000. The noteloan is secured by
a leasehold mortgage on the prime lease as well as a collateral assignment of
rents by the sublandlord. The note receivableloan is payable by the sublandlord over 20 years
and bears interest at 5 -1/5-1/2% 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 five successive one-year extensions. As of JuneSeptember 30, 2002,
we have incurred approximately $3,778,000,$4,250,000, excluding capitalized interest of
approximately $83,000$138,000 for the retrofit of this facility to better fit our
needs. The total cost for the retrofit will be
approximately $4,300,000.At September 30, 2002, this project is substantially complete.
We built a 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 ERBITUX. The cost of the
facility was approximately $53,000,000, excluding capitalized interest of
approximately $1,966,000. The cost forof the facility has comewas funded from our cash
reserves, which wereconsisting primarily obtained throughof the proceeds from 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 time.
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 be approximately $233,000,000,$234,000,000,
excluding capitalized interest. The actual cost of the new facility may change
depending upon various factors. We have incurred approximately $52,617,000,$64,693,000,
excluding capitalized interest of approximately $1,234,000,$1,831,000, in conceptual
design, engineering, equipment and construction costs through JuneSeptember 30,
2002.
On January 31, 2002 we purchased 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 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
material logistics for our Somerville campus.campus and are in the process of
retrofitting the building to better suit our needs. We have incurred
approximately $326,000, excluding capitalized interest of approximately $2,000,
for the retrofit of this facility through September 30, 2002. The total cost for
the retrofit is expected to be approximately $635,000.
On May 20, 2002, we 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 building with 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. We intend to use this property as the
administrative building for the Somerville campus.campus and are in the process of
retrofitting the building to better suit our needs. As of JuneSeptember 30, 2002, we
have incurred approximately $422,000$2,857,000,
Page 23
excluding capitalized interest of approximately $7,000, for the retrofit of
this facility. The total cost for the retrofit willis expected to be approximately
$5,187,000.
Total capital expenditures made during the sixnine months ended JuneSeptember 30,
2002 were $42,686,000$60,165,000 and primarily included $1,579,000$1,955,000 related to the purchase
of equipment for and leasehold improvement costs associated with our corporate
office and research laboratories in our New York facility, $23,437,000$36,110,000 related
to the conceptual design, preliminary engineering plans, capitalized interest
costs and construction costs for athe second commercial manufacturing facility,
$1,125,000 and $5,895,000 for the land and building, respectively, for the
purchase of and $328,000 for the retrofit of the warehousing and material
logistics building including capitalized interest, $1,041,000 and $3,474,000 for
the land and building, respectively, for the purchase of and $422,000$2,864,000 for the
retrofit of the central operationsadministration building $3,198,000including capitalized interest,
$3,725,000 for the retrofit of the Brooklyn chemistry lab $725,000including capitalized
interest, $1,483,000 related to improving and equipping our product launch
manufacturing facility, and $1,031,000$1,439,000 related to improving and equipping our pilot
manufacturing facility.facility, and approximately $719,000, for updating and upgrading
our computer and telephonic software and hardware systems.
We believe that our existing cash on hand, marketable securities and
amounts to which we are entitled should enable us to maintain our current and
planned operations through 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. 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 $25,000,000
in equity-based milestone payments under our ERBITUX development and license
agreement with Merck KGaA and up to $18,500,000 in cash-based milestone payments
under our BEC2 development agreement with Merck KGaA. There can be no assurance
that we will achieve these 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 competition
- 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 2003, we will require significant
levels of additional capital and 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. If
adequate funds are not available, we may be required to significantly curtail
our planned operations.
Page 24
Below is a table that presents our contractual obligations and commercial
commitments as of JuneSeptember 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............................. 205,000 78,000 76,000 15,000 38,00036,000
Operating leases ................. 54,637,000 1,020,000 3,024,000 3,521,000 47,072,000....................... 54,269,000 528,000 3,106,000 3,534,000 47,101,000
Construction commitments ......... 62,987,000 23,208,000 38,287,000 1,492,000 --............... 65,899,000 5,008,000 32,093,000 11,401,000 17,397,000
Lonza ............................ 63,385,000 39,335,000 24,050,000.................................. 46,633,000 26,283,000 20,350,000 -- --
------------ ------------ ------------ ----------------------- ----------- ----------- ------------
Total contractual cash obligations $423,508,000 $ 63,733,000 $ 65,437,000 $ 7,228,000 $287,110,000..... $409,206,000 $31,897,000 $55,625,000 $17,150,000 $304,534,000
============ ============ ============ ======================= =========== =========== ============
New Jersey State Tax Law ChangesAt December 31, 2001, our estimated net operating loss carryforwards for
United States Federal income tax purposes were approximately $389,742,000, which
expire at various dates from 2002 through 2021. Of our $389,742,000 in estimated
net operating loss carryforwards, we have approximately $347,798,000 (of which
$342,639,000 will carryforward to 2003) available to use in 2002, approximately
$5,159,000 available to use in each year from 2003 through 2010 and
approximately $672,000 available to use in 2011. Any of these net operating loss
carryforwards which are not utilized are available for utilization in future
years, subject to applicable statutory expiration dates. See the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 filed with the
SEC.
The estimated amount of net operating loss carryforwards at December 31,
2001 reported above represents a reduction of approximately $47,447,000 in the
amount of net operating loss carryforwards previously reported at December 31,
2001 in our Annual Report on Form 10-K. The reduction is the result of a change
in the Company's position with respect to the deductibility under Section 162(m)
of the Internal Revenue Code of certain stock options granted to certain
executive officers of the Company.
Under Section 162(m), compensation expense in excess of $1 million per
person is not deductible and compensation expense attributable to stock options
is subject to this limit, unless the options qualify as "qualified
performance-based compensation" as defined. The reduction in the amount of the
Company's net operating loss carryforwards at December 31, 2001 reflects the
Company's position that certain options granted to executive officers do not
meet the definition of "qualified performance-based compensation".
NEW JERSEY STATE TAX LAW CHANGES
In July 2002, the State of New Jersey (""NJ''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 carryover to offset such taxable income. Page 22
A
second provision establishes the Alternative Minimum Assessment ("AMA") aimed at
companies like ours that currently pay no corporate business tax. This provision
requires that we assess an alternate tax liability with a formula that uses
either reported gross receipts or gross profits as a determining factor. We are
then required to pay the greater of the regular NJ Corporation Business Tax or
the AMA. The AMA tax paid is creditable and can be carried forward to reduce the
income tax in future periods. We have recorded a tax provision of approximately
$550,000 for the nine months ended September 30, 2002 associated with the NJ
AMA.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On August 17, 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" was issued and will be effective
for the Company in the first quarter of the year endedending December 31, 2003. The
new rule requires the fair value of a liability for an asset retirement
obligation to be recognized in the period in which it is incurred. When the
liability is initially recorded, a cost is capitalized by increasing the
carrying amount of the related 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 the related asset. To settle the liability,
the obligation for its recorded amount is paid or a gain or loss upon settlement
is incurred. Management will beis analyzing this requirement to determine the effect,
if any, 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
contracts, 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
Page 25
be measured at fair value. SFAS 146 will require a company to disclose
information about its exit and disposal activities, the related costs, and
changes in those costs in the notes to the interim and annual financial
statements that include the period in which an exit activity is initiated and in
any subsequent 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, if
any, of adoption of this statement.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS--SAFE HARBOR STATEMENT
ThoseThis Form 10-Q contains "forward-looking" statements, contained hereinas defined in the
Private Securities Litigation Reform Act of 1995, that doare based on current
expectations, estimates and projections. Statements that are not relate to historical
informationfacts, including statements about our and our subsidiary's beliefs and
expectations, are forward-looking statements. There can be no assurance that the
future results covered by such forward-lookingThese statements will be achieved.
Actualinvolve potential
risks and uncertainties; therefore, actual results may differ materially duematerially. You
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the risks and uncertainties inherent
in our business, including without limitation,date on which they were made. We do not undertake any
obligation to update any forward-looking statements, whether as a result of new
information, future events or otherwise.
Important factors that may affect these expectations include, but are not
limited to: the risks and uncertainties associated with completing pre-clinical
and clinical trials of our compounds that demonstrate such compounds' safety and
effectiveness; obtaining additional financing to support our operations;
obtaining and maintaining regulatory approval for such compounds and complying
with other governmental regulations applicable to our business; obtaining the
raw materials necessary in the development of such compounds; consummating and
maintaining 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 our
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;third party payers; attracting and retaining key personnel; obtaining and protecting
proprietary rights; legal costs and
the outcome of outstanding legal proceedings and investigations; obtaining
patent protection for discoveries and those other factors set forth in "Risk Factors" in the
Company's most recent Registration Statement and Form 10-K.risks associated with commercial
limitations imposed by patents owned or controlled by third parties.
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 guaranteed debt and
commercial paper. All such instruments are classified as securities available
for sale. Generally, we do not invest in portfolio equity securities,
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. The table below
presents the principal amounts and related weighted average interest rates by
year of maturity for our investment portfolio as of JuneSeptember 30, 2002.
2002 2003 2004 2005
------------ ------------ ------------ ---------------- ---- ---- ----
Fixed Rate .............................. $ 5,831,0002,500,000 $ 248,000-- $ -- $ --
Average Interest Rate 6.37% 6.00%......... 6.50% -- -- --
Variable Rate ....... 12,003,000(1) -- 15,603,000(1) 12,994,000(1)................. 12,002,000(1) 666,000 14,198,000(1) 10,598,000(1)
Average Interest Rate 1.99% -- 4.60% 2.21%
------------ ------------ ------------ ------------......... 1.97% 5.69% 4.55% 2.15%
----------- ----------- ----------- -----------
$14,502,000 $ 17,834,000 $ 248,000 $ 15,603,000 $ 12,994,000
============ ============ ============ ============
666,000 $14,198,000 $10,598,000
=========== =========== =========== ===========
2007 AND
2006 THEREAFTER TOTAL FAIR VALUE
------------ ------------ ------------ ------------
---- ---------- ----- ----------
Fixed Rate .............................. $ -- $ 14,506,00014,544,000 $ 20,585,00017,044,000 $ 21,782,00018,180,000
Average Interest Rate ......... -- 6.18% 6.23% --
Variable Rate ........................ 4,799,000(1) 217,616,000(1) 263,015,000 264,295,000179,259,000(1) 221,522,000 222,469,000
Average Interest Rate 2.31% 2.82% 2.85%......... 2.20% 2.63% 2.70% --
------------ ------------ ------------ ------------
$ 4,799,000 $232,122,000 $283,600,000 $286,077,000$193,803,000 $238,566,000 $240,649,000
============ ============ ============ ============
Page 23
(1) These holdings consist of U.S. corporate and foreign cortecorporate 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 -1/5-1/2% 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
Page 26
$55.09 per share. The fair value of fixed interest rate instruments are affected
by changes in interest rates and in the case of the convertible notes by changes
in the price of our common stock. The fair value of the 5 -1/5-1/2% convertible
subordinated notes (which have a carrying value of $240,000,000) was
approximately $168,300,000$135,300,000 at June 28,September 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES.
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our Chief
Executive Officer and our Chief Financial Officer, after evaluating
the effectiveness of the Company's "disclosure controls and
procedures" (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) as of a date (the "Evaluation Date") within 90 days of
the filing date of this quarterly report, have concluded that as of
the Evaluation Date, our disclosure controls and procedures were
effective and designed to ensure that material information relating
to us and our consolidated subsidiary would be made known to them by
others within those entities.
b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in
our internal controls or to our knowledge, in other factors that
could significantly affect our internal controls subsequent to the
Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1 -1. LEGAL PROCEEDINGS
A. LITIGATION
1. FEDERAL SECURITIES CLASS ACTIONS
ABeginning in January 2002, a number of complaints asserting claims under
Section 10(b)the federal securities laws against us and certain of the
Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 promulgated
thereunderour directors and Section 20(a) of the Exchange Actofficers
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 theseYork.
Those actions were consolidated under the caption of the first-filed of these actions, Irvine v. ImClone Systems
Incorporated et at.al., No. 02 Civ. 0109(RO).0109 (RO), and on September 16, 2002, a
consolidated amended complaint was filed in that consolidated action, which
plaintiffs corrected in limited respects on October 22, 2002. The original complaints in these
actions allegecorrected
consolidated amended complaint names us as defendants, our former chief
executive officer Dr. Samuel D. Waksal, our current chief executive officer Dr.
Harlan W. Waksal, the chairman of our board of directors Robert Goldhammer,
current or former directors Richard Barth, David Kies, Paul Kopperl, John
Mendelsohn and William Miller, our former general counsel John Landes, and our
vice president for marketing and sales, Ronald Martell. The complaint asserts
claims for securities fraud under sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 and SEC Rule 10b-5, on behalf of a purported class of
persons who purchased our publicly traded securities between March 27, 2001 and
January 25, 2002. The complaint also asserts claims against Dr. Samuel D. Waksal
under section 20A of the Exchange Act on behalf of a separate purported
sub-class of purchasers of our securities between December 27, 2001 and December
28, 2001. The complaint generally alleges that various public statements made by
or on behalf of us or our senior
officersthe other defendants during 2001 and early 2002 regarding
the prospects for FDA approval of ERBITUX were false or misleading when made,
that various Company insidersthe individual defendants were allegedly aware of material non-public
information regarding the actual prospects for ERBITUX at the time that those insidersthey
engaged in transactions in our common stock and that members of the purported
shareholderstockholder 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 seekcomplaint seeks to proceed on behalf of athe alleged
class of our
present and former shareholders, other than defendants or persons affiliated
with the defendants, seekdescribed above, seeks monetary damages in an unspecified amount and seekseeks
recovery of plaintiffs' costs and attorneys' fees. AUnder the existing schedule
in that action, defendants' response to the consolidated amended complaint is
expecteddue in late November 2002.
Separately, on September 17, 2002 an individual purchaser of our common
stock filed an action on his own behalf asserting claims against us, Dr. Samuel
D. Waksal and Dr. Harlan W. Waksal under sections 10(b) and 20(a) of the
Exchange Act and SEC Rule 10b-5. That action is styled Flynn v. ImClone Systems
Incorporated, et al., No. 02 Civ. 7499. Plaintiff alleges that he purchased
shares on various dates in late 2001, that various public statements made by us
or the other defendants during 2001 regarding the prospects for FDA approval of
ERBITUX were false or misleading when made and that plaintiff relied on such
allegedly false and misleading information in making his purchases. Plaintiff
seeks compensatory damages of not less than $180,000 and punitive damages of $5
million, together with interest, costs and attorneys' fees. Defendants' response
to be filed shortly.the complaint is due in late November 2002.
Page 27
2. DERIVATIVE ACTIONS
Beginning on January 13, 2002 and continuing thereafter, eightnine separate
purported shareholder derivative actions have been filed against the members of
our Board of Directors and the Company,us, as nominal defendant, advancing claims based on
allegations similar to the allegations in the federal securities class action
complaints. ThreeFour 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
twothree 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 and Henshall v. Bodnar, et al.,
Index No. 603121/02. All of these actions assert claims, purportedly on our behalf
of the Company, for breach of fiduciary duty by certain members of theour 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.ERBITUX or
improperly disclosed such information to others. Another complaint, purportedly
asserting direct claims on behalf of a class of the
Company'sour shareholders but in fact
asserting derivative claims that are similar to those asserted in these eightnine
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 theour Board of Directors for
breach of fiduciary duty purportedly on behalf of all persons who purchased
shares of the Company'sour 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 ofWe intend to vigorously defend ourselves against the claims asserted in
these actions, which are in their earliest stages. We intendare unable to contest
vigorouslypredict the
claims asserted inoutcome of these actions.actions at this time. Because we do not believe that a loss is
probable, no legal reserve has been established.
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 have also received subpoenas and requests for information
pertaining to document retention issues in 2001 and 2002 and to certain
communications regarding ERBITUX in 2000. 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 of the
Commission is considering recommending that the Commission bring an action
against us relating to our disclosuredisclosures 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 Septemberby the end of this year.
ITEM 2 - CHANGES IN SECURITIESC. INDICTMENT AND USEPLEA OF PROCEEDS
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meetingDR. SAMUEL D. WAKSAL; ACTION AGAINST DR. SAMUEL D.
WAKSAL
On August 7, 2002, a federal grand jury in the Southern District of stockholders was heldNew
York returned an indictment charging Dr. Samuel D. Waksal with, inter alia,
securities fraud and conspiracy to commit securities fraud. On October 15, 2002,
Dr. Samuel D. Waksal entered a plea of guilty to several counts in that
indictment, including that on June 11,December 27, 2001 he directed a family member to
sell shares of our common stock and attempted to sell shares that he owned in
advance of an expected announcement that the FDA had issued a "refusal to file"
letter with respect to our application for approval of ERBITUX. We received such
a "refusal to file" letter from the FDA on December 28, 2001 and announced our
receipt of that letter following the close of trading.
On August 14, 2002, (the
"Annual Meeting").
(b) The directors elected at the Annual Meeting were 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. 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 resultsfederal grand jury indictment of the
voting are set forth below. Broker non-votes were not applicable.
(i) ElectionDr. Samuel
D. Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to
certain counts of directors
NAME IN FAVOR WITHHELD
---- ---------- ---------
Andrew G. Bodnar ........ 54,276,035 8,728,530
Vincent T. DeVita, Jr ... 54,279,942 8,724,623
Robert F. Goldhammer .... 54,238,633 8,765,932
Paul B. Kopperl ......... 54,280,272 8,724,293
David M. Kies ........... 54,284,503 8,720,062
Arnold Levine ........... 54,283,391 8,721,174
John Mendelsohn ......... 53,912,661 9,091,904
William R. Miller ....... 54,278,940 8,725,625
Peter S. Ringrose ....... 54,281,356 8,723,209
Harlan W. Waksal ........ 53,860,561 9,144,004
(ii) The stockholders approved the Company's 2002 Stock Option
Plan. The stockholders voted 45,617,936 sharesthat indictment, we filed an action in favor and
17,268,070 shares against. 118,559 shares abstained from
voting.
(iii) The stockholders approved a proposalNew York State Supreme
Court seeking recovery of certain compensation, including advancement of certain
defense costs, that we had paid to amend the Company's
certificateor on behalf of incorporation to increase the total number of
shares of common stock the CompanyDr. Samuel D. Waksal. That
action, styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No.
02/602996, 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,
2002. The stockholders voted 62,207,089 shares in favor and
404,703 shares against. 392,773 shares abstainedits earliest stages.
Page 2528
from voting.
ITEM 6 -6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit No. DescriptionEXHIBIT NO. DESCRIPTION
----------- -----------
3.1C Amendment dated August 9, 2002 to the Company's
Certificate of Incorporation, as amended
10.90 Employment Agreement10.93 Target Price Contract, dated as of February 1,July 15, 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,and Kvaerner Process, a division
of Kvaerner U.S. Inc., for the Architectural, Engineering,
Procurement Assistance, Construction Management and Validation
of a Commercial Manufacturing Project in Branchburg, New
Jersey
executed as of March 1, 2002
99.8 ImClone Systems Incorporated 2002 Stock Option Plan.
99.9Jersey.
99.11 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.1099.12 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
On June 26, 2002, the Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission reporting events under Item 5.None
Page 2629
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: AugustNovember 14, 2002 By /s/ HARLAN W. WAKSAL
-------------------------------------
Harlan W. Waksal
President and Chief Executive Officer
Date: AugustNovember 14, 2002 By /s/ DANIEL S. LYNCH
-------------------------------------
Daniel S. Lynch
Senior Vice President, Finance and
Chief Financial Officer
Page 2730
SECTION 302 CERTIFICATIONS -
CERTIFICATION
I, Daniel S. Lynch, Chief Financial Officer of ImClone Systems Incorporated (the
"Company"), certify that:
1. I have reviewed the Form 10-Q for the Quarter Ended September 30,
2002 of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel S. Lynch
-----------------------
Daniel S. Lynch
Chief Financial Officer
Page 31
CERTIFICATION
I, Harlan W. Waksal, Chief Executive Officer of ImClone Systems Incorporated
(the "Company"), certify that:
1. I have reviewed the Form 10-Q for the Quarter Ended September 30,
2002 of the Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Harlan W. Waksal
-----------------------
Harlan W. Waksal
Chief Executive Officer
Page 32