SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number: 0-19131 MEDIMMUNE, INC. (Exact name of registrant as specified in its charter) Delaware 52-1555759 State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 35 West Watkins Mill Road Gaithersburg, Maryland 20878 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (301) 417-0770 Securities Registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) 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 No: Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Aggregate market value of the 54,907,653 shares of voting stock held by non-affiliates of the registrant based on the closing price on February 28, 1999 was $3,019,920,915 . Common Stock outstanding as of February 28, 1999: 55,311,727 shares. Documents Incorporated by Reference: Document Part of Form 10-K Proxy Statement for the Annual Meeting Part III of Stockholders to be held May 20, 1999. MEDIMMUNE, INC. FORM 10-K TABLE OF CONTENTS PART I PAGE Item 1. Business 1 Item 2. Properties 41 Item 3. Legal Proceedings 42 Item 4. Submission of Matters to a Vote of Security Holders 42 PART II Item 5. Market for MedImmune, Inc.'s Common Stock and Related Shareholder Matters 42 Item 6. Selected Financial Data 43 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 57 Item 8. Financial Statements and Supplementary Data 59 Report of Independent Accountants 90 Report of Management 91 Item 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure 92 PART III Item 10. Directors and Executive Officers of MedImmune, Inc. 93 Item 11. Executive Compensation 93 Item 12. Security Ownership of Certain Beneficial Owners and Management 93 Item 13. Certain Relationships and Related Transactions 93 PART IV ITEM 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 94 SIGNATURES 95 Schedule I S-1 Exhibit Index E-1 Exhibits (Attached to this Report on Form 10-K) CytoGam and RespiGam are registered trademarks and Synagis is a trademark of the Company. THE STATEMENTS IN THIS ANNUAL REPORT THAT ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS REFLECT MANAGEMENT'S CURRENT VIEWS, ARE BASED ON CERTAIN ASSUMPTIONS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS", AS WELL AS OTHER RISKS DETAILED BELOW. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AS A RESULT OF THE FOREGOING OR OTHER FACTORS. PART I Item 1. Business MedImmune, Inc. ("the Company"), is a biotechnology company headquartered in Gaithersburg, Maryland with three products on the market and a diverse product development portfolio. The Company is focused on using advances in immunology and other biological sciences to develop important new products that address significant medical needs in areas such as infectious diseases, transplantation medicine, autoimmune diseases and cancer. In 1998, the Company launched Synagis (palivizumab) in the United States for preventing respiratory syncytial virus (RSV) in high-risk pediatric patients. Synagis is the first monoclonal antibody approved for an infectious disease and has become an important new pediatric product for the prevention of RSV, the leading cause of pneumonia and bronchiolitis in infants and children. The Company also markets CytoGam (Cytomegalovirus Immune Globulin Intravenous (Human), CMV-IGIV) and RespiGam (Respiratory Syncytial Virus Immune Globulin Intravenous (Human), RSV-IGIV) and has five new product candidates undergoing clinical trials. Products on the Market. Synagis Synagis is a humanized monoclonal antibody approved for marketing in June 1998 by the U.S. Food and Drug Administration ("FDA") for the prevention of serious lower respiratory tract disease caused by respiratory syncytial virus ("RSV") in pediatric patients at high risk of RSV disease. Synagis is administered by intramuscular injection at 15 1 mg/kg and is given once per month during anticipated periods of RSV prevalence in the community. In the Northern Hemisphere, the RSV season typically commences in October or November and lasts through March or April. RSV is the most common cause of lower respiratory infections in infants and children worldwide. Healthy children and individuals with adequate immune systems often acquire a benign chest cold when infected with RSV. In contrast, certain high-risk infants such as premature infants and children with chronic lung disease ("CLD"; also known as bronchopulmonary dysplasia, or "BPD") are at increased risk for acquiring severe RSV disease (pneumonia and bronchiolitis), often requiring hospitalization. Each year in the United States, more than 90,000 infants are hospitalized with RSV disease. The mortality rate of hospitalized infants with RSV infection of the lower respiratory tract is about 2 percent. There are approximately 325,000 infants at high risk of acquiring severe RSV disease in the United States. In a randomized, double-blind, placebo-controlled Phase 3 clinical trial known as "IMpact- RSV" evaluating the ability of Synagis to prevent serious RSV disease in 1,502 high-risk pediatric patients, RSV hospitalizations occurred among 53 of 500 (10.6 percent) patients in the placebo group and 48 of 1002 (4.8 percent) patients in the Synagis group, a 55 percent reduction (p<0.001). Synagis was safe and generally well-tolerated, and the proportions of subjects in the placebo and Synagis groups who experienced any adverse event or any serious adverse event were similar. In December 1997, the Company formed an exclusive worldwide marketing alliance with Abbott Laboratories ("Abbott") to commercialize Synagis. Within the United States, the Ross Products Division of Abbott is co- promoting Synagis with the Company. The Company records all U.S. sales and Abbott receives a commission on sales above pre-determined thresholds. Each company is responsible for its own selling expenses. Outside the United States, the International Division of Abbott Laboratories has the exclusive right to distribute Synagis. The Company manufactures and sells Synagis to Abbott for sales outside the United 2 States. Sales to Abbott in 1998 for "named patient" sales of Synagis outside of the United States were $2.3 million. During 1998, the Company and Abbott submitted regulatory applications requesting approval to market Synagis in 25 countries outside the United States: Austria, Australia, Argentina, Belgium, Brazil, Colombia, Denmark, Finland, France, Germany, Hungary, Ireland, Italy, Kuwait, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Greece, Spain, Sweden, Switzerland, and the United Kingdom. By year-end 1998, approval was received in Kuwait. In accordance with the Company's agreement with Abbott, the Company would receive a $15 million milestone payment from Abbott if and when marketing approval is received from the centralized European Agency for the Evaluation of Medicinal Products ("EMEA"). There can be no assurances that the EMEA will approve Synagis for marketing in time for the 1999 - 2000 RSV season or at all. The Company has established a manufacturing alliance with German-based Boehringer Ingelheim Pharma KG ("BI") to supplement its own manufacturing capacity. In September 1998, the FDA approved the Company's supplement to its Biologic License Application ("BLA") allowing the Company to import and sell in the United States product from the BI facility. Additionally, the Company's Gaithersburg Manufacturing and Development Facility was approved to produce Synagis. The Company has completed construction of a manufacturing facility in Frederick, Maryland ("Frederick Manufacturing Center" or "FMC") and plans to add this facility as a third production site, subject to FDA clearance. Production lots of Synagis seeking to validate the consistency of the manufacturing process are underway at the FMC. The Company plans to submit to the FDA in 1999 an amendment to its BLA requesting approval to sell Synagis produced at the FMC. There can be no assurances that this approval will be received in a timely manner or at all. The Company will continue to rely upon BI for production of Synagis for the foreseeable future; there can be no assurances that Synagis product supply will be properly matched with product demand. BI produces Synagis in large lot sizes relative to overall product supply; 3 there can be no assurances that failure of one or more lots of Synagis will not adversely impact the Company's supply of product or market perception. Additionally, because Synagis costs rely on favorable foreign exchange rates and production yields, there can be no assurances that Synagis will continue to be economical to purchase from BI. In 1998, the Company sold $109.8 million of Synagis, $92.8 million of which occurred in the fourth quarter. In general, the Company expects most of its Synagis sales to occur in the fourth and first quarters of the year because of the seasonality of RSV in the United States; limited sales are expected in the second and third quarters. The Company expects this seasonality to continue in the foreseeable future. The Company believes that Synagis was broadly reimbursed by third party payors during the 1998 - 1999 RSV season. There can be no assurances that third party payors will not attempt to restrict reimbursement guidelines of Synagis in future RSV seasons. In November 1998, the Company began two clinical trials evaluating the safety of Synagis in 1) children under 2 years of age with congenital heart disease ("CHD") and 2) children with cystic fibrosis. The Company expects both trials to be concluded by 2000. In addition, the Cooperative Antiviral Studies Group ("CASG") at the National Institutes of Health ("NIH") expects to begin a two-year clinical study evaluating the administration of Synagis for treating RSV disease in bone marrow transplant recipients. There can be no assurances that data from these clinical trials will establish the safety or efficacy of Synagis in these populations, or that results from these trials will not adversely affect perceptions of Synagis in the marketplace. Recent clinical and laboratory observations by the Company and others have suggested that RSV may be implicated in the development of childhood asthma. Consistent with this hypothesis, data were presented in 1998 at the 36th Annual Meeting of the Infectious Diseases Society of America ("IDSA") in Denver suggesting that children who received the 4 Company's first RSV product, RespiGam (see below), scored better in measurements of asthma-like symptoms than those that did not receive the drug. While these results do not prove that RSV causes asthma, or that RSV prevention may prevent asthma, the Company believes a prospective study is warranted. No assurances can be given that such a prospective study, if conducted, would prove that RSV causes asthma or that RSV prophylaxis can prevent childhood asthma. The Company received a composition of matter patent protecting Synagis and its cell line through October 20, 2015. Other than the Company's product RespiGam (see below), the Company is not aware of any competing products being marketed anywhere in the world for the prevention of RSV disease. The Company believes that any products being developed, if successfully commercialized, would require at least four years of clinical development and regulatory approval prior to reaching the marketplace. Nevertheless, there can be no assurances that a competitive product will not be brought to market sooner than expected, or, if brought to market, would not be superior to Synagis. The Company is currently working on developing third-generation products and/or formulations for the prevention of RSV disease to preempt possible competition in the field. RespiGam RespiGam, an intravenous immune globulin enriched in neutralizing antibodies against RSV, was approved by the FDA for marketing in the United States in January 1996. RespiGam is indicated for the prevention of serious RSV disease in children under 24 months of age with BPD or a history of premature birth (i.e., born at 35 weeks or less gestation). RespiGam was the first product demonstrated to be safe and effective in reducing the incidence and duration of RSV hospitalization and the severity of RSV illness in these high risk infants. While Synagis is administered by a simple intramuscular injection, RespiGam is administered by an approximately four hour intravenous infusion. Because of these and other considerations, the Company believes that RespiGam will largely be replaced by Synagis in the marketplace. 5 CytoGam CytoGam is an intravenous immune globulin product enriched in antibodies against cytomegalovirus ("CMV") and is marketed for prophylaxis against CMV disease associated with transplantation of kidney, lung, liver, pancreas, and heart. CMV contributes significantly to morbidity and mortality in organ transplant recipients. CMV can cause severe pneumonia and other organ complications related to invasive CMV disease which, if not successfully treated, can lead to organ failure. CMV has also been shown to cause increased bacterial and fungal infections, and has been associated with an increased risk of rejection of the transplanted organ. There are approximately 20,000 kidney, lung, liver, pancreas, and heart transplants performed annually in the United States. Clinical studies have shown a 50 percent reduction in CMV disease in kidney transplant patients given CytoGam and a 56 percent reduction in serious CMV disease in liver transplant patients given CytoGam. CytoGam prophylaxis has also been associated with increased survival in liver transplant recipients. CytoGam was initially approved for marketing by the FDA in 1991 for the attenuation of primary CMV disease in donor-positive/recipient-negative kidney transplant patients, approximately 2,000 patients annually. The approved indication was expanded in 1998 to further include lung, liver, pancreas and heart transplant recipients, approximately 20,000 patients annually. The Company believes that the expanded indication will not significantly affect sales in the United States as many physicians have already been prescribing CytoGam's use in the setting of solid organ transplantation. CytoGam was first sold through an exclusive distribution agreement with Connaught Laboratories. The Company began marketing CytoGam through its own hospital-based sales force in 1993. Sales of CytoGam have grown at a compounded annual rate of approximately 53 percent since 1993 to $32.9 million in 1998. Sales outside the United States accounted for $6.3 million of total CytoGam sales in 1998. The Company believes a significant portion of CytoGam sales in 1998 in the United States was 6 related to the use of CytoGam as a substitute for standard intravenous immune globulin ("IVIG"). It is unclear when and if the current supply shortage of IVIG will end and if the continuation of such a shortage would affect sales of CytoGam. The Company believes the United States marketplace for CMV drugs in transplantation is competitive and no assurances can be given that growth in the United States will continue or that a continued IVIG shortage would increase CytoGam sales. The Company continues to expand the opportunities for CytoGam outside the United States. During 1998, CytoGam was approved for marketing in Poland, Argentina and South Korea. Additionally, product was sold by distributors in Turkey, Mexico, the Czech Republic, and Canada, and on a named patient basis in nine other countries. Company's orphan drug status expired in 1997 and there can be no assurance that additional CMV intravenous specialty immune globulin products will not be successfully commercialized by other companies. The Company is aware of one other CMV immune globulin in development by NABI, Inc. Products In Development Human Papillomavirus Vaccine The Company is developing vaccines for human papillomaviruses ("HPVs"), the cause of genital warts and cervical cancer. There are over 75 different types of HPVs associated with a variety of clinical disorders ranging from benign lesions to potentially lethal cancers. Four types of HPV cause the majority of genital warts and cervical cancer cases: HPV-6 and HPV-11 (genital warts) and HPV-16 and HPV-18 (cervical cancer). There are currently no vaccines to prevent these common sexually transmitted diseases that affect 24 to 40 million men and women in the United States. The Company's strategy for vaccine development relies on a virus-like particle ("VLP") technology for producing a structurally identical, non- infectious form of the virus. Scientists at the Company in collaboration with a team at Georgetown University first demonstrated the effectiveness of a VLP vaccine candidate using a dog model for 7 papillomavirus infection. In 1998, the Company completed a double-blind, randomized, dose- escalating, adjuvant-controlled Phase 1 clinical trial with its HPV-11 vaccine candidate, MEDI-501, evaluating its safety, tolerance, and immunogenicity. Sixty-five healthy volunteers received an initial injection and two booster injections of either alum-adjuvanted vaccine at various escalating doses or alum alone. Vaccine injections were believed to be generally well-tolerated. The most common adverse events within four days after an injection were those commonly seen with alum- adjuvanted vaccines, including pain at the injection site, headache and fatigue. HPV antibodies were elevated in all patients after each of the three injections of MEDI-501 in the dosing regimen. Antibodies that could neutralize HPV were induced in nearly all volunteers at the higher doses and 100 percent of the patients receiving all three injections at the highest dose (n=10) developed elevated levels of antibodies that could neutralize HPV. In December 1997, the Company announced a strategic alliance with SmithKline Beecham ("SB") to develop and commercialize the Company's HPV vaccines. Under the terms of the agreement, SB receives exclusive worldwide rights to the Company's HPV vaccine technology and both companies will collaborate on research and development activities. In January 1998, the Company received an up-front payment of $15 million and an equity investment of $5.0 million. Pursuant to the agreement, the Company also recorded $5.7 million in research funding during 1998, will continue to receive certain research funding, would receive milestones if specified development and sales goals are met, and royalties on any product sales. Total funding and payments to the Company could total over $85 million. Under the terms of the agreement, the Company will conduct Phase 1 and Phase 2 clinical trials, manufacture clinical material for those studies and receive funding from SB for these activities. SB is responsible for the final development of the product, as well as regulatory, 8 manufacturing, and marketing activities. MEDI-507, Anti-CD2 Humanized Monoclonal Antibody MEDI-507 is a humanized monoclonal antibody being developed by the Company in collaboration with BioTransplant Incorporated ("Bio Transplant"). MEDI-507 was derived from a rat monoclonal antibody called BTI-322. BTI-322 is a registered trademark of BioTransplant. Both MEDI- 507 and BTI-322 bind specifically to the CD2 antigen receptor found on T cells and natural killer ("NK") cells. Laboratory studies have suggested that BTI-322 and MEDI-507 primarily inhibit the response of T cells directed at transplant antigens while subsequently allowing immune cells to respond normally to other antigens. The selectivity and long lasting effects of this inhibition suggest that these molecules may have potential utility in applications in the transplantation field including treatment or prevention of graft-versus-host disease ("GvHD"), or in patients with certain autoimmune diseases. BioTransplant exclusively licensed BTI-322 and MEDI-507 to MedImmune for evaluation and potential commercialization. MedImmune is responsible for all activities related to commercialization, and BioTransplant would receive milestone payments at various stages related to regulatory approval and royalties if the products are commercialized. BioTransplant has retained the right to use BTI-322 and/or MEDI-507 in its proprietary ImmunoCognance(TM) systems, which are designed to reeducate the immune system to accept foreign tissue: AlloMune(TM) for human-to-human transplants and XenoMune(TM) for porcine-to-human transplants. GvHD is a potentially fatal complication of bone marrow or stem cell transplantation caused when certain white blood cells from the donor bone marrow attack the tissue of the recipient. Clinical manifestations include skin rash, severe diarrhea, and liver abnormalities and jaundice. GvHD is usually treated with a first-line therapy of corticosteroids. Patients who develop moderate or severe GvHD have over a 70% chance of death despite diverse treatments. Lack of understanding of the physiologic mechanism of the disease has been a major impediment 9 to the development of more effective treatments. Both T cells and NK cells may play a role in development of GvHD. MEDI-507 which specifically inhibits both types of cells may provide certain advantages over current therapies. There are approximately 30,000 bone marrow and stem cell transplants done worldwide each year. Autoimmune diseases are of major medical importance worldwide and include common afflictions such as rheumatoid arthritis, multiple sclerosis, Crohn's disease and psoriasis. The Company believes the unique immune modulatory properties of MEDI-507 observed in vitro may have utility in certain autoimmune indications. A Phase 1 trial in psoriasis is currently ongoing to address that possibility. BTI-322 has been studied in over 100 patients in the United States and Europe including a Phase 2 for treatment of steroid-refractory GvHD, and in a Phase 1/2 for prevention of rejection. In the Phase 2 clinical trial evaluating BTI-322 for treatment of steroid-refractory GvHD, the compound was well-tolerated and 55% of the patients responded positively to treatment, with either a complete response or a reduction in grade of GvHD. The study was conducted at six transplantation centers in 20 patients who received allogeneic (non-self donated) bone marrow or stem cell transplantation, and who experienced acute GvHD that was unresponsive to corticosteroid treatment. The primary endpoints in the study were safety and reduction in grade of GvHD. All 20 patients received a single daily dose of BTI-322 (0.1 mg/kg) for ten consecutive days, in conjunction with a standard immunosuppression treatment regimen. The grade of GvHD was measured on a scale of 1 (mild) to 4 (severe) with patients experiencing an overall reduction in the grade of GvHD from 2.95 to 1.80 (p=0.0005). For the trial, 11 patients responded positively to treatment, with six patients experiencing a complete response to treatment and five patients showing a reduction in the grade of GvHD. In three patients, the grade of GvHD did not progress to a more severe stage. The grade of GvHD decreased from 2.82 to 0.73 (p<0.00001) for the 14 patients who responded to the 10 BTI-322 therapy. Aside from mild/moderate first dose reactions, patients tolerated the BTI-322 well. As expected, some of the patients responding to BTI-322 later experienced a relapse after treatment was completed, indicating that further studies of extended treatment regimens would be necessary. A Phase 1/2 trial was completed for the prevention of acute renal transplant rejection in which BTI-322 was given at the time of organ transplantation. Results of the trial showed a 58% reduction at two years post-transplant in the incidence of kidney graft rejection episodes compared to conventional triple drug therapy alone. Because of the encouraging results of studies evaluating BTI-322, the Company moved forward during 1998 to clinically evaluate MEDI-507, the humanized version of BTI-322. In the MEDI-507 antibody, the rat components of the BTI-322 are replaced with human components thereby reducing the likelihood that a recipient will recognize the drug as foreign and develop an immune reaction. This potential reaction is especially possible if the antibody is administered chronically in a patient whose immune system is not severely suppressed, such as in many patients with autoimmune diseases. The Company has therefore suspended development of BTI-322 pending the results of studies evaluating MEDI- 507. During 1998, the Company announced data from the first clinical trial evaluating MEDI-507. The study was a Phase 1, open-label, dose- escalating safety trial in renal allograft recipients examining three dose levels (0.012, 0.06, and 0.12 mg/kg/dose) of MEDI-507. Thirteen patients were given an initial dose within six hours after kidney transplant surgery and a second dose 60-72 hours later. Results indicated that MEDI-507 was generally well-tolerated and no anti-MEDI- 507 antibodies were detected following administration. During the first 30 days of follow up, two patients experienced acute rejection of their kidneys. During 1998, the Company concluded a second clinical trial of MEDI-507, 11 a Phase 1/2 study evaluating MEDI-507 for the treatment of GvHD in adult steroid-resistant stem cell transplant ("SCT") or bone marrow transplant ("BMT") patients. In one of the arms of this clinical trial, the MEDI- 507 dosing regimen was extended past the initial 10 days of treatment. The data from this trial are currently being analyzed and the results are expected to be presented at a medical conference in 1999. In December 1998, the Company announced plans to initiate two additional Phase 1/2 clinical trials to evaluate MEDI-507. Both studies are expected to be completed in 1999. In the first study, adult steroid- naive SCT or BMT recipients will receive MEDI-507 or placebo combined with corticosteroids (methylprednisolone) for initial treatment of acute GvHD. Because this study would be the first to evaluate MEDI-507 as part of initial treatment of GvHD, all patients are expected to receive the standard initial GvHD treatment with corticosteroids. It is anticipated that this Phase 1/2 trial will include up to 32 patients recruited from up to 15 centers. At year-end 1998, the trial protocol had been approved by the FDA, and patient recruitment had begun. In the second study, MEDI-507 will be assessed in an open-label trial for its ability to treat GvHD in pediatric SCT or BMT patients. Currently there are no agents approved for the treatment of GvHD in children. Up to 20 pediatric patients (age 2-17) are expected to be recruited from at least ten centers for this Phase 1/2 study. At year- end 1998, the clinical trial protocol had been submitted for approval to the FDA and, if approved, the study would commence enrollment following the entry of initial patients in the adult trial. The Company believes that data from the current studies evaluating MEDI- 507 may allow the Company in late 1999 to determine an appropriate clinical strategy for MEDI-507. No assurances can be given that the current clinical trials will be successful, or if successful, would lead to a continuation of the program in the indications currently studied or at all. In 1998, the Company announced that MEDI-507 received orphan drug 12 designation from the Office of Orphan Products Development of the FDA for MEDI-507 for the treatment of GvHD. The Orphan Drug Act was established to encourage development of drugs for rare diseases and conditions affecting a small patient population (generally fewer than 200,000 people). Orphan designation of a product can potentially provide a company with seven years of market exclusivity if the company is the first to receive FDA product marketing approval for the orphan drug in the designated indication. Additionally, this designation provides a company with tax credits of 50% for qualified clinical research expenses and the opportunity for clinical research grants. No assurances can be given that MEDI-507 would be successfully developed for GvHD treatment or, if successfully developed, would not experience significant competition from other products for treatment of GvHD. During 1998, the Company announced issuance of two patents from the United States Patent and Trademark Office, relating to the MEDI-507 and BTI-322 programs. The first patent covers composition of matter and the use of BTI-322 and MEDI-507 to inhibit T cell-mediated immune responses; the second patent covers the use of any antibody that binds to the target epitope recognized by the BTI-322 and MEDI-507 antibodies. While the Company believes these patents protect the Company against direct imitation of BTI-322 and MEDI-507, there are no assurances that other products with similar properties will not be developed by other companies. The Company is aware of several companies developing products directed at treating GvHD and autoimmune diseases with monoclonal antibodies. MEDI-491, B19 Parvovirus Vaccine The Company is developing a vaccine for B19 parvovirus based on VLP technology. Discovered in 1975, B19 parvovirus has been linked to a number of serious conditions including certain types of miscarriages in pregnant women, life-threatening sudden reduction of red blood cells in sickle cell anemia patients, chronic anemia in AIDS and chemotherapy patients, and persistent arthritis in some adults. Recently, it has been suggested by certain laboratory observations published in medical 13 journals that B19 may be associated with rheumatoid arthritis. There are no agents available for the prevention of B19 parvovirus infection. MEDI-491 is a vaccine intended to prevent human B19 parvovirus infection. MEDI-491 utilizes VLP technology similar to that used for the Company's HPV vaccine candidates. By producing two natural B19 parvovirus proteins in the correct proportions in an insect cell recombinant protein production system, the Company and collaborators at the National Heart, Lung, and Blood Institute("NHLBI") are able to generate VLPs which resemble the natural B19 parvovirus particles, but are not infectious. The Company has completed a Phase 1 clinical trial to evaluate the safety of MEDI-491 adjuvanted with aluminum hydroxide. MEDI-491 in this trial appeared generally well-tolerated and measurable antibody responses were observed. In 1998, the Company entered into an agreement with Chiron Corporation ("Chiron") to use MF59, Chiron's proprietary vaccine adjuvant, to improve the antibody response of MEDI-491. Pursuant to the agreement, the Company would provide payments to Chiron if certain milestones are achieved and would pay royalties on any commercialized products. MF59 has been evaluated by Chiron in clinical trials involving over 15,000 people. It was shown to enhance the immune response to certain antigens and was generally safe and well-tolerated. The Company believes MF59 has the advantage of being one of the most extensively tested investigational vaccine adjuvants in human clinical trials. Additionally, the Company has seen significant immune responses to MEDI- 491 when formulated with MF59 in animal studies compared to other available adjuvants. MedImmune believes a successful B19 parvovirus vaccine could be used both to immunize women entering their child-bearing years to protect them from experiencing B19 parvovirus-induced miscarriages and to vaccinate children with sickle cell anemia to protect them against 14 transient aplastic crisis. The Company is also investigating further the potential link between B19 parvovirus infection and rheumatoid arthritis. Based on a number of papers over the past decade implicating B19 parvovirus in rheumatoid arthritis, authors of a recent paper in the Proceedings of the National Academy of Sciences titled "Human B19 parvovirus as a causative agent for rheumatoid arthritis" identified B19 parvovirus in the joint fluid of 100% rheumatoid arthritis patients with active arthritis. The Company is collaborating with the National Institutes of Health to attempt to replicate and expand upon this work. No assurances can be made that the Company will successfully establish a definitive link between B19 parvovirus infection and rheumatoid arthritis. The Company is not aware of any other vaccine candidates by any other company in development for B19 parvovirus. Urinary Tract Infection Vaccine The Company is developing a vaccine candidate for urinary tract infections ("UTIs"). UTIs are a significant medical problem and one of the most common disorders prompting medical attention in otherwise healthy women and children. UTIs, caused by the bacterium Escherichia coli ("E. coli"), result in 7-8 million physician and hospital visits per year at a cost of greater than $1 billion. It is estimated that by age 30, roughly 50% of women have had at least one infection and 2-10% are affected by recurrent infections. Recent studies have shown that, on average, women who are 18-40 years old get 1-2 infections over a two year period. Older adults are also at risk with the incidence as high as 33 out of 100 people. Currently, there are no vaccines to prevent UTIs. Most infections can be treated with antibiotics; however, recurrence is common and emerging antibiotic resistant bacteria create an additional threat. Earlier attempts to use pili, the hair-like protein appendages on the surface of bacteria, as vaccine targets were not successful in protecting against a broad range of pathogenic bacteria, including E. coli, because of the strain-to-strain variation in the major component 15 of the pili. The identification of specific proteins, or "adhesins", at the end of pili which facilitate the attachment of E. coli to human tissue, provided a novel target for vaccine development. The Company's vaccine strategy is based on blocking these adhesins, preventing the disease- causing bacteria from binding and accumulating in the bladder. The novel target of the Company's vaccine candidate is the FimH adhesin. FimH does not vary widely among the different strains of E. coli which cause UTIs. The Company believes this is a requisite quality for development of a broadly effective UTI vaccine. The Company first demonstrated the feasibility of a FimH-based UTI vaccine to prevent UTIs in mice. In 1998, the Company completed studies in monkeys with its UTI vaccine formulated with Chiron's MF59 (see also B19 Parvovirus vaccine) that further supported its potential to prevent UTIs. Laboratory tests indicated that the antibodies generated in animals to the Company's UTI vaccine candidate react against a wide range of UTI E. coli strains. The Company intends to begin clinical trials with its E. coli vaccine candidate adjuvanted with MF59 in late 1999. Lyme Disease Vaccine The Company is developing a second-generation Lyme disease vaccine candidate based on a protein known as decorin binding protein ("DbpA"), found on the organism which causes Lyme disease. In 1998, the Company announced that it had granted worldwide rights to its Lyme disease vaccine candidate to Pasteur Merieux Connaught ("PMC"), a wholly owned subsidiary of Rhone-Poulenc S.A., in exchange for potential milestone payments and royalties on any future sales. Lyme disease is the most common arthropod-borne disease in the United States. Forty-eight states have reported cases of Lyme disease, with an annual nationwide incidence of approximately 16,000 new cases. Lyme disease is also reported in Europe, Japan, China and Russia. The disease 16 is caused by a bacterium known as B. burgdorferi and related species, and is transferred through a tick, primarily of the genus, Ixodes, most commonly found on the white-footed mouse or deer in the northeastern U.S. When the tick feeds on a human host, it can transmit bacteria to the host, thereby beginning a Lyme disease infection. Following a tick bite, an infected person can often develop a circular rash with a bulls- eye pattern. Weeks to months later, this rash may be followed by neurological, cardiac and joint abnormalities, malaise and general flu- like symptoms. Early treatment with antibiotics is generally most effective; however, some infections, particularly if diagnosed late, have proven to be resistant to antibiotic therapy. Difficulties with early diagnosis as well as the occurrence of serious treatment-resistant infections emphasize the need for safe and effective vaccines against Lyme disease. The first generation Lyme disease vaccine candidate of PMC is based on a protein known as outer surface protein A ("OspA") found on the organism which causes Lyme disease. This product has completed a Phase 3 clinical trial. The Company is also aware of another first-generation vaccine based on OspA developed by SmithKline Beecham which has received marketing approval from the FDA. DbpA was discovered in 1993 by Magnus Hook, Ph.D. and Betty Guo at Texas A&M University's Institute of Biosciences and Technology in Houston, Texas and exclusively licensed to MedImmune. These scientists found that a protein expressed by spirochetes which cause Lyme disease, including Borrelia burgdorferi and related species, could bind to a protein called "decorin" commonly found in human skin and connective tissue. Hook and Guo determined the gene sequence encoding the protein in 1995. The Company and Texas A&M University found that animals immunized with DbpA can be protected from challenge with the bacterium. These researchers have also shown the ability of antibodies directed against DbpA to inhibit growth of B. burgdorferi and related strains, including isolates not inhibited by antibodies directed against OspA. To date, DbpA has been tested in animals. The Company does not believe 17 that a vaccine incorporating DbpA will enter clinical trials prior to year-end 1999. PMC intends to use DbpA as a component in the development of European, and possibly improved U.S., vaccines for the prevention of Lyme disease. MedImmune would receive milestone payments and royalties on sales of any vaccine incorporating DbpA. Streptococcus pneumoniae Vaccine The Company is involved in the discovery and screening of new proteins for development of a Streptococcus pneumoniae vaccine. Streptococcus pneumoniae is a major cause of pneumonia, middle-ear infections and meningitis worldwide, especially in the very young or elderly. Pneumonia causes more than one million deaths per year and is the most common cause of childhood death in developing countries. In industrialized countries, pneumococcal pneumonia is a serious problem among the elderly. Middle-ear infections affect almost every child at least once during the first two years of life. Vaccination against pneumococcal infections has become more urgent in recent years due to the emergence of antibiotic-resistant strains throughout the world. The Company has established a research collaboration with St. Jude Children's Research Hospital("St. Jude") to develop products for the prevention and treatment of Streptococcus pneumoniae infection. The Company has been granted a worldwide exclusive license from the Rockefeller University to commercialize product candidates developed from a novel set of genes discovered by scientists at St. Jude, formerly at Rockefeller University. In addition, research efforts are underway by scientists at the Company and St. Jude to identify novel conserved surface proteins for potential vaccine applications. During 1998, a number of promising candidate proteins were found and tested. The Company believes that one or more candidates may be chosen for further development in 1999. Other Products The Company continues to work on small feasibility studies in a number of other areas. Any of these programs could become more significant to 18 the Company over the next 12 months; however, there can be no assurances that any of the new programs under review will generate viable product opportunities. The Company may choose to address new opportunities for future growth in a number of different ways including, but not limited to, internal discovery and development of new products, in-licensing of products and technologies, and/or merger or acquisition of companies with products and/or technologies. Any of these activities may require substantial capital investment. Products and Product Development Programs The following table summarizes the indications and current status of the Company's products and product development programs. Product Indication Status(1) - --------------------------------------------------------------- Synagis RSV Prevention of RSV disease Marketed Monoclonal in pediatric patients at Antibody (IM) high risk of RSV disease CytoGam Prophylaxis of cytomegalovirus Marketed disease associated with transplantation of kidney, lung, liver, pancreas and heart RespiGam Prevention of serious RSV Marketed RSV Immune disease in infants with Globulin (IV) prematurity or lung disease Synagis RSV Treatment of RSV disease in Phase 3 (4) Monoclonal bone marrow transplant Antibody recipients Vitaxin Anti- Treatment of cancer by inhibition Phase 2 Alfa-V-Beta-3 of angiogenesis leiomyosarcoma Moloclonal patents Antibody MEDI-507 Treatment of graft-versus-host Phase 1/2 Monoclonal disease Antibody MEDI-501 HPV-11 Prevention of genital warts Phase 1 Vaccine(2) Completed MEDI-507 Treatment of psoriasis Phase 1 Monoclonal 19 Antibody MEDI-491 B19 Prevention of B19 parvovirus Phase 1 Parvovirus infection Completed Vaccine MEDI-504 HPV-18 Prevention of cervical cancer Clinical Vaccine(2) Development MEDI-503 HPV-16 Prevention of cervical cancer Clinical Vaccine(2) Development E. coli Vaccine Prevention of urinary tract Pre-clinical (FimH Adhesin) infections Development Second-Generation Prevention of Lyme disease Pre-clinical Lyme Disease Development Vaccine (3) S. pneumoniae Prevention and treatment of Research Vaccine streptococcus pneumoniae _______________ (1) "Phase 1" and "Phase 2" clinical trials generally involve administration of a product to a limited number of patients to evaluate safety, dosage and, to some extent, efficacy. "Phase 3" clinical trials generally examine the efficacy and safety of a product in an expanded patient population at multiple clinical sites. (2) These products are being co-developed by the Company and SmithKline Beecham. The Company is entitled to certain milestone payments and royalties on any sales, if and when cleared for marketing by the FDA. The specific clinical status of these products is not disclosed. (3) This product was out-licensed to Pasteur-Merieux Connaught ("PMC") in 1998. PMC is responsible for clinical development and commercialization. The Company is entitled to certain milestone payments and royalties on any sales, if and when cleared for marketing by the FDA. (4) This clinical trial is sponsored by the Cooperative Antiviral Studies Group of the National Institutes of Health Marketing, Research, Development and Collaborative Agreements The Company's internal research programs are augmented by collaborative projects with its scientific partners. As part of its strategy, the Company has established alliances with pharmaceutical and other biotechnology companies, academic scientists and government laboratories. Currently, its principal strategic alliances are the following: 20 Abbott Laboratories In December 1997, the Company entered into two agreements with Abbott Laboratories ("Abbott"). The first agreement calls for Abbott to co- promote Synagis in the United States in exchange for a percentage of net sales in excess of annual sales thresholds. Each company is responsible for its own selling expenses. The second agreement allows Abbott exclusively to distribute Synagis outside the United States, if and when licensed for marketing by the appropriate regulatory authorities. The Company would manufacture and sell Synagis to Abbott at a price based on end user sales and could receive additional milestone payments based on meeting certain milestones and sales thresholds. In July 1998, the Company and Abbott submitted a Marketing Authorization Application("MAA") to the European Agency for The Evaluation of Medical Products ("EMEA") for Synagis. The approval time of an MAA submitted to the EMEA can be 12 to 24 months or more. As of December 31, 1998, the Company and Abbott had submitted a total of 25 regulatory applications for approval to market Synagis. No assurance can be given that the MAA will be approved by the EMEA in time for the 1999 - 2000 RSV season or at all, or that any other applications submitted to any other countries for marketing licensure will be approved in a timely manner or at all. American Home Products Corporation The Company's strategic alliance with American Home Products ("AHP") calls for the two companies to co-develop and co-promote RespiGam. The agreement provided for AHP to fund a portion of the cost of the development of RespiGam and to co-promote the product in the United States. AHP shares in the profits and losses of RespiGam in the U.S. The alliance provides for the Company to receive royalties on any sales of AHP's RSV vaccine product, currently in Phase 2 clinical development and for AHP to receive royalties on all domestic sales of Synagis. SmithKline Beecham In December 1997, the Company entered into a strategic alliance with 21 SmithKline Beecham PLC ("SB") to research, develop, manufacture and commercialize therapeutic and prophylactic HPV vaccines. In exchange for exclusive worldwide rights to the Company's HPV technology, SB provided the Company with an up-front payment of $15 million, which was received and recorded in 1998, future funding and potential developmental and sales milestones which together could total over $85 million, royalties on any product sales and an equity investment of $5 million. Under the terms of the agreement, the companies will collaborate on research and development activities. MedImmune will conduct Phase 1 and Phase 2 clinical trials and manufacture clinical material for those studies. SB is responsible for the final development of the product, as well as regulatory, manufacturing, and marketing activities. BioTransplant, Incorporated In October 1995, the Company and BioTransplant, Incorporated ("BTI") formed a strategic alliance for the development of products to treat and prevent organ transplant rejection. The alliance is based upon the development of products derived from BTI's anti-CD2 antibody, BTI-322, the Company's anti-T cell receptor antibody, MEDI-500, and future generations of products derived from these two molecules (such as MEDI- 507, or humanized BTI-322). Pursuant to the alliance, the Company received an exclusive worldwide license to develop and commercialize BTI-322 and any products based on BTI-322, with the exception of the use of BTI-322 in kits for xenotransplantation or allotransplantation. The Company has assumed responsibility for clinical testing and commercialization of any resulting products. BTI may receive milestone payments which could total up to an additional $11.0 million, as well as royalties on any sales of BTI-322, MEDI-500, MEDI-507 and future generations of these products, if any. Human Genome Sciences, Inc. In July 1995, the Company entered into a collaborative research and development relationship with Human Genome Sciences, Inc. ("HGS") to create antibacterial vaccines and immunotherapeutic products based upon the genomic sequences of bacteria. The Company and HGS have collaborative 22 research efforts underway to develop a vaccine for Streptococcus pneumoniae. Rights to another genomic sequence for vaccine development, Helicobacter pylori, were out-licensed to Oravax, Inc. and Pasteur Merieux Connaught in November 1996 for license payments as well as milestone and royalty obligations. Pursuant to a collaboration and license agreement between the Company and HGS, the Company will be solely responsible for the commercialization of any products developed through the collaboration, and HGS will be entitled to royalties based upon the extent to which any products jointly developed are covered by patents or license rights held by HGS. Massachusetts Health Research Institute and Massachusetts Biologics Laboratories. In August 1989 and April 1990, the Company entered into a series of research, supply and license agreements with Massachusetts Health Research Institute ("MHRI") and Massachusetts Public Health Biologics Laboratories, then a division of the Massachusetts Department of Public Health ("The State Lab"), covering products intended for the prevention or treatment of CMV and RSV infection and other respiratory virus infections by immune globulins or monoclonal antibodies. The Company has agreed to pay royalties on all sales using the licensed technology. Pursuant to the agreements, the Company paid $17.8 million in 1998, $13.3 million in 1997,and $11.8 million in 1996 , for royalties, process development and manufacturing. Pasteur Merieux Connaught In December 1998, the Company entered into a license agreement with Pasteur Merieux Connaught ("PMC"), a subsidiary of Rhone-Poulenc S.A., to develop a second generation vaccine for the prevention of Lyme disease. The first generation vaccine candidate of PMC, OspA, has completed a Phase 3 clinical trial. In exchange for exclusive worldwide rights to the Company's DbpA technology, PMC made an up-front payment in December 1998, and agreed to make additional payments if certain development and sales milestones are achieved, and agreed to pay royalties on any product sales. PMC indicated that it intends to use DbpA for the development of 23 European, and possibly improved U.S., vaccines for the prevention of Lyme disease. Other Agreements The Company has a number of other collaborative and business agreements with academic institutions and business corporations, including agreements with 1) Washington University in St. Louis covering development of pilus-based anti-bacterial vaccines, 2) Georgetown University, the German Cancer Research Center and the University of Rochester covering development of vaccines for human papillomaviruses, 3)Chiron Corporation covering supply of MF59, a proprietary vaccine adjuvant to be used for B19 parvovirus and E.coli development and, 4) scientists at St. Jude for the discovery and commercialization of products to treat and prevent Streptococcus pneumoniae. In addition, the Company has license agreements with third parties for CytoGam, RespiGam, Synagis and substantially all of its other potential products. Under such license agreements the Company is obligated to pay royalties on any sales of these products. Marketing and Sales The Company has developed a sales and marketing organization which it believes is responsive to the increased importance of managed care and the need of the healthcare industry to provide higher quality care at lower costs. The Company's first product, CytoGam, was originally marketed by a third party as the Company's exclusive distributor. In December 1992, the Company reacquired marketing rights to CytoGam and in January 1993, the Company commenced marketing of CytoGam in the United States through its own sales force (then consisting of 14 people) focused on 250 leading transplantation hospitals. Sales outside the United States are made through regional distributors. The Company now has approximately 100 people devoted to sales and marketing of the Company's three approved products. Approximately 50 sales and managed care representatives cover approximately 500 hospitals 24 and clinics in the United States, which specialize in transplantation and/or pediatric/neonatal care, for the promotion of CytoGam and Synagis or RespiGam, respectively. Each sales representative is responsible for selling all three products. The Company has established a collaboration with Abbott, through its Ross Pediatrics Division, to co-promote Synagis in the U.S. In addition, Abbott has agreed to serve as the Company's exclusive distributor for Synagis outside of the U.S., if and when Synagis is cleared for marketing by the appropriate regulatory authorities. There can be no assurance that such approvals would be granted, or, if granted, that approvals would occur in a timely manner. Manufacturing and Supply The Company has entered into manufacturing, supply and purchase agreements in order to provide a supply of human plasma and production capability for Synagis, CytoGam and RespiGam. CytoGam and RespiGam are produced from human plasma collected from donors who have been screened to have high concentrations of antibodies against CMV and RSV, respectively. Human plasma for CytoGam and RespiGam is converted to an intermediate raw material (Fraction II+III paste) under supply agreements with Baxter and V.I. Technologies, Inc. The State Lab processes the Fraction II+III paste into bulk product. The Company has an informal arrangement with the State Lab for planned production of bulk product for CytoGam and RespiGam. The State Lab holds the sole product and establishment licenses for CytoGam and RespiGam. The Company also has an agreement with Connaught Laboratories, Inc. ("Connaught") to fill and package CytoGam and RespiGam. If the State Lab, the suppliers of the Fraction II+III paste, or Connaught is unable to satisfy the Company's product requirements on a timely basis or is prevented for any reason from manufacturing its products, the Company may be unable to secure an alternative supplier or manufacturer without undue and materially adverse operational disruption and increased cost. 25 In 1997, the Company entered into a manufacturing and supply agreement with BI to provide supplemental production capability for Synagis, a humanized monoclonal antibody product. BI is currently the primary manufacturer of Synagis. BI also fills and packages Synagis produced at their facility. The BI facility is subject to inspection and approval by the appropriate regulatory authorities in connection with maintaining its FDA licensure as well as for obtaining and maintaining approval from certain ex-U.S. countries. Should BI be unable to supply Synagis to the Company for any reason, there can be no assurance that the Company would be able to secure an alternate manufacturer in a timely basis or without increased cost. If and when the Company's Frederick manufacturing facility is licensed for production by the FDA, the Company would continue for the foreseeable future to rely upon BI for production of additional quantities of Synagis in order to meet expected worldwide demand for the product. There can be no assurances that BI will be licensed by the appropriate regulatory authorities to manufacture the product for sale outside the U.S. The Company has completed construction of its manufacturing facility in Frederick, Maryland. The facility, currently undergoing start-up and validation activities, is a multi-use biologics facility intended to provide production capability for the manufacture of immune globulins and by-products from human plasma. In addition, the facility contains a cell culture production area for the manufacture of recombinant products, such as Synagis, MEDI-501 and MEDI-507, if and when MEDI-501 and MEDI-507 are cleared for marketing by the FDA. The Company is currently planning to submit in 1999 an amendment to its BLA for approval of the facility for production of Synagis. There can be no assurances that the facility will receive regulatory approval for its intended purposes. Any resulting sales of product from this facility would not commence for at least the next 12 months. The Company has no experience in commercial manufacturing. Accordingly, even if the necessary approvals were obtained, the Company would encounter new risks associated with 26 commercial manufacturing, including potential scale-up issues, cost overruns, product defects and environmental problems. Furthermore, there can be no assurance that the Company will be able to manufacture products at a cost that is competitive with third party manufacturing operations or that the production yields will be comparable or better than those achieved at third party manufacturing operations. The Company's pilot plant facility in Gaithersburg, Maryland was licensed by the FDA for the commercial production of Synagis in June 1998. Due to the small capacity at the facility, only limited quantities of Synagis are produced at this site. In addition, this site produces materials for the Company's clinical trials. Materials currently being used in clinical trials for MEDI-501, MEDI-507, and MEDI-491 have been produced at the Company's pilot plant. The Company entered into an agreement with Chiron Corporation ("Chiron") in 1997, pursuant to which Chiron fills and packages Synagis produced at the Gaithersburg pilot plant and Frederick manufacturing plant. The term of the agreement is for three years. Patents, Licenses and Proprietary Rights Products currently being developed or considered for development by the Company are in the area of biotechnology, an area in which there are extensive patent filings. The Company relies on patent protection against use of proprietary products and technologies by competitors. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be no assurance that patent applications owned or licensed by the Company will result in patents being issued or that, if issued, such patents will afford protection against competitors with similar technology. The Company believes that there are other patents issued to third parties and/or patent applications filed by third parties which could have applicability to each of the Company's products and product candidates 27 and could adversely affect the Company's freedom to make, have made, use or sell such products or use certain processes for their manufacture. The Company is unable to predict whether it will ultimately be necessary to seek a license from such third parties or, if such a license were necessary, whether such a license would be available on terms acceptable to the Company. The necessity for such a license could have a material adverse effect on the Company's business. There has been substantial litigation regarding patent and other intellectual property rights in the biotechnology industry. Litigation may be necessary to enforce certain intellectual property rights of the Company. Any such litigation could result in substantial cost to and diversion of effort by the Company. Government Regulation The production and marketing of the Company's products and research and development activities are subject to regulation for safety and efficacy by numerous governmental authorities in the United States and other countries. In the United States, vaccines, biologics, drugs and certain diagnostic products are subject to FDA review and licensure. The federal Food, Drug and Cosmetics Act, the Public Health Service Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, licensure, advertising and promotion of such products. No assurances can be given that any products under development will be licensed for marketing by the FDA or, if approved, that the product would be successfully commercialized or maintained in the marketplace. Non-compliance with applicable requirements could result in fines, recall or seizure of products, total or partial suspension of production, refusal of the government to approve product license applications, restrictions on the Company's ability to enter into supply contracts and criminal prosecution. The FDA also has the authority to revoke product licenses and establishment licenses previously granted. The FDA may designate a drug as an Orphan Drug for a particular use, in 28 which event the developer of the drug may be entitled to a seven year marketing exclusivity period. CytoGam, RespiGam and MEDI-507 have been designated as Orphan Drugs for certain indications by the FDA. Accordingly, RespiGam has market exclusivity for its currently licensed indication through January 17, 2003. Marketing exclusivity for CytoGam's originally licensed indication for use in kidney transplantation expired in 1997. MEDI-507 would have market exclusivity for seven years from the date of FDA approval if it is the first product approved by the FDA for treatment of GvHD. The Company is also subject to regulation by the Occupational Safety and Health Administration ("OSHA") and the Environmental Protection Agency ("EPA") and to regulation under the Toxic Substances Control Act, the Resources Conservation and Recovery Act and other regulatory statutes, and may in the future be subject to other federal, state or local regulations. OSHA and/or the EPA may promulgate regulations concerning biotechnology that may affect the Company's research and development programs. The Company is unable to predict whether any agency will adopt any regulation which would have a material adverse effect on the Company's operations. The Company voluntarily attempts to comply with guidelines of the National Institutes of Health regarding research involving recombinant DNA molecules. Such guidelines, among other things, restrict or prohibit certain recombinant DNA experiments and establish levels of biological and physical containment that must be met for various types of research. Sales of pharmaceutical and biopharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Whether or not FDA licensure has been obtained, licensure of a product by comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing the product in those countries. The time required to obtain such licensure may be longer or shorter than that required for FDA approval, and no assurances can be given that such approval will be obtained. 29 Competition The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. The Company's competitors include pharmaceutical, chemical and biotechnology companies, many of which have financial, technical and marketing resources significantly greater than those of the Company. In addition, many specialized biotechnology companies have formed collaborations with large, established companies to support research, development and commercialization of products that may be competitive with those of the Company. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products on their own or through joint ventures. The Company is aware of certain products manufactured by competitors that are used for the prevention or treatment of certain diseases the Company has targeted for product development, including CMV, RSV, Lyme disease, HPV infections and organ graft rejection. In the prevention of CMV disease, the Company's CytoGam competes with several other products including other antiviral drugs, standard immune globulin preparations and intravenous and oral ganciclovir, marketed by Hoffmann-La Roche Inc. The Company is aware that a number of physicians have prescribed CytoGam in combination with ganciclovir for the prevention of CMV disease in certain patients. The Company believes that for the prevention of RSV disease, the Company's second generation RSV product, Synagis, and its first generation product, RespiGam, which has largely been replaced by Synagis, do not compete directly with any product; however, the Company is aware of one product in the U.S., ribivirin, which is indicated for the treatment of RSV disease. The existence of these products, or other products or treatments of which the Company is not aware, or products or treatments that may be developed in the future, may adversely affect the marketability of products developed by the Company. 30 The Company expects its products to compete primarily on the basis of product efficacy, safety, patient convenience, reliability, price and patent position. In addition, the first product to reach the market in a therapeutic or preventive area is often at a significant competitive advantage relative to later entrants to the market. The Company's competitive position will also depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement product and marketing plans, obtain patent protection and secure adequate capital resources. EXECUTIVE OFFICERS OF THE COMPANY Officer Name Age Position Since - ----------------------------------------------------------------------- Wayne T. Hockmeyer, Ph.D. 54 Chairman and Chief Executive 1988 Officer Melvin D. Booth 53 President and Chief Operating 1998 Officer David M. Mott 33 Vice Chairman and Chief 1992 Financial Officer David P. Wright 51 Executive Vice President- 1990 Sales and Marketing Franklin H. Top, Jr., 63 Executive Vice President and 1988 M.D. Medical Director Bogdan Dziurzynski 50 Senior Vice President 1994 Regulatory Affairs and Quality Assurance James F. Young, Ph.D. 46 Senior Vice President 1989 Research and Development Dr. Hockmeyer founded the Company in April 1988 as President and Chief Executive Officer and was elected to serve on the Board of Directors in May 1988. He became Chairman of the Board of Directors in May 1993. 31 From 1986 to 1988, Dr. Hockmeyer served as Vice President, Research and Development, of Praxis Biologics, Inc. ("Praxis"). From 1980 to 1986, Dr. Hockmeyer served as Chairman, Department of Immunology, Walter Reed Army Institute of Research. Dr. Hockmeyer is a member of the Maryland Economic Development Commission, a member of the Board of Directors of Digene Corporation, serves on the Advisory Board of the University of Maryland Biotechnology Institute, is a member of Board of Advisors of the Institute of Human Virology, is a member of the Board of Directors of the High Technology Council of Maryland, is Chairman of the Maryland Bioscience Alliance and a member of the University of Maryland University College Graduate School Advisory Board, Executive Programs. Dr. Hockmeyer received a Bachelor of Science degree from Purdue University and a doctorate from the University of Florida. Mr. Booth joined the Company in October 1998 as President and Chief Operating Officer and was elected to serve on the Board of Directors in November 1998. Prior to joining the Company, he was President, Chief Operating Officer and a member of the Board of Directors of Human Genome Sciences, Inc. from July 1995 until October 1998. Prior to this time, Mr. Booth was employed at Syntex Corporation from 1975 to 1995, where he held a variety of positions, including President of Syntex Laboratories, Inc. from 1993 to 1995 and Vice President of Syntex Corporation from 1992 to 1995. From 1992 to 1993, he served as the President of Syntex Pharmaceuticals Pacific. From 1991 to 1992, he served as an area Vice President of Syntex, Inc. From 1986 to 1991 he served as the President of Syntex, Inc., Canada. Mr. Booth is a past Chairman of the Pharmaceutical Manufacturers Association of Canada and currently is a member of the Board of Directors of Neoprobe Corporation. Mr. Booth graduated from Northwest Missouri State University and holds a Certified Public Accountant Certificate. Mr. Mott joined the Company in April 1992 as Vice President, with responsibility for business development, strategic planning and investor relations. In 1994, Mr. Mott assumed additional responsibility for the medical and regulatory groups, and in 1995 was appointed Executive Vice 32 President and Chief Financial Officer. In November 1995, Mr. Mott was appointed to the position of President and Chief Operating Officer and was elected to the Board of Directors. In October 1998, Mr. Mott was appointed Vice Chairman and Chief Financial Officer. Prior to joining the Company, he was a Vice President in the Health Care Investment Banking Group at Smith Barney, Harris Upham & Co., Inc. At Smith Barney, where he was employed from July 1986 to April 1992, Mr. Mott's activities included public and private equity and debt financings as well as merger and acquisition work for biotechnology, healthcare services, and medical product and device companies. Mr. Mott is a member of the Board of Directors of Conceptis Technologies. He holds a Bachelor of Arts degree in economics and government from Dartmouth College. Dr. Top joined the Company in June 1988 as Executive Vice President. He was elected to the Board of Directors in July 1988 and became the Company's Medical Director in 1990. From 1987 to 1988, Dr. Top served as Senior Vice President for Clinical and Regulatory Affairs at Praxis. Prior to 1987, Dr. Top served for 22 years in the U.S. Army Medical Research and Development Command, where he was appointed Director, Walter Reed Army Institute of Research in 1983. Dr. Top holds a doctorate of medicine cum laude and a Bachelor of Science degree in biochemistry from Yale University. Mr. Wright, prior to joining the Company in 1990, was President of Pediatric Pharmaceuticals, Inc. (1989-1990) and Vice President of the Gastrointestinal Business Group at Smith, Kline and French Laboratories. Mr. Dziurzynski, prior to joining the Company in 1994, was Vice President of Regulatory Affairs and Quality Assurance at Immunex Corporation. Dr. Young, prior to joining the Company in 1989, was Director, Department of Molecular Genetics at Smith, Kline and French Laboratories. 33 EMPLOYEES As of February 15, 1999, the Company had 438 full time employees. These include 101 marketing and sales personnel, 45 clinical and regulatory affairs personnel, 128 manufacturing facility personnel, and 88 research and development personnel. The Company considers relations with its employees to be good. RISK FACTORS In addition to the other information included in this report, you should consider the following risk factors. This report contains forward- looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that may affect our business and prospects. Our results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors which are listed below or discussed elsewhere in this report and our other filings with the Securities and Exchange Commission. Product sales may vary: The amount we receive from sales of our products may vary from period to period for several reasons, including: seasonal demand for our principal product, general market demand for our products, which may fluctuate, availability of other competitive products in the market, availability of third-party reimbursement for the cost of treatment with our products, effectiveness and safety of our products, rate of adoption and use of our products for approved indications and possible additional indications, likelihood and timing of FDA and other regulatory approvals. We do not expect any of the products we have under development to be commercially available prior to 2002 and they may never become commercially available. Increased work force could result in substantial costs and time delays: Recent increases in the size of our work force and scope of operations could be harmful to us. In connection with our increased marketing 34 efforts for Synagis, and in preparation for commencement of manufacturing in our new Frederick, Maryland facility, we have substantially increased the size of our work force. This rapid growth and increased scope of operations present new risks we have not previously encountered and could result in unanticipated and substantial costs and time delays which could materially and adversely affect the Company. Significant costs could result from our new manufacturing facility: Our new manufacturing facility could result in significant costs to us. We completed construction of the facility, located in Frederick, Maryland, in early 1998. We are currently in the process of validating the manufacturing process and beginning production. We expect to submit to the FDA in 1999 an amendment to our Biologics License Application for approval of the facility for the production of Synagis. We cannot sell any Synagis or CytoGam manufactured in the facility unless and until the FDA inspects the facility and approves our application. We cannot guarantee that our facility will be approved on a timely basis, or at all. Even if the approval process goes according to our expectations, we anticipate that sales of product manufactured in the facility will not begin for at least the next nine to 18 months. Until approval is received, all costs of operating our manufacturing facility must be borne by us without being offset by revenue from sales of Synagis or CytoGam that we manufacture. If approval were substantially delayed, or we were unable to obtain approval at all, we could be forced to continue to incur these costs and to seek alternative sources of supply for Synagis or CytoGam, which could have a material adverse effect on our business, financial condition or results of operations. We have limited experience in commercial manufacturing. Even if our facility were approved for the manufacture of Synagis, we would encounter many new risks associated with commercial manufacturing, such as: manufacturing processes appropriate for low-volume production may not be suitable for higher-volume production; costs of operating and maintaining the production facility may be in excess of our expectations; product defects may result; our production process may 35 result in environmental problems; we may not be able to manufacture products at a cost that is competitive with third party manufacturing operations. If we were to experience any one or more of these problems, there could be a material adverse effect on our business, financial condition or results of operations. We are dependent on third party manufacturers and suppliers: We are currently, and for the foreseeable future expect to be, dependent on a limited number of contract manufacturers for some or all of the manufacture of our current and future products (if any). We depend on Boehringer Ingleheim Pharma KG ("BI") to produce virtually all the Synagis we sell. BI's facility is subject to inspection and approval by both U.S. and foreign regulatory authorities in order to obtain and maintain its license to manufacture our products. Should BI be unable to supply Synagis to us for any reason, there can be no assurance that we would be able to secure an alternate manufacturer on a timely basis or without increased cost. We also depend on the University of Massachusetts, Massachusetts Biologics Laboratories (the "State Lab") to produce all the CytoGam and RespiGam we sell. The State Lab holds the sole product and establishment licenses from the FDA for the manufacture of CytoGam and RespiGam. Our manufacturing arrangements with the State Lab are renegotiated annually. We cannot guarantee that any new arrangements will be on terms favorable to us. In addition, we rely on a limited number of suppliers to obtain substantially all of the plasma used as raw material for the production of CytoGam and RespiGam. The State Lab or these suppliers of raw material could fail to meet our requirements for the production of CytoGam and RespiGam. If we were unable to obtain these products on reasonable terms or at all, we could be unable to secure alternative suppliers or manufacturers without unduly disrupting our operations. Such a disruption could have a materially adverse effect on our business, financial condition or results of operations. We have previously experienced shortages of CytoGam and RespiGam, which has limited sales of these products without reducing our sales and 36 marketing costs. We are dependent on strategic alliances: We depend on strategic alliances with our corporate partners to accomplish many of our goals. If those corporate partners fail to devote sufficient effort and attention to achieving those goals, we would be adversely affected. Patent protection for our products may be inadequate or costly to enforce: We may not be able to obtain effective patent protection for products we develop. We are currently developing, or considering developing, products in the biotechnology industry, an industry in which there are extensive patent filings. The patent position of biotechnology firms generally is highly uncertain and involves complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of claims allowed in biotechnology patents. Accordingly, there can be no assurance that our patent applications will result in patents being issued or that, if issued, such patents will afford protection against competitors with similar technology. Litigation could be necessary from time to time in order to enforce our intellectual property rights. There has been substantial litigation regarding patent and other intellectual property rights in the biotechnology industry. If we were required to litigate, there could be substantial cost involved and significant diversion of our business efforts. We may be required to seek patent licenses from third parties: We believe that there are patents issued to third parties and/or patent applications filed by third parties which could apply to each of our products and product candidates. These patents and/or applications could limit our ability to manufacture, use or sell our products. In such a case, we may be required to seek to purchase a patent license in order to avoid infringing a third party's intellectual property rights. If such a license were necessary, there can be no assurance that it would be available on terms acceptable to us or at all, which could have a material adverse effect on our business, financial condition or 37 results of operations. Technological developments by our competitors may render our products obsolete: If our competitors were to develop superior products or technologies, our products or technologies could be rendered noncompetitive or obsolete. Biotechnology and pharmaceuticals are evolving fields in which developments are expected to continue at a rapid pace. Our success depends upon achieving and maintaining a competitive position in the development of products and technologies. Competition from other biotechnology and pharmaceutical companies is intense. Many of our competitors have substantially greater research and development capabilities, marketing, financial and managerial resources and experience in the industry. Were a competitor to develop a better product or technology, our products or technologies could be rendered obsolete, decreasing our product sales and resulting in a material adverse effect on our business, financial condition or results of operations. Compliance with government regulations is costly and time-consuming: Substantially all of our products require costly and time-consuming regulatory approval by governmental agencies. In particular, human therapeutic and vaccine products are subject to rigorous preclinical and clinical testing for safety and efficacy and approval processes by the FDA in the United States, as well as regulatory authorities in foreign countries. There can be no assurance that required approvals will be obtained. If we were unable to obtain these approvals on a timely basis or at all, our ability to successfully market products directly and through our collaborators, and to generate revenues from sales or royalties, would be impaired. Any approved products are subject to continuing regulation. If we were to fail to comply with applicable requirements, we could be subject to fines, recall or seizure of products, total or partial suspension of production, refusal by the government to approve our product license applications, restrictions on our ability to enter into supply 38 contracts, and criminal prosecution. The FDA also has the authority to revoke product licenses and establishment licenses previously granted to us. Further, the regulation of recombinant DNA technologies and the regulation of manufacturing facilities by state, local and other authorities is subject to change. Any changes to existing regulations would obligate us to comply, which could entail additional cost, time and risk of non- compliance. Product liability claims may result from sales of our products: As a developer, tester, manufacturer, marketer and seller of health care products, we are potentially subject to product liability claims. Our blood products, such as CytoGam and RespiGam, involve heightened risks of claims, including the risk of claims resulting from the transmission of blood-borne diseases. Defending a product liability claim could be costly and divert our focus from business operations. There can be no assurance that we will be able to maintain our current product liability insurance at a reasonable cost, or at all. If a claim were successful, there is no guarantee that the amount of the claim would not exceed the limit of our insurance coverage. Further, a successful claim could result in the recall of some or all of our products. Any of these occurrences could have a material adverse effect on our business, financial condition or results of operations. Additionally, blood products like CytoGam and RespiGam are occasionally recalled from the market because of risks of contamination from infectious agents or for other reasons. Any such recall of our products could have a material adverse effect on our business, financial condition or results of operations. We depend on key personnel: Our success depends upon the continued contributions of our executive officers and scientific and technical personnel. Many key responsibilities have been assigned to a relatively small number of individuals. The competition for qualified personnel is intense, and the loss of services or certain key personnel could 39 adversely affect our business. We do not maintain or intend to purchase "key man" life insurance on any of our personnel. The price of our common stock could fluctuate significantly over time: The market price of our common stock has fluctuated significantly over time, and it is likely that the price will fluctuate in the future. Investors and analysts have been and will continue to be, interested in our reported earnings, as well as how we perform compared to their expectations. Announcements by us or others regarding operating results, existing and future collaborations, results of clinical trials, scientific discoveries, commercial products, patents or proprietary rights or regulatory actions may have a significant effect on the market price of our common stock. In addition, the stock market has experienced extreme price and volume fluctuations that have particularly affected the market price for many high technology companies and that have often been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. Changes in foreign currency exchange rates or interest rates could cause us losses: We have entered into foreign exchange forward contracts which could result in losses. Because we have contracts for the future purchase of inventory which are denominated in foreign currencies, there is a chance that the foreign currency exchange rate could change between the time those contracts become due and the time when our payments are actually made, resulting in increases or decreases in the actual cost of our purchases. To reduce the risk of unpredictable changes in the cost of our purchases, we enter into forward foreign exchange contracts, which allow us to purchase, for a fixed price on a specific date in the future, the amount of foreign currency necessary to pay for our contractual purchase of inventory. Fluctuations in the anticipated payment date for the inventory could require us to adjust the date of the contract, which could result in a change in the foreign currency exchange rate, which could have a material adverse effect on our financial condition. 40 A discussion of our accounting policies for financial instruments and further disclosure relating to financial instruments is included in the Notes to Financial Statements, located in Part II, Item 8 of this report. The success of our products may be limited by government and third-party payors: The continuing efforts of government and third party payors to contain or reduce the costs of health care through various means may negatively affect sales of our products. In some foreign markets, pricing and profitability of pharmaceutical products is subject to governmental control. In the United States, there have been, and we expect there will continue to be, various Federal and state proposals to implement similar government controls over pricing and profitability. The adoption by Federal or state governments of any such proposals could limit the commercial success of our existing or any future products. Both in the United States and elsewhere, sales of pharmaceutical products depend on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Third party payors are increasingly challenging the prices charged for products, and are limiting reimbursement levels offered to consumers for these products. To the extent that third party payors focus their efforts on our products, sales of our products could be negatively impacted. Our business may be harmed by the year 2000 issue: See Part II, Item 7, under the caption "Year 2000" for a discussion of the risks associated with Year 2000 readiness. ITEM 2. PROPERTIES The Company occupies, under a lease expiring in 2006, a facility in Gaithersburg, Maryland, that contains approximately 85,000 square feet of research, development and administrative space. In 1996, the Company acquired a 27 acre parcel of land in Frederick, Maryland. The Company 41 has completed construction of a 91,000 square foot multi-use biologics facility on this site to provide for the manufacture of immune globulins and by-products from human plasma and a cell culture production area for manufacture of products such as Synagis. The Company also purchased in December 1998, administrative and warehouse space on approximately a six acre parcel of land adjacent to the existing Frederick facility. The structure contains approximately 56,000 square feet. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR MEDIMMUNE, INC.'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's common stock trades on The Nasdaq Stock Market under the symbol "MEDI". At February 28, 1999, the Company had 327 common stockholders of record. This figure does not represent the actual number of beneficial owners of common stock because shares are generally held in "street name" by securities dealers and others for the benefit of individual owners who may vote the shares. The number of beneficial shareholders as of February 28, 1999 was over 15,000. The following table shows the range of high and low closing prices and year end closing prices for the common stock for the two most recent fiscal years, adjusted for the effect of a two-for-one stock split effective December 31, 1998. 42 1997 1998 ---- ---- High Low High Low ---- ---- ---- ---- First Quarter $8 3/4 $6 11/16 $29 1/8 $19 3/8 Second Quarter 9 7/8 5 11/16 32 15/16 22 11/16 Third Quarter 18 5/8 8 1/4 34 7/8 21 Fourth Quarter 21 7/8 15 1/2 50 11/16 25 5/8 Year End Close $21 7/16 $49 11/16 The Company has never declared or paid any dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain any earnings to fund future growth, product development, and operations. ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data) RESULTS FOR THE YEAR 1998 1997* 1996* 1995* 1994* ----- ----- ----- ---- ---- Product sales $163,440 $65,271 $35,782 $16,173 $12,054 Other 37,268 15,693 5,317 11,263 6,804 ------- ------- ------- -------- ------- Total revenues 200,708 80,964 41,099 27,436 18,858 Research and develop- ment expenses 25,775 40,669 32,192 26,417 21,939 Net earnings/(loss) 56,240<F1> (36,895) (29,544) (22,671) (18,828) Earning/(Loss) per Share* Earnings Basic 1.06 (0.80) (0.70) (0.71) (0.64) Diluted 0.91 (0.80) (0.70) (0.71) (0.64) YEAR END POSITION Cash and marketable Securities $134,882 $50,326 $114,765 $38,039 $22,527 Total assets 353,120 170,336 163,971 57,332 44,724 Long term debt 83,195 85,363 70,874 1,984 2,090 Shareholders' equity 209,833 40,536 72,865 43,779 34,194 43 *Note: loss per share data have been restated to give effect for the two- for-one stock split on December 31, 1998. <FN> <F1> Includes deferred income tax benefit of $47,428. </FN> QUARTERLY FINANCIAL DATA (UNAUDITED) (thousands, except per share amounts) 1998 Quarter Ended Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- Net Sales $92,939 $23,840 $24,591 $59,338 Gross profit 66,364 16,937 10,108 37,063 Net income/(loss) 72,655 <F1> (11,052) (18,568) 13,205 Earnings/(loss) per share *: Basic 1.34 (.21) (.35) .25 Diluted 1.13 (.21) (.35) .22 1997 Quarter Ended Dec. 31 Sept. 30 June 30 March 31 -------- -------- -------- -------- Net Sales $53,757 $10,659 $6,411 $10,138 Gross Profit 33,227 5,401 2,981 4,923 Net income/(loss) 3,294 (13,657) (12,209) (14,322) Earnings/(loss) per share *: Basic .07 (.29) (.27) (.33) Diluted .06 (.29) (.27) (.33) *Amounts have been restated to give effect for the two-for-one stock split on December 31, 1998. <FN> <F1> Includes deferred income tax benefit of $47,428. </FN> 44 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This review contains management's discussion of the Company's operational results and financial condition and should be read in conjunction with the accompanying financial statements. OVERVIEW MedImmune commenced operations in April 1988 and, through 1990, revenue was generated solely from research and development agreements and research grants. In 1991, contract revenues rose substantially and the Company began selling its first product, CytoGam, to an exclusive distributor. In December 1992, the Company reacquired the CytoGam marketing rights from its distributor and launched an expanded marketing program for this product through its own sales force in January 1993. On January 18, 1996, the Company's second product, RespiGam, was licensed for marketing by the U.S. Food and Drug Administration ("FDA") for the prevention of serious lower respiratory tract infection caused by RSV in children under 24 months of age with BPD or a history of pre- maturity. On June 18, 1998, the Company's second generation RSV drug, Synagis, was approved for marketing by the FDA and the Company's Gaithersburg pilot plant facility was licensed for production of Synagis. Synagis is approved in the U.S. for the prevention of serious lower respiratory tract disease caused by RSV in pediatric patients at high risk for RSV disease. Because of the seasonal nature of RSV, limited sales, if any, are expected during the second and third quarters of any calendar year, causing results to vary significantly from quarter to quarter. On November 11, 1998, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend payable December 31, 1998. Accordingly, all share and per share amounts have been restated to reflect this stock split. RESULTS OF OPERATIONS 1998 Compared to 1997 45 Product sales increased 150% for the year ended December 31, 1998 over the year ended December 31, 1997 due primarily to demand for Synagis, launched in 1998. Sales of Synagis generally will be expected to occur each year in proximity to the RSV season, from September through March. Synagis sales, commenced in September 1998 and were $109.8 million for the year. Of those sales, $2.3 million were sales to Abbott International, the Company's exclusive distributor outside the U.S., for "named patient" sales of Synagis. As of December 31, 1998. The Company and Abbott International have filed international registrations in 25 countries for approval of Synagis. There can be no assurance that approval by the appropriate regulatory authorities will be granted. RespiGam sales decreased 56% to $19.8 million in 1998 from $45.0 million in 1997. RespiGam sales in 1998 primarily reflect sales for the end of the 1997/1998 season, as most customers had switched to Synagis for the beginning of the 1998/1999 season. Net sales for RespiGam in 1998 include an adjustment of $12.5 million recorded in the fourth quarter reflecting actual and expected product returns as a result of the shift in demand from RespiGam to Synagis. The Company estimates that there will be limited usage of RespiGam over the remainder of the 1998/1999 RSV season and that usage in the 1999/2000 RSV season will be limited. Sales of CytoGam increased 62% to $32.9 million in 1998 from $20.3 million in 1997. Domestic units sold increased by 41% and international units sold increased by 264%. CytoGam is sold at a lower selling price to international distributors than domestic units. The increase in domestic units sold reflects both an increase in the core business for CytoGam and substitution occurring as a result of the worldwide shortage of standard intravenous immune globulin ("IVIG") products. The duration of this shortage and continued impact, if any, on CytoGam sales cannot be determined at this time. The Company also received in December 1998, FDA approval for the use of CytoGam in kidney, lung, liver, pancreas and heart transplants. The Company does not expect the approval to significantly affect future sales in the U.S. as many physicians have already been prescribing CytoGam's use in the settings of solid organ transplantation. The increase in international CytoGam sales reflects a greater focus on this 46 market as well as the effects of the worldwide shortage of IVIG products. The level of future product sales will be dependent on several factors, including, but not limited to, the timing and extent of future regulatory approvals of the Company's products and product candidates, availability of finished product inventory, approval and commercialization of competitive products and the degree of acceptance of the Company's products in the marketplace. Other revenue increased 137% to $37.3 million in 1998 from $15.7 million in 1997. Revenues in 1998 include a $15.0 million milestone payment from Abbott Laboratories ("Abbott") received upon FDA approval of Synagis, and $20.9 million of funding from SmithKline Beecham ("SB") in connection with the HPV vaccine development collaboration, including a $15.0 million milestone payment that was due upon signing of the agreement. Other revenues in 1997 consist primarily of a $15.0 million payment made by Abbott in connection with the signing of the international distribution agreement. The Company would also become entitled to receive an additional $15.0 million from Abbott if marketing approval for Synagis is obtained in Europe. The level of contract revenues in future periods will depend primarily upon the extent to which the Company enters into other collaborative contractual arrangements, if any, and the extent to which the Company achieves certain milestones provided for in its existing agreements. Cost of sales of $70.2 million was recorded in 1998 versus $34.4 million in 1997, an increase of 104%. Factors impacting 1998 cost of sales include a charge of $11.2 million related to the writedown of RespiGam inventory and by-product inventory, offset by credits for the reversal of previously recorded RespiGam royalties expected to be due to Massachusetts Health Research Institute ("MHRI"). Excluding the RespiGam inventory writedown and the royalty adjustments from cost of sales and excluding the RespiGam returns from product sales, gross margins improved to 65% in 1998 from 49% in 1997, reflecting the change in product mix towards Synagis, which has a lower cost than CytoGam and RespiGam. The Company's products are primarily manufactured by third parties and future per-unit cost of sales could increase if the Company is unable to negotiate favorable pricing. The Company has completed 47 construction of its own manufacturing facility intended for the production of some portion of two of its approved products as well as potentially for other product candidates if approved for marketing. This facility is subject to inspection and approval by the FDA and any resulting sales of product from this facility would not commence for at least the next 9 to 18 months. Research and development expenses decreased to $25.8 million in 1998 from $40.7 million in 1997, or 37%, reflecting primarily $14.5 million of expenses in 1997 for conducting the Company's 1,502 patient Phase 3 Synagis clinical trial. No large Phase 3 trials were conducted in 1998. The level of research and development spending in future periods will fluctuate depending on the extent of clinical trial spending and the level of investment in new or existing programs. The Company expects higher clinical trial expenses in 1999, as it continues to move new product candidates into the clinic, and continues testing of products already in clinical trials. Selling, general and administrative expenses increased 95% to $62.0 million in 1998 from $31.7 million in 1997. A significant portion of the increase in expenses in 1998 reflects payments expected to be due to the Ross Products Division of Abbott for co-promotion of Synagis and approximately $9.3 million of marketing expenses for the launch of Synagis. Additionally, 1998 SG&A reflects increased spending over 1997 for increased distribution costs resulting from Synagis sales as well as for added headcount and facilities needed to handle growth in the Company's operations. Selling, general, and administrative expenses in 1999 will be significantly impacted by the level of Synagis sales, due to the nature of the threshold-based co-promotion agreement with Abbott. Other operating expenses were $36.5 million in 1998 versus $11.5 million in 1997, an increase of 216%. This increase is primarily a result of 1)increased wages and supply costs as the Frederick manufacturing facility increased staffing levels in 1998, 2)increased consulting costs for plant validation and start-up activities, and 3)a $10.3 million charge for the buydown of certain Synagis royalty 48 obligations prior to FDA approval in June 1998. Other operating expenses are expected to continue to be significant in 1999 and into 2000 as the Company continues start-up and validation activities at the Frederick plant. Interest income increased to $6.7 million for 1998 from $4.0 million in 1997 reflecting higher cash balances available for investment, including the proceeds from the Company's private placement of stock in January 1998 resulting in net proceeds of $66.3 million, offset by a decrease in interest rates which lowered the overall portfolio yield. Interest expense of $4.0 million was recorded in 1998 versus $3.5 million in 1997, reflecting primarily interest on the Company's convertible debt (net of amounts capitalized) and interest on equipment financing beginning in June 1997. Interest expense in 1998 and 1997 is net of $2.9 million and $2.2 million, respectively, of interest capitalized for the manufacturing facility and the pilot plant expansion. The Company's convertible debt is callable in July 1999. If the convertible debt is called or converted, interest expense is expected to decrease substantially in the second half of 1999. The Company recorded an overall net income tax benefit of $47.4 million in 1998 as a result of a reversal of the Company's valuation allowance against its deferred tax assets. The Company believes that it is now more likely than not that such benefit will ultimately be utilized. The 1998 net income of $56.2 million compared to a 1997 net loss of $36.9 million. Basic earnings per share in 1998 were $1.06 on 53.1 million shares. Diluted earnings per share were $0.91 on 63.4 million shares. Basic and diluted loss per share was $0.80 in 1997 on 46.3 million shares. The Company does not believe inflation had a material effect on its financial statements. These results were consistent with the Company's objectives for the year and with the continued development of its immunotherapeutic and vaccine products. The factors that affected 1998 results may continue to affect near-term future financial results. 49 1997 Compared to 1996 Product sales increased 82% for the year ended December 31, 1997, over the year ended December 31, 1996, due to increased demand for RespiGam in the first half of the product's second full season of sales, as well as a 10% increase in CytoGam sales. RespiGam sales were $45.0 million in 1997 versus $17.3 million in 1996, a 159% increase, reflecting an increase in vials sold. Supply constraints limited 1996 sales. CytoGam product sales increased to $20.3 million from $18.4 million in 1996 due primarily to a 4% increase in units sold, and two price increases that took effect in mid-1996 and mid-1997. In 1996 CytoGam product sales were reduced by a $0.7 million reserve for trade receivables due from a pharmaceutical wholesaler that filed Chapter 11 bankruptcy in August 1996; $0.1 million was recovered against this loss in 1997 as a result of a sale of the receivables to a third party. Other revenues increased to $15.7 million in 1997 from $5.3 million in 1996. Other revenues in 1997 reflect primarily fees paid by Abbott Laboratories for the right to distribute Synagis outside the U.S. Other revenues in 1996 reflect the completion of milestone and research funding payments under the Company's strategic alliance with AHP, formerly American Cyanamid Company. Under the terms of the alliance, the Company and AHP share in the profits or losses of RespiGam; reimbursements or payments under this arrangement are deducted from or added to operating expenses and are included in selling, general and administrative expenses. Cost of sales increased 75% to $34.4 million in 1997 from $19.7 million in 1996, due to a 68% increase in vials sold. Gross margins in 1997 improved to 47% versus 45% in 1996, reflecting the increased sales of RespiGam in the product mix, which has a lower royalty rate than CytoGam. 1997 margins were adversely impacted by a charge for an estimate of additional royalties due to MHRI as part of a possible settlement of an ongoing inquiry by the Inspector General of the Commonwealth of Massachusetts. The charges were reversed in 1998 as the matter was substantially resolved without financial impact to the Company. 50 Research, development and clinical costs of $40.7 million were incurred in 1997 compared to $32.2 million in 1996, an increase of 26%. Expenditures in 1997 and 1996 include approximately $14.5 million and $10 million, respectively, for the clinical studies performed for Synagis, including a 1,502-patient Phase 3 clinical trial that began in the fourth quarter of 1996 and was substantially completed by the end of the 1997 second quarter. 1997 expenses also include $1.3 million in license fees relating to Synagis and MEDI-507, a monoclonal antibody that inhibits T cell responses. Selling, general and administrative expenses increased to $31.7 million in 1997 from $22.2 million in 1996. The increase in 1997 reflects primarily AHP's share of RespiGam's profits, which resulted in a charge of $3.0 million to selling expenses as calculated under the terms of the strategic alliance. This compared to $4.3 million in reimbursement from AHP in 1996 for its share of RespiGam product line loss, as calculated under the terms of the strategic alliance. Other selling and marketing expenses increased by $1.7 million, reflecting increased commission and product distribution costs resulting from the increased product sales. This was offset by a $1.1 million decrease in sales detailing costs to AHP as a result of the Company's decision to not use AHP's sales force to detail RespiGam in the 1997/1998 RSV season. General and administrative expenses increased by $0.6 million reflecting increased headcount, legal and other costs. Expenses in 1997 include $11.5 million of other operating expenses, which include the costs of start-up of the Frederick manufacturing facility and scale-up of production of Synagis at the Gaithersburg pilot plant and at a third-party manufacturer, Boehringer Ingelheim Pharma KG ("BI") in Biberach, Germany. Interest income decreased to $4.0 million in 1997 compared to $5.7 million in 1996. The decrease reflects lower cash balances available for investment, partially offset by an increase in interest rates that increased the overall portfolio yield. Interest expense increased to $3.5 million in 1997 from $2.3 million in 1996, reflecting primarily interest on the convertible subordinated notes of the Company issued in July 1996 (net of amounts 51 capitalized) and interest on equipment financing, primarily in the second half of 1997. Interest expense in 1997 and 1996 is net of $2.2 and $0.3 million, respectively, of interest capitalized for the manufacturing facility and the pilot plant expansion. The 1997 net loss of $36.9 million, or $0.80 basic and diluted per common share, compared to a 1996 net loss of $29.5 million, or $0.70 basic and diluted per common share. Shares used in computing basic and diluted loss per share were 46.3 million and 42.0 million, respectively, in 1997 and 1996. LIQUIDITY AND CAPITAL RESOURCES Cash and marketable securities were $134.9 million at 1998 year end compared to $50.3 million at 1997 year end. Working capital was $158.4 million at 1998 year end versus $56.6 million at 1997 year end. Net cash provided by 1998 operating activities was $12.7 million compared to $47.7 million used in 1997. The cash inflow from operations in 1998 reflected the net income of $56.2 million adjusted for non-cash items and working capital changes. The non-cash items consisted primarily of the reversal of the valuation allowance for the deferred tax asset, offset by trade accounts receivable allowances, primarily the allowance for RespiGam product returns, and the RespiGam and by-product inventory reserves. The working capital changes consisted of: 1)a $33.6 million increase in trade accounts receivable reflecting the high volume of Synagis product sales in November and December; 2) an $8.7 million increase in royalties payable due to the level of Synagis sales; and 3)a $5.2 million increase in accounts payable and accrued expenses reflecting primarily amounts expected to be due to Abbott for Synagis co- promotion. The cash outflow from operations in 1997 reflected the net loss of $36.9 million adjusted for depreciation and amortization and working capital changes. Working capital changes included: 1) a $25.2 million increase in inventory reflecting build-up of CytoGam and RespiGam to support increased sales; 2) an $8.1 million increase in trade receivables as a result of the increased fourth quarter sales, primarily 52 RespiGam; and 3) a $17.4 million increase in accounts payable and accrued expenses reflecting primarily accruals for plasma inventories, contract manufacturing activities, amounts due to AHP for its share of RespiGam product line profit and increased sales commission accruals. Most of the working capital increase in 1997 resulted from growth in accounts receivable, reflecting an 117% increase in product sales in the fourth quarter 1997 versus the fourth quarter 1996, and growth in inventory in anticipation of increased first quarter 1998 sales compared to first quarter 1997. Inventory growth was also impacted by an increase in plasma collections in 1997 as more plasmapheresis centers were added to increase the volume of collections. Cash flows from financing activities were $81.2 million in 1998 compared to $20.9 million in 1997. In January 1998, the Company completed a private placement of 3.4 million shares of common stock resulting in net proceeds to the Company of $66.3 million. In addition, in January 1998, SmithKline Beecham purchased 166,820 shares of common stock for net proceeds of $5.0 million in connection with the collaborative agreement signed in December 1997 related to HPV development. In 1998 and 1997, the Company drew down $0.6 million and $14.4 million respectively of $15.0 million of available equipment financing. Also in 1997, the Company received the remaining $2.8 million of financing available from the state and local governments to fund the construction of the manufacturing plant. Capital expenditures in 1998 were $10.1 million compared to $36.7 million in 1997 excluding capitalized interest of $2.9 million and $2.2 million, respectively. Expenditures in 1998 consist primarily of $3.2 million for the purchase of warehouse and administrative space in Frederick, Maryland, administrative expansion at the Gaithersburg headquarters and manufacturing, laboratory and office equipment. The 1997 expenditures include $33.2 million (excluding capitalized interest) for the construction, equipment and validation of the Company's manufacturing facility and the completion of its pilot plant expansion at the Gaithersburg headquarters. Additional 1997 expenditures were for laboratory and office equipment. Capital expenditures in 1999 are expected to approximate $15.0 53 million, due mostly to expansion at the Frederick manufacturing facility to provide additional capacity for Synagis and the Company's other cell culture product candidates. Construction of the manufacturing facility is completed and start-up activities will be on-going in 1999. There can be no assurance that appropriate regulatory approvals will be obtained to enable the use of the facility for production of the Company's products or product candidates. Any resulting sales of product from this facility would not commence for at least the next 9 to 18 months, subject to regulatory approvals. The Company is obligated in 1999 to provide $8.8 million in funding for various clinical trials, research and development and license agreements with certain institutions. The Company's existing funds, together with funds contemplated to be generated from product sales and investment income, are expected to provide sufficient liquidity to meet the anticipated needs of the business for the foreseeable future, absent the occurrence of any unforeseen events. In February 1999, the Company formed an alliance with Ixsys, Inc. ("Ixsys") to develop four monoclonal antibodies. The first of these products, Vitaxin, was developed by Ixsys using its proprietary Directed Evolution technology and is currently being tested in a Phase 2 trial for cancer treatment by inhibition of angiogenesis. The Company will provide three additional target antibodies to be optimized by Ixsys. Under the terms of the alliance, Ixsys will use its Directed Evolution protein engineering technology to optimize antibodies identified by the Company. The Company will be responsible for clinical development, manufacturing, and commercialization of any resulting products. Concurrent with the signing of the agreements, the Company made a $6.4 million equity investment in Ixsys. The company is also obligated to fund certain research to be performed by Ixsys and would make future milestone and royalty payments on sales, if any, of any resulting products. Year 2000 54 The Company has established a Year 2000 Project Team comprised of representatives from key functional areas to complete a review of its internal and external systems for Year 2000 readiness. The Year 2000 issue is expected to affect the systems of the Company and various entities with which the Company interacts, including the Company's marketing partners, suppliers and various vendors. The Year 2000 Project is designed to address three major areas: (1) information technology systems, (2) hardware, equipment and instrumentation, including embedded systems, and (3) third party relationships. The Company's plan involves inventorying, assessing and prioritizing those items which have Year 2000 implications; remediating (repairing, replacing or upgrading) non-compliant items; testing items with major exposure to ensure compliance; and developing contingency plans to minimize potential business interruption. The inventory, assessment and prioritization phases of the project are substantially complete. With regard to the Company's information technology systems, hardware, equipment and instrumentation, the Company has identified mission critical and non-critical items and is in the process of updating and/or replacing items that are non-compliant. The Company believes that it should be able to substantially complete implementation of critical aspects of its Year 2000 plan prior to the commencement of the year 2000. Because the Company has relied primarily on off-the-shelf software for its information technology needs and because much of the hardware, equipment and instrumentation is currently compliant, the Company does not anticipate that the costs for internal remediation efforts will be significant. The Company does not separately track the internal costs of its Year 2000 compliance efforts and therefore these costs are unknown. As of December 31, 1998, the Company estimates that it has spent no more than $50,000 replacing, upgrading or repairing the systems and/or equipment that are non-compliant and expects the cost to complete these efforts should not exceed $300,000. The Company presently anticipates that its remediation efforts will be substantially complete by June 1, 1999. Testing of certain business critical items is expected to be completed by the third quarter 1999. 55 In addition to the risks associated with the Company's own computer systems and equipment, the Company has relationships with, and is in varying degrees dependent upon, a large number of third parties that provide information, goods and services to the Company. These include, but are not limited to, third party manufacturers, suppliers, customers, and distributors. The Company has identified those third parties with which the Company has material relationships to assess their Year 2000 readiness. The Company has distributed surveys and/or contacted these parties to aid in this assessment. For mission critical functions, the Company intends to visit third parties to assess their Year 2000 readiness. The Company may also be affected by the failure of other third parties to be Year 2000 compliant even if they do not do business directly with the Company. For example, the failure of state, federal and private payors or reimbursers to be Year 2000 compliant and thus unable to make timely, proper or complete payments to sellers and users of the Company's products, could have a material adverse effect on the Company. The Government Accounting Office has stated that the Health Care Financing Administration, the principal federal reimburser for the Company's marketed products, may not become fully year 2000 compliant on a timely basis. The Company does not currently have a Year 2000 contingency plan established. The Company expects by mid-1999 to have finalized a contingency plan which will address the most likely worst case Year 2000 scenario. The Company believes that its most likely worst case scenario would be delays in product shipments due to a complete or partial manufacturing shutdown. To mitigate this risk, the Company plans, among other things, to stock extra inventory. With regard to the Company's Year 2000 readiness plan, there can be no assurances: 1) that the Company will be able to identify all aspects of its business that are subject to Year 2000 problems, including issues of its customers or suppliers, 2) that the Company's software vendors, third parties and others will be correct in their assertions that they 56 are Year 2000 ready, 3) that the Company's estimate of the cost of Year 2000 readiness will prove ultimately to be accurate, 4) that the Company will be able to successfully address its Year 2000 issues and that this could result in interruptions in, or failures of, certain normal business activities or operations that may have a material adverse effect on the Company's business, results of operations and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's risk-management activities includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company did not have significant exposure to changing interest rates on invested cash at December 31, 1998. The Company invests primarily in money market funds, investment grade commercial paper and short-term notes. The interest rates on these securities are primarily fixed, the maturities are relatively short and the Company generally holds the securities until maturity. The Company has issued debt in the form of Notes in the amount of $85.9 million at December 31, 1998, which bear interest at fixed rates. The Company does not have significant exposure to changing interest rates related to the Notes because the interest rate on these notes is fixed. The Company's contract for the purchase of Synagis from BI is denominated in German Marks. In an effort to reduce the impact of fluctuations in the rate of exchange between the U.S. Dollar and the German Mark on the cost of the Company's purchases of Synagis, the Company periodically enters into foreign exchange forward contracts. These contracts permit the Company to purchase German Marks, in an amount the Company believes will be sufficient to fund its inventory purchase obligations, at a fixed exchange rate. Each contract 57 terminates on the day the Company expects to make payment for a shipment of Synagis. The Company does not enter into foreign exchange forward contracts for speculative or trading purposes. The table below provides information about the Company's foreign exchange forward contracts. The anticipated purchase amount is the amount, in German Marks ("DM"), that the Company is contractually obligated to pay BI. The contract amount is the sum of all of the Company's forward contracts during the period indicated. The forward contract exchange rate is the rate at which the Company has agreed to purchase German Marks upon termination of the contract. 1999 ---- Anticipated purchase amount (DM 000's) 54,789 Related foreign currency forward Contracts: Contract Amount (DM 000's) 56,692 Average forward contract exchange Rate for German marks per U.S. Dollar 1.66 58 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BALANCE SHEETS (in thousands, except share data) December 31, December 31, 1998 1997 ---------- ---------- ASSETS Cash and cash equivalents $37,959 $29,984 Marketable securities 96,923 20,342 Trade receivables, net 31,682 15,236 Contract receivables, net 3,155 3,064 Inventory, net 19,760 28,857 Deferred tax assets 22,595 -- Other current assets 4,292 2,740 ---------- ---------- Total Current Assets 216,366 100,223 Property and equipment, net 74,822 65,254 Deferred tax assets, net 54,923 -- Other assets 7,009 4,859 ---------- ---------- Total Assets $353,120 $170,336 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable, trade $4,052 $4,535 Accrued expenses 33,397 27,682 Accrued interest 2,580 2,583 Product royalties payable 14,948 6,227 Other current liabilities 2,993 2,633 ---------- ---------- Total Current Liabilities 57,970 43,660 Long-term debt 83,195 85,363 Other liabilities 2,122 777 ---------- ---------- Total Liabilities 143,287 129,800 ---------- ---------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred Stock, $.01 par value; -- -- Authorized 5,524,525 shares; none 59 Issued or outstanding Common Stock, $.01 par value; Authorized 120,000,000 shares; Issued and outstanding 54,654,842 And 24,444,745 at December 31, 1998 and 1997, respectively 547 244 Paid-in capital 289,318 176,564 Accumulated deficit (80,032) (136,272) ---------- ---------- Total Shareholders' Equity 209,833 40,536 ---------- ---------- Total Liabilities and $353,120 $170,336 Shareholders' Equity ========== ========== The accompanying notes are an integral part of these financial statements. Statements of Operations (in thousands, except per share data) For the year ended December 31, --------------------------------- 1998 1997 1996 -------- -------- -------- REVENUES Product sales $163,440 $65,271 $35,782 Other revenue 37,268 15,693 5,317 -------- -------- -------- Total revenues 200,708 80,964 41,099 -------- -------- -------- COSTS AND EXPENSES Cost of sales 70,236 34,433 19,678 Research and development 25,775 40,669 32,192 Selling, administrative And general 62,008 31,735 22,165 Other operating expenses 36,495 11,543 -- -------- -------- -------- Total expenses 194,514 118,380 74,035 -------- -------- -------- Operating income (loss) 6,194 (37,416) (32,936) Interest income 6,659 4,004 5,655 60 Interest expense (4,041) (3,483) (2,263) -------- -------- -------- Income (loss) before income taxes 8,812 (36,895) (29,544) Deferred income tax benefit 47,428 -- -- -------- -------- -------- Net earnings (loss) $56,240 ($36,895) ($29,544) ======== ======== ======== Basic earnings (loss) per share $1.06 ($0.80) ($0.70) ======== ======== ======== Shares Used in calculation of basic Earnings(loss) per share 53,130 46,264 42,038 ======== ======== ======== Diluted earnings (loss) per share $0.91 ($0.80) ($0.70) ======== ======== ======== Shares used in calculation of diluted earnings (loss) per share 63,401 46,264 42,038 ======== ======== ======== The accompanying notes are an integral part of these financial statements. 61 Statements of Cash Flows (in thousands) For the year ended December 31, -------------------------------- 1998 1997 1996 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings (loss) $56,240 $(36,895) $(29,544) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Deferred taxes (47,428) -- -- Depreciation and amortization 3,455 2,749 1,843 Capitalized interest (2,901) (2,188) (273) Amortization of (discount) premium on Marketable securities (785) 937 447 Allowance for trade accounts Receivable 17,153 984 1,839 Provision for inventory reserve 9,672 (8) (409) Amortization of debt issuance costs 358 330 155 Other 67 325 96 Increase(decrease) in cash due to Changes in assets and liabilities: Trade receivables (33,599) (8,097) (7,275) Contract receivables (91) (1,144) (954) Inventory (3,078) (25,235) 376 Other assets (1,551) (990) (641) Accounts payable and accrued expenses 5,232 17,351 5,595 Product royalties payable 8,721 3,668 783 Accrued interest (3) 526 2,057 Other liabilities 1,229 (4) 119 -------- -------- -------- Net cash provided by (used in) operating activities 12,691 (47,691) (25,786) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Investments in securities available for sale (158,591) -- (131,908) Maturities of securities available for sale 82,795 80,857 53,199 Capital expenditures (10,122) (36,728) (22,402) -------- -------- -------- Net cash (used in) provided by 62 investing activities (85,918) 44,129 (101,111) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock 82,965 4,566 58,630 Proceeds from issuance of long-term debt 613 17,187 69,000 Deferred costs from debt issuance (6) (306) (2,172) Repayments on long-term debt (2,370) (530) (97) --------- -------- -------- Net cash provided by financing activities 81,202 20,917 125,361 --------- -------- -------- Net increase (decrease) in cash and cash Equivalents 7,975 17,355 (1,536) Cash and cash equivalents at beginning Of year 29,984 12,629 14,165 -------- -------- -------- Cash and cash equivalents at end of Year $37,959 $29,984 $12,629 ========= ======== ======== The accompanying notes are an integral part of these financial statements. 63 Statements of Shareholders' Equity (in thousands, except share data) Common Stock, $.01 par --------------- Paid-in Accum Shares Amount Capital Deficit Total --------- ------ ------- --------- ------- Balance, December 31, 1995 17,706,137 $177 $113,435 $(69,833) $43,779 Common stock options exercised 288,484 3 700 -- 703 Sale of common stock, February 1996 public offering, net of under writing commissions and expenses of $4,173 3,450,000 34 57,893 -- 57,927 Conversion of Series A Convertible Preferred Stock 392,142 4 (4) -- -- Net loss -- -- -- (29,544) (29,544) -------- ------ -------- -------- ------- Balance, December 31, 1996 21,836,763 218 172,024 (99,377) 72,865 Common stock options exercised 614,629 6 4,560 -- 4,566 Conversion of Series A Convertible Preferred Stock 1,993,353 20 (20) -- -- Net loss -- -- -- (36,895) (36,895) -------- ----- -------- -------- -------- Balance, December 31, 1997 24,444,745 244 176,564 (136,272) 40,536 Common stock options exercised 1,099,266 12 11,729 -- 11,741 Private placement of Common stock, January 1998, net of underwriting commissions and expenses of $74 1,700,000 17 66,209 -- 66,226 Private placement of common stock, January 1998 83,410 1 4,999 5,000 Tax benefit associated with the exercise of 64 stock options -- -- 30,090 -- 30,090 Two-for-one stock split 27,327,421 273 (273) -- -- Net earnings -- -- -- 56,240 56,240 ---------- ----- -------- --------- -------- Balance, December 31, 1998 $54,654,842 $547 $289,318 $(80,032)$209,833 ========== ===== ======== ========== ======== The accompanying notes are an integral part of these financial statements. 65 NOTES TO FINANCIAL STATEMENTS (in thousands, except share and per share data) 2. ORGANIZATION MedImmune, Inc. ("the Company"), a Delaware corporation, is a biotechnology company headquartered in Gaithersburg, Maryland with three products on the market and a diverse product development portfolio. The Company is focused on using advances in immunology and other biological sciences to develop important new products that address significant medical needs in areas such as infectious diseases, transplantation medicine, autoimmune diseases and cancer. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies applied in the preparation of these financial statements are as follows: Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Marketable Securities Marketable securities include investments with original maturities of greater than three months having a remaining maturity of less than 24 months. The Company's securities are held for an unspecified period of time and may be sold to meet liquidity needs. The securities included as marketable securities are considered available-for-sale as defined by Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Amortized cost of marketable securities approximates market; therefore, no adjustment has been made to shareholders' equity as a result of changes in market value to these securities. Interest income is accrued as earned. 66 Concentration of Credit Risk The Company has invested its excess cash generally in securities of the U.S. Treasury, U.S. government agencies, corporate debt securities, commercial paper and money market funds with strong credit ratings and deposits with a major bank. The Company has not experienced any significant losses on its investments. The Company sells its products primarily to a limited number of pharmaceutical wholesalers and distributors without requiring collateral. The Company periodically assesses the financial strength of these customers and establishes allowances for anticipated losses when necessary. Inventory Inventory is stated at the lower of cost or market. Cost is determined using a weighted-average approach that approximates the first- in, first-out method. Where the Company has a firm contract for their puchase, by-products that result from production of the Company's principal products are accounted for as a reduction of the cost of the principal products. Product Sales Product sales are recognized upon shipment of the product to customers. Product sales are recorded net of reserves for estimated chargebacks, returns, discounts, and Medicaid rebates. The Company maintains reserves at a level that management believes is sufficient to cover estimated future requirements. Allowances for discounts, returns, bad debts, chargebacks and Medicaid rebates, which are netted against accounts receivable, totaled $20,189 and $3,037 at December 31, 1998 and 1997, respectively. Product royalty expense is recognized concurrently with the recognition of product revenue. Royalty expense, included in cost of sales, was $19,921, $8,504 and $4,282 for the years ended December 31, 1998, 1997 and 1996, respectively. 67 Contract Revenues Contract revenues are recognized over the fixed term of the contract or, where appropriate, as the related expenses are incurred. Non-refundable fees or milestone payments in connection with research and development or commercialization agreements are recognized when they are earned in accordance with the applicable performance requirements and contractual terms. Payments received that are related to future performance are deferred and recorded as revenues as they are earned over specified future performance periods. Co-promotion Expense In connection with the agreement the Company signed with Abbott Laboratories to co-promote Synagis in the United States, the Company is required to pay to Abbott an increasing percentage of net domestic sales based on reaching certain sales thresholds over the annual contract year, which runs from July to June and coincides with the annual respiratory syncytial virus ("RSV") season, which occurs primarily in the fourth and first quarters (See Note 13). The Company estimates its net sales and resulting co-promotion expense for the entire contract year to determine a proportionate percentage of expense to apply across all Synagis sales during the season. Property and Equipment Property and equipment are stated at cost. Interest cost incurred during the period of construction of plant and equipment and prior to FDA licensure is capitalized. Depreciation and amortization is computed using the straight-line method based upon the following estimated useful lives: Years ----- Building and improvements 30 Manufacturing, laboratory, and facility equipment 5-15 Office furniture, computers and equipment 3-7 Amortization of leasehold improvements is computed on the straight-line method based on the shorter of the estimated useful life of the 68 improvement or the term of the lease. Upon the disposition of assets, the costs and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statements of operations. Repairs and maintenance costs are expensed as incurred and were $1,849, $1,002, and $537 for the years ended December 31, 1998, 1997 and 1996, respectively. Long-Lived Assets The Company evaluates the recoverability of the carrying value of property and equipment and intangible assets in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of." The Company considers historical performance and anticipated future results in its evaluation of the potential impairment. Accordingly, when the indicators of impairment are present, the Company evaluates the carrying value of these assets in relation to the operating performance of the business and future undiscounted cash flows expected to result from the use of these assets. Impairment losses are recognized when the sum of the expected future cash flows are less than the assets' carrying value. To date, the Company has recorded no impairment losses. Forward Exchange Contracts The Company is obligated to make certain payments to a foreign supplier in its local currency. To hedge the effect of fluctuating foreign currencies in its financial statements, the Company may enter into foreign forward exchange contracts. Gains or losses associated with the forward contracts are computed as the difference between the foreign currency contract amount at the spot rate on the balance sheet date and the forward rate on the contract date. Unrealized gains or losses are deferred until the obligation date and are then offset against the gains or losses on the foreign currency transaction. See Note 14 for information regarding the fair value of the Company's foreign forward exchange contracts. Fair Value of Financial Instruments 69 The carrying amount of financial instruments, including cash and cash equivalents, trade accounts and contracts receivable, other current assets, accounts payable, and accrued expenses, approximate fair value as of December 31, 1998 and 1997 due to the short maturities of these instruments. See Note 8 for information regarding the fair value of the Company's long-term debt and notes payable and Note 14 for information regarding the fair value of the Company's foreign forward exchange contracts. Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Earnings (Loss) Per Share Basic earnings/loss per share is computed by dividing the net earnings/loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding after giving effect to all dilutive potential common shares that were outstanding during the period. Potential common shares are not included in the computation of diluted earnings per share if they are antidilutive. Comprehensive Income The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on December 31, 1998. Under SFAS No. 130 the Company is required to display comprehensive income and its components as part of the financial statements. Comprehensive income is comprised of net earnings (loss) and other comprehensive income, which includes certain changes in equity that are excluded from net income. SFAS No. 130 requires unrealized 70 holding gains and losses on available-for-sale securities to be included in other comprehensive income. For the years ended December 31, 1998, 1997 and 1996, comprehensive income was equal to net earnings (loss). New Accounting Standard In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value, gains or losses depends on the intended use of the derivative and its resulting designation. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company will adopt SFAS No. 133 by January 1, 2000. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of SFAS No. 133 will have a material effect on the earnings or financial position of the Company. Stock Split On November 11, 1998, the Company's Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend payable December 31, 1998 to shareholders of record on December 15, 1998. This resulted in the issuance of 27,327,421 additional shares of common stock. All share, per share and weighted average share amounts have been restated to reflect this stock split. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the financial statement date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 71 3. SEGMENT INFORMATION The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", at December 31, 1998. SFAS No. 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Under SFAS No. 131, the Company's operations are considered one operating segment as only aggregate profit and loss information is reported to the chief operating decision makers of the Company. The Company sells its products primarily to a limited number of pharmaceutical wholesalers and distributors. Customers individually accounting for at least ten percent of the Company's product sales over the past three years are as follows: 1998 1997 1996 ---- ---- ---- Company A 23% 19% 19% Company B 20% 27% 26% Company C 18% 20% 24% Company D 12% 15% 17% ------ ------ ------ Total % of product sales 73% 81% 86% ==== ==== ==== The Company relies on a limited number of distributor agents to sell CytoGam internationally and has a contractual agreement with Abbott for international distribution of Synagis. The breakdown of product sales by geographic region is as follows: 1998 1997 1996 ---- ---- ---- United States $ 153,607 $ 63,032 $ 35,495 All other 9,833 2,239 287 ------ ------ ------ Total product sales $ 163,440 $ 65,271 $ 35,782 ====== ====== ====== Other revenue of $37,268, $15,693 and $5,317 in 1998, 1997 and 1996, respectively, consists mainly of United States licensing and milestone 72 revenues and corporate funding. 4. INVENTORY Inventory at December 31, is comprised of the following: 1998 1997 ------ ------ Raw materials $ 9,794 $14,503 Work in process 9,188 12,990 Finished goods 5,727 3,810 ------ ------ 24,709 31,303 Less non current (4,949) (2,446) ------ ------ $19,760 $28,857 ========= ========= The Company has purchased plasma and other raw materials for use in production in the Company's Frederick manufacturing facility, which is subject to FDA licensure and approval. Due to the uncertainty surrounding the likelihood and timing of FDA approval, this inventory has been classified as noncurrent in the accompanying balance sheet. As a result of the June 1998 FDA approval of the Company's second generation RSV product, Synagis, and the market acceptance of Synagis, the Company reserved approximately $9.2 million against its RespiGam inventory, as minimal product sales are expected to result from this inventory in the foreseeable future. The remaining RespiGam plasma inventory of $2.9 million has been written down to the value the Company expects to recover upon sale to third parties. Finished goods at December 31, 1998 and 1997 include approximately $1.6 million and $0.8 million, respectively, of by-products that result from the production of the Company's principal products at one of its contract manufacturers and are held for resale. As of December 31, 1998, minimal sales of these by-products have occurred. The December 73 31, 1998 and 1997 balances are net of reserves of $1.6 million and $0.8 million, respectively. 5. PROPERTY AND EQUIPMENT Property and equipment, stated at cost at December 31, is comprised of the following: 1998 1997 ----- ----- Land $ 2,147 $ 1,521 Buildings and building improvements 7,085 - Leasehold improvements 12,736 11,042 Laboratory, manufacturing and facilities 10,841 9,355 equipment Office furniture, computers, and equipment 5,739 4,377 Construction in progress 48,067 49,040 ------- ------- 86,615 75,335 Less accumulated depreciation and Amortization (11,793) (10,081) ------- ------- $74,822 $65,254 ======= ======= Construction in progress includes costs incurred in connection with the design and construction of the Company's manufacturing facility and includes capitalized interest costs of $5,324 and $2,423 at December 31, 1998 and 1997, respectively. Buildings includes the purchase in December 1998 of a new facility in Frederick, Maryland. This facility will provide additional warehouse and administrative space. Buildings also includes costs associated with the portions of the Company's manufacturing facility placed in service 74 during 1998. Construction of the manufacturing facility is complete and validation and start-up activities are ongoing. The Company will continue to capitalize costs, primarily capitalized interest related to the facility until placed in service. The portions of the facility that are subject to inspection and approval by the FDA will be placed in service and depreciation will commence upon receipt of such approval. 6. ACCRUED EXPENSES Accrued expenses at December 31, is comprised of the following: 1998 1997 ------- ------- Accrued contracts $ 1,492 $14,959 Accrued manufacturing 6,607 8,792 Accrued sales and marketing 22,337 2,299 Accrued other 2,961 1,632 ------- ------- $33,397 $27,682 ======= ======= 7. FACILITIES LEASES The Company entered into a 15-year lease beginning in November 1991, as amended, for administrative and laboratory facilities in Gaithersburg, Maryland. Under the lease, the Company is obligated to pay a basic monthly rent which will increase 3% each lease year and in 1998 totaled $1,158. The lease also requires the Company to pay for utilities and its proportionate share of taxes, assessments, insurance and maintenance costs. Rent expense for the years ended December 31, 1998, 1997 and 1996 was $1,454, $1,328, and $1,113, respectively. The Company's future minimum lease payments under the facility operating lease are as follows: 75 Year ending December 31, -------------------------- 1999 1,236 2000 1,274 2001 1,312 2002 1,352 2003 1,392 Thereafter 4,315 -------- $ 10,881 ======== 8. LONG-TERM DEBT Long-term debt at December 31, is comprised of the following: 1998 1997 ----- ----- 7% convertible subordinated notes, due 2003 $60,000 $60,000 Notes payable to Transamerica Business Credit Corporation due through 2004, interest 9.95%-10.6% 12,868 13,975 7.53% note due to Maryland Industrial Development Finance Authority, due 2007 4,744 5,000 4% notes due to Maryland Department of Business and Economic Development, due 2016 6,538 6,800 Notes payable to landlord, due through 2006, interest 11.5%-13% 1,742 1,874 ------- ------- 85,892 87,649 Less current portion included in other current liabilities (2,697) (2,286) ------- ------- 76 $83,195 $85,363 ======= ======= The convertible subordinated notes were issued in July 1996 and are convertible at the option of the holders into 6,097,560 shares of the Company's common stock at a conversion price of $9.84 per share, subject to adjustments in certain events. The notes are redeemable by the Company after July 7, 1999 with 30 days notice at a declining premium until the due date, plus accrued interest. The notes are subordinated to all senior debts of the Company including the state and local loans, the Transamerica loans, and the loans from the landlord. The Company may be required to redeem the notes at amounts up to 105% of the principal amount in the event of a change in control of the Company. Principal and interest payments on the state and local notes began in 1998. Pursuant to the terms of the agreements, the Company is required to meet certain financial and non-financial covenants including maintaining minimum cash balances and net worth ratios. The Company maintains a $400 compensating balance related to the notes, which is included in other assets. The notes are collateralized by the land, buildings and building fixtures of the manufacturing facility. The agreements include a provision for early retirement of the notes by the Company. Loans from Transamerica Business Credit Corporation issued in 1997 and 1998 are collateralized by manufacturing, laboratory, and office equipment of the Company. The agreements include a provision for early retirement of the loans by the Company. Subsequent to December 31, 1998, the Company paid the remaining principal balance on the landlord loans. Maturities of long-term debt for the next five years are as follows: 1999, $2,697; 2000, $2,961; 2001, $3,254; 2002, $3,576; and 2003, $64,644. Interest paid was $6,352, $4,817 and $304, for the years ended December 31, 1998, 1997 and 1996, respectively. The fair value of the Company's long-term debt at December 31, 1998, based on quoted market prices or discounted cash flows based on 77 currently available borrowing rates, was $330,000 compared to its carrying value of $85,892. 9. SHAREHOLDERS' EQUITY In connection with the closing of the Company's initial public offering in 1991, the holders of the Series A Convertible Preferred Stock warrants agreed that if such warrants were exercised, the holders thereof would simultaneously exercise their right to convert the Series A Convertible Preferred Stock received upon exercise of the warrants into 5,049,050 shares of common stock. Pursuant to an amendment to the warrant agreement in which the holders could elect a cashless exercise of the warrants for a reduced number of common shares based on a calculation of the fair market value of the common stock on the exercise date, 2,108,652 and 415,873 of the Series A Convertible Preferred Stock warrants were exercised and converted through a cashless exercise into 3,986,706 and 784,284 shares of common stock in 1997 and 1996, respectively. As of December 31, 1997, all warrants were exercised and converted. In July 1997, the Company's Board of Directors adopted a Stockholder Rights Plan. Pursuant to the terms of the Plan, common stock purchase Rights were distributed as a dividend at the rate of one Right for each share of common stock of the Company held by stockholders of record as of the close of business on July 21, 1997. The Rights will be exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the Company's common stock or commences a tender or exchange offer upon consummation of which such a person or group would beneficially own 20 percent or more of the Company's stock. The Rights will expire on July 9, 2007. In January 1998, the Company closed the private placement of 3.4 million new shares of common stock to institutional investors for net proceeds of $66.3 million, and sold 166,820 shares of common stock to SmithKline Beecham for net proceeds of $5.0 million. 10. EARNINGS PER SHARE The following is a reconciliation of the numerator and denominator 78 of the diluted EPS computation for the year ended December 31, 1998. 1998 ------ Numerator: Net earnings $56,240 Interest on 7% convertible notes, net of amounts capitalized and related taxes 1,468 ------- Numerator for diluted EPS $57,708 ======= Denominator: Weighted average shares outstanding 53,130 Effect of dilutive securities: Stock options 4,173 7% convertible notes 6,098 ------- Denominator for diluted EPS 63,401 ======= Options to purchase 830,600 shares of common stock with prices ranging from $29.75 to $48.50 per share were outstanding during 1998, but were not included in the computation of diluted earnings per share. The exercise prices for these options were greater than the average market price of the common stock for 1998, and therefore would be antidilutive. No reconciliation of the numerator and denominator is necessary for 1997 or 1996, as losses were reported and inclusion of potential common shares would be antidilutive. 11. COMMON STOCK OPTIONS In April 1991 and as subsequently amended, the Board of Directors adopted the 1991 Plan, under which 11,000,000 shares of common stock were reserved for issuance upon exercise of options granted to employees, consultants and advisors of the Company. In May 1993, a Non- Employee Directors Stock Option Plan was approved by the shareholders under which 500,000 shares of common stock were reserved for issuance upon exercise of options granted to non-employee directors. The 1991 Plan provides for the grant of incentive and nonqualified stock options and the Non-Employee Directors Plan provides for the grant of 79 nonqualified stock options. The maximum term of each option granted is 10 years. The option prices under the 1991 Plan and the Non-Employee Directors Plan are equal to the closing market price on the day prior to the date of grant. Options normally vest on the anniversary date of the grant over a three to five year period. The Company has reserved a total of 9,043,670 shares of common stock for issuance under these plans as of December 31, 1998. Related stock option activity, is as follows: Options Granted Prior to Establishment of Non-Employee the 1991 Plan 1991 Plan Directors Plan ------------------ ------------------ ----------------- Wtd. Wtd. Wtd. Avg. Avg. Avg. Exercise Exercise Exercise Price Price Price Per Per Per Shares Share Shares Share Shares Share Balance, Dec. 31, 1995 1,580,330 $ 1.55 4,585,492 $ 5.63 140,000 $5.38 Granted - - 1,628,800 8.51 30,000 8.50 Exercised (465,608) .32 (111,360) 4.98 - - Canceled (4,000) 25.50 (218,814) 6.54 - - -------- --------- ------- Balance, Dec. 31,1996 1,110,722 1.98 5,884,118 6.41 170,000 5.93 Granted - - 1,593,300 8.93 40,000 9.32 Exercised (334,718) 1.46 (869,540) 4.48 (25,000) 7.27 Canceled - - (220,206) 8.38 - - -------- -------- ------- Balance, Dec. 31, 1997 776,004 2.20 6,387,672 7.21 185,000 12.96 Granted - - 2,410,600 27.30 40,000 31.19 Exercised (466,800) 2.08 (1,731,732) 6.22 - - Canceled (4,000) 8.94 (118,524) 10.97 - - -------- -------- -------- Balance, Dec. 31, 1998 305,204 $2.29 6,948,016 $14.35 225,000 $10.87 ======== ========= ======= 80 Additional information related to the plans as of December 31, 1998 is as follows: Options Outstanding Options Exercisable ---------------------- -------------------- Wtd Avg Range of remaining Wtd Avg Wtd Avg exercise Options contractual Exercise Options Exercise prices outstanding life (yrs) Price Exercisable Price $0.01- $7.00 2,271,356 5.3 $4.76 1,557,008 $4.81 $7.01-$13.50 2,444,802 7.7 $8.09 717,408 $8.18 $13.51-$20.00 310,262 5.2 $16.92 206,135 $17.17 $20.01-$48.50 2,451,800 9.3 $27.34 9,200 $27.98 ----------- ---------- $0.01-$48.50 7,478,220 7.4 $13.76 2,489,751 $6.89 495,284 236,525 ========== ========== There were 1,315,450 and 250,000 shares available for future option grants at December 31, 1998 under the 1991 Plan and the Non-Employee Directors Plan, respectively. The Company has adopted the disclosure only provisions of SFAS No. 123 as they pertain to financial statement recognition of compensation expense attributable to option grants. As such, no compensation cost has been recognized for the Company's option plans. If the Company had elected to recognize compensation cost for the 1991 Plan and the Non- Employee Directors Plan consistent with SFAS No. 123, the Company's net income and earnings/(loss) per share on a pro forma basis would be: 1998 1997 1996 ------- ------- ------- Net earnings/(loss) - as reported $56,240 ($36,895) ($29,544) Net earnings/(loss) - pro forma $49,128 ($45,208) ($36,556) Basic earnings/(loss) per share-as reported $ 1.06 $ (.80) $ (.70) -pro forma $ .92 $ (.98) $ (.87) Diluted earnings/(loss) per share-as reported $ .91 $ (.80) $ (.70) 81 -pro forma $ .80 $ (.98) $ (.87) The pro forma expense related to the stock options is recognized over the vesting period, generally five years. The fair value of each option grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for each year: 1998 1997 1996 ----- ----- ----- Risk-free interest rate 5.28% 6.21% 6.09% Expected life of options - years 7 7 7 Expected stock price volatility 75% 75% 75% Expected dividend yield N/A N/A N/A The weighted average fair value of options granted during 1998, 1997 and 1996 was $19.82, $12.94, and $12.63, respectively. 12. INCOME TAXES The components of the provision (benefit) for income taxes are as follows: Year ended December 31, 1998 1997 1996 ---- ---- ---- Current: Federal $ -- $ -- $ -- State -- -- -- ______ ______ ______ Total current benefit -- -- -- Deferred: Federal (47,428) -- -- State -- -- -- ______ ______ ______ Total deferred benefit (47,428) -- -- ______ ______ ______ $(47,428) $ -- $ -- ====== ====== ====== 82 Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets at December 31, are as follows: 1998 1997 ------ ------ Net operating loss carryforwards $58,887 $61,225 General business credit 4,718 3,191 Accrued expenses not currently 7,960 2,484 deductible Accounts receivable allowances 11,257 1,376 and reserves Other 4,545 1,375 ------- ------- 87,367 69,651 Valuation allowance (9,849) (69,651) ------- ------- Net deferred taxes $77,518 $ -- ======== ======== The provision (benefit) for income taxes varies from the income taxes provided based on the federal statutory rate (34%) as follows: Year ended December 31, 1998 1997 1996 ------ ------ ------ Tax at U.S. federal statutory rate $ 2,996 $(12,544) $(10,045) State taxes, net of federal benefit 405 (1,697) (1,359) Change in valuation allowance (59,802) 22,150 13,394 Research and development credits (1,527) (1,172) (627) Other 10,500 (6,737) (1,363) 83 ______ ______ ______ $(47,428) $ -- $ -- ====== ====== ====== At December 31, 1998 the Company had net operating loss carryforwards for federal tax reporting purposes of approximately $153 million expiring from 2003 to 2013. The net operating loss includes the tax benefit related to the exercise of stock options, which benefit was recorded to paid-in capital. The utilization of net operating losses will be limited to approximately $37 million per year under Internal Revenue Code Section 382. The Company also has federal research and development credit carryforwards of approximately $4.7 million at December 31, 1998 expiring through 2013. Based on its 1998 pre-tax profit and its estimates of future taxable income, the Company believes that it is more likely than not that certain of its deferred tax assets (comprised mostly of federal net operating loss carryforwards and research and development credits) will be realized, and has therefore recorded a tax benefit of its deferred tax assets arising from federal income taxes as of December 31, 1998. Because management is uncertain of the utilization of the net operating losses in the states in which they were generated, a full valuation allowance remains for these assets at December 31, 1998. 13. COLLABORATIVE ARRANGEMENTS Abbott Laboratories In December 1997, the Company signed two agreements with Abbott Laboratories ("Abbott"). The first agreement calls for Abbott to co- promote Synagis in the U.S. The second agreement allows Abbott to exclusively distribute Synagis outside the U.S., if and when cleared for marketing by the appropriate regulatory authorities. Under the terms of the U.S. co-promotion agreement, Abbott will receive a percentage of net U.S. sales based on defined annual sales thresholds. Expenses associated with the co-promotion agreement are included in selling, 84 general and administrative expenses on the accompanying statements of operations. The Company received a $15 million milestone payment as part of this agreement in 1998, which is included in other revenue. Each company is responsible for its own selling expenses. Under the terms of the distribution agreement, the Company will manufacture and sell Synagis to Abbott at a price based on end-user sales. The Company received a $15 million milestone payment as part of this agreement in 1997, which is included in other revenue. The Company could receive up to an additional $30 million based on the achievement of certain milestones, including European marketing clearance of Synagis. SmithKline Beecham In December 1997, the Company and SmithKline Beecham ("SB") entered into a strategic alliance to develop and commercialize human papillomavirus (HPV) vaccines for prevention of cervical cancer and genital warts. In exchange for exclusive worldwide rights to the Company's HPV technology, SB agreed to provide the Company with an up- front payment, future funding and potential developmental and sales milestones which together could total over $85 million, as well as royalties on any product sales. Under the terms of the agreement, the companies will collaborate on research and development activities. MedImmune will conduct Phase 1 and Phase 2 clinical trials and manufacture clinical material for those studies. SB is responsible for the final development of the product, as well as regulatory, manufacturing, and marketing activities. In January 1998, the Company received a $15 million payment from SB and completed the sale of 166,820 shares of common stock to SB resulting in net proceeds to the Company of $5.0 million. Additionally $5.7 million of research funding associated with the agreement has been included in other revenues for the year ended December 31, 1998. American Home Products On November 8, 1993, the Company signed definitive agreements with American Cyanamid Company to form an alliance in the United States for the development and marketing of three generations of products to prevent and treat respiratory syncytial virus (RSV) and for the 85 marketing of a new anti-infective product, ZOSYN, developed by American Cyanamid. The parties agreed to co-promote and share profits or losses on the Company's RSV product, RespiGam, which was licensed for marketing by the United States Food and Drug Administration (FDA) on January 18, 1996. In 1994, AHP acquired American Cyanamid. In 1995 , the Company and AHP agreed to amend certain terms of their agreements entered into concurrently with the formation of their 1993 alliance. Pursuant to these amendments, AHP's funding obligations and co-promotion rights with respect to the second generation RSV monoclonal product developed by the Company were terminated, the Company returned its right to co-promote ZOSYN to AHP and AHP received a right to receive a royalty on any sales of the RSV monoclonal product. In addition, the Company's right to co- fund and to co-promote an RSV vaccine being developed by AHP was converted into the right to receive royalties on any sales of the vaccine. Revenue of $4.8 million in 1996 associated with these agreements is included as other revenue in the accompanying statements of operations. Additionally, $0.9 million of expense, $3.0 million of expense and $4.3 million of reimbursement for co-promotion activity has been added to and netted against selling, general and administrative expense for the years ended December 31, 1998, 1997 and 1996, respectively. Zosyn is a registered trademark of American Home Products BioTransplant Incorporated In October 1995, the Company and BioTransplant, Incorporated ("BTI") formed a strategic alliance for the development of products to treat and prevent organ transplant rejection. The alliance is based upon the development of products derived from BTI's anti-CD2 antibody BTI-322, the Company's anti-T cell receptor antibody MEDI-500 and future generations of products derived from these two molecules, including, but not limited to, MEDI-507. Pursuant to the alliance, the Company received an exclusive worldwide license to develop and commercialize BTI- 322 and any products based on BTI-322, with the exception of the use of BTI-322 in kits for xenotransplantation or allotransplantation. The 86 Company has paid BTI $4.5 million in license fees and research support through December 31, 1997. No payments were made in 1998. The Company has assumed responsibility for clinical testing and commercialization of any resulting products. BTI may receive milestone payments that could total up to an additional $11.0 million, as well as royalties on any sales of BTI-322, MEDI-500, MEDI-507 and future generations of these products, if any. Other Agreements The Company has entered into research, development and license agreements with various federal and academic laboratories and other institutions to further develop its products and technology and to perform clinical trials. Under these agreements, the Company is obligated to provide funding of approximately $8.8 million and $0.5 million in 1999 and 2000, respectively. The Company has also agreed to make milestone payments in the aggregate amount of $11.2 million on the occurrence of certain events such as the granting by the FDA of a license for product marketing in the U.S. for some of the product candidates covered by these agreements. In exchange for the licensing rights for commercial development of proprietary technology, the Company has agreed to pay royalties on sales using such licensed technologies. 14. FORWARD EXCHANGE CONTRACTS Beginning in 1997, the Company entered into foreign forward exchange contracts to hedge against foreign exchange rate fluctuations that may occur on the Company's foreign currency denominated obligations. As of December 31, 1998 the Company had outstanding forward Deutsche mark contracts in the amount of $34.1 million, all expiring within one year. Fair value of the outstanding contracts at December 31, 1998 was $34.0 million, resulting in an unrealized loss of $0.1 million. Unrealized gains and losses on foreign forward exchange contracts that are designated and effective as hedges are deferred and recognized in the same period that the hedged obligation is recognized. The notional principal amounts for off-balance sheet instruments provide 87 one measure of the transaction volume outstanding as of year end, and does not represent the amount of the Company's exposure to credit or market loss. The Company's exposure to market risk will vary over time as a function of currency rates. 15. COMMITMENTS AND CONTINGENCIES Manufacturing, Supply and Purchase Agreements The Company has entered into manufacturing, supply and purchase agreements in order to provide production capability for CytoGam and RespiGam, and to provide a supply of human plasma for production of both products. No assurances can be given that an adequate supply of plasma will be available from the Company's suppliers. Human plasma for CytoGam and RespiGam is converted to an intermediate raw material (Fraction II+III paste) under two supply agreements with two vendors. This intermediate material is then supplied to the manufacturer of the bulk product, the State Lab. Pursuant to the agreements with the State Lab, the Company paid $12.9 million in 1998, $10.2 million in 1997, and $9.7 million in 1996 for production and process development. The Company has an informal arrangement with the State Lab for planned production of CytoGam through June 1999 for $8.0 million, subject to production level adjustments. Currently, no production of RespiGam is planned for the foreseeable future due to existing inventories and the market acceptance of Synagis. If the State Lab, which holds the sole product and establishment licenses from the FDA for the manufacture of CytoGam and RespiGam, is unable to satisfy the Company's requirements for CytoGam on a timely basis or is prevented for any reason from manufacturing CytoGam, the Company may be unable to secure an alternative manufacturer without undue and materially adverse operational disruption and increased cost. The Company also has an agreement with Connaught Laboratories to fill and package CytoGam through 2000. In December 1997, the Company entered into an agreement with Boehringer Ingelheim Pharma KG ("BI"), to provide supplemental 88 manufacturing of the Company's second generation RSV product, Synagis. The Company paid $16.0 million in 1998 and $2.2 million in 1997 related to production and scale-up of production as part of this agreement. The Company has firm commitments with BI for planned production through 2001 for approximately 59.1 million Deutsche marks. Should the manufacturer be unable to supply Synagis to the Company for any reason, there can be no assurances that the Company will be able to secure an alternate manufacturer in a timely basis or without increased cost. 16. OTHER OPERATING EXPENSES Other operating expenses in 1998 include the costs of start-up of the Frederick manufacturing facility and scale-up of production of Synagis at the Gaithersburg pilot plant and at a third-party manufacturer, BI, prior to the licensure of Synagis by the FDA. Expenses in 1998 also include $10.3 million for the buydown of certain Synagis royalty obligations prior to FDA approval in June 1998. The Company expects to incur significant start-up and scale-up costs throughout 1999, primarily for ongoing start-up activities at the Frederick manufacturing facility. 17. PENSION PLAN The Company has a defined contribution 401(k) pension plan available to all full-time employees. Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal tax regulations. Participants are always fully vested in their contributions. The Company began employer contributions as of April 1, 1997. During 1998 and 1997, the Company contributed $222 and $122 respectively, in cash to the plan. 18. SUBSEQUENT EVENT - COLLABORATIVE ARRANGEMENT In February 1999, the Company entered into an alliance with Ixsys, Inc. ("Ixsys"), to develop four monoclonal antibodies. The first of 89 these products, Vitaxin, is currently being tested in a Phase 2 trial for cancer treatment by inhibition of angiogensis. The Company will provide three additional target antibodies to be optimized by Ixsys. The Company would be responsible for clinical development, manufacturing, and commercialization of any resulting products. Concurrent with the signing of the agreements, the Company made a $6.4 million equity investment in Ixsys. The Company is obligated to provide research funding of $0.5 million in 1999. Ixsys may receive milestone payments that could total up to $35.0 million, as well as royalties on any sales, if any, of the products and future generation of such products, included in the agreement. Milestone payments due under the agreement, at the Company's option, may be made in the form of a purchase of the common stock of Ixsys, subject to certain terms and limitations. Report of Independent Accountants To the Board of Directors and Shareholders of MedImmune, Inc. In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) and (2) present fairly, in all material respects, the financial position of MedImmune, Inc. at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe 90 that our audits provide a reasonable basis for the opinion expressed above. /s/PRICEWATERHOUSECOOPERS LLP McLean, Virginia January 25, 1999, except for Note 18 which is as of February 24, 1999 Report of Management The management of the Company is responsible for the preparation of the financial statements and related financial information included in this annual report. The statements were prepared in conformity with generally accepted accounting principles, and accordingly, include amounts that are based on informed estimates and judgments. Management maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and that transactions are properly authorized and accurately recorded. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal accounting control and that the costs of such systems should not exceed the benefits expected to be derived. The Company continually reviews and modifies these systems, where appropriate, to maintain such assurance. The system of internal controls includes careful selection, training and development of operating and financial personnel, well-defined organizational responsibilities and communication of Company policies and procedures throughout the organization. The selection of the Company's independent accountants, PricewaterhouseCoopers LLP, has been approved by the Board of Directors and ratified by the shareholders. The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with the Company's independent accountants and management to review the financial statements and related information and to confirm that they are properly discharging their responsibilities. In addition, the independent accountants and the Company's legal counsel meet with the 91 Audit Committee, without the presence of management, to discuss their findings and their observations on other relevant matters. Recommendations made by PricewaterhouseCoopers LLP are considered and appropriate action is taken to respond to these recommendations. /s/Wayne T. Hockmeyer, Ph.D. /s/David M. Mott Chairman and Chief Executive Vice Chairman and Chief Officer Financial Officer /s/Lawrence C. Hoff Chairman of the Audit Committee ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 92 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MEDIMMUNE, INC. Information with respect to directors is included in the Company's Proxy Statement to be filed pursuant to Regulation 14A (the "Proxy Statement") under the caption "Election of Directors," and such information is incorporated herein by reference. Set forth in Part I, Item 1, are the names and ages (as of February 6, 1999), the positions and offices held by, and a brief account of the business experience during the past five years of each executive officer. All directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified. Officers are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" and the information set forth under the caption "Election of Directors-Director Compensation" included in the Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The common stock information in the section entitled "Principal Shareholders" of the Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Certain Transactions" of the Proxy Statement is incorporated herein by reference. PART IV 93 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K The following documents or the portions thereof indicated are filed as a part of this report. a) Documents filed as part of the Report 1. Financial Statements and Supplemental Data a. Balance Sheets at December 31, 1998 and 1997 b. Statements of Operations for the years ended December 31, 1998, 1997 and 1996 c. Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 d. Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 e. Notes to Financial Statements f. Report of Independent Accountant g. Report of Management 2. Supplemental Financial Statement Schedule Schedule I - Valuation and Qualifying Accounts Page S-1 b) Reports on Form 8-K Date Filed Event Reported 10/9/98 BioTransplant and MedImmune Announce Issuance of Second U.S. Patent Covering Medi-507 and BTI-322 Antibodies 10/23/98 MedImmune Revenues Increase Nearly Four-Fold in First Three Quarters of 1998 11/13/98 MedImmune's Board of Directors Authorizes Two-For- One Stock Split 11/13/98 MedImmune Announces Issuance of U.S. Patent for Synagis 12/3/98 MedImmune and Pasteur Merieux Connaught Enter Agreement to Develop Second Generation Vaccine for Lyme Disease 94 12/10/98 MedImmune Reports CytoGam Receives FDA Approval for Expanded Indication 12/16/98 MedImmune and Biotransplant Announce Initiation of Two New Clinical Studies and Orphan Drug Designation of MEDI-507 12/23/98 MedImmune Announces Synagis Publication Pediatric Data Presented in the December Edition of the Journal of Infectious Diseases C) ITEM 601 EXHIBITS Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits filed herewith and such listing is incorporated by reference. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. MEDIMMUNE, INC. /s/ Wayne T. Hockmeyer Date: March 23, 1999 By: Wayne T. Hockmeyer Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /s/ Wayne T. Hockmeyer Date: March 23, 1999 Wayne T. Hockmeyer Chairman and Chief Executive Officer (Principal executive officer) /s/ David M. Mott Date: March 23, 1999 David M. Mott Vice Chairman and Chief Financial Officer (Principal financial and accounting officer) 95 /s/ M. James Barrett Date: March 23, 1999 M. James Barrett, Director Date: March 23, 1999 /s/ Melvin D. Booth Melvin D. Booth, Director /s/ James H. Cavanaugh Date: March 23, 1999 James H. Cavanaugh, Director /s/ Barbara Hackman Franklin Date: March 23, 1999 Barbara Hackman Franklin, Director /s/ Lawrence C. Hoff Date: March 23, 1999 Lawrence C. Hoff, Director /s/ Gordon S. Macklin Date: March 23, 1999 Gordon S. Macklin , Director /s/ Franklin H. Top, Jr. Date: March 23, 1999 Franklin H. Top, Jr., Director 96 Schedule I MedImmune, Inc. Valuation and Qualifying Accounts (in thousands) Balance at Balance beginning at end of of Description period Additions Deductions period - -------------------------- --------- ---------- ---------- ------- For the year ended December 31, 1998 Trade and Contract Receivables Allowance $3,294 $36,689 ($11,085) $28,898 Trade Receivables Bad Debt Reserve 104 402 (238) 268 Inventory Reserve -- 12,374 (2,702) 9,672 ------ ------ ------- ------ $3,398 $49,465 ($14,025) $38,838 ====== ====== ====== ====== For the year ended December 31, 1997 Trade and Contract Receivables Allowance $1,425 $4,036 ($2,167) $3,294 Trade Receivables Bad Debt Reserve 745 -- (641) 104 Inventory Reserve 8 -- (8) -- ------ ------ ------- ------ $2,178 $4,036 ($2,816) $3,398 ====== ====== ======= ====== For the year ended December 31, 1996 Trade and Contract Receivables Allowance $309 $2,136 ($1,020) $1,425 Trade Receivables Bad Debt Reserve 21 724 -- 745 Inventory Reserve 417 249 (658) 8 ------ ------ ------ ------ $747 $3,109 ($1,678) $2,178 ====== ====== ====== ====== S-1 c) Item 601 Exhibits 3.1(4) Restated Certificate of Incorporation, dated May 14, 1991 3.2(3) By-Laws, as amended 4.1 (19) Amended and Restated Rights Agreement, dated as of October 31, 1998, between MedImmune, Inc., and American Stock Transfer and Trust Company, as Rights Agent 10.1(1)(3) License Agreement dated November 15, 1990 between the Company and Merck & Co., Inc. ("Merck") 10.1(3) Plasma Supply Agreement dated May 31, 1990 between the Company and Plasma Alliance, Inc. 10.2(3) Termination Agreement dated June 29, 1990 between the Company and Pediatric Pharmaceuticals, Inc. ("PPI") (formerly MedImmune, Inc.) 10.3(3) RSV Research Agreement dated August 1, 1989 between the Company, PPI and the Massachusetts Health Research Institute, Inc. ("MHRI") 10.4(3) RSV License Agreement dated August 1, 1989 between the Company, PPI and MHRI 10.5(3) RSV Supply Agreement dated August 1, 1989 between the Company, PPI, MHRI and the Massachusetts Public Health Biologic Laboratory ("MPHBL") 10.6(3) CMV License Agreement dated April 23, 1990 between the Company and MHRI 10.7(3) First Amendment to CMV License Agreement dated May 3, 1991 between the Company and MHRI 10.8(3) CMV Research Agreement dated April 23, 1990 between the Company, MHRI and MPHBL 10.9(3) License Agreement dated November 8, 1989 between the Company, PPI, and the Henry M. Jackson Foundation for the Advancement of Military Medicine ("HMJ") 10.11(1)(3) License Agreement dated November 15, 1990 between Company and Merek & Co., Inc. 10.10(3) Research Agreement dated November 8, 1989 between the Company, PPI and HMJ 10.11(1)(3) Research and License Agreement dated April 1, 1990 between the Company and New York University 10.12(1)(3) Research and License Agreement dated January 2, 1991 between the Company and the University of Pittsburgh 10.13(3) Patent License Agreement between the Company and the National Institutes of Health regarding parvovirus 10.14(3) License Agreement dated September 1, 1988 between the Company and Albany Medical College of Union College 10.15(3) License Agreement dated July 5, 1989 between the Company, Albert Einstein College of Medicine of Yeshiva University, The Whitehead Institute and Stanford University 10.16(3) License Agreement dated July 1, 1989 between the Company and the National Technical Information Service ("NTIS") 10.17(3) License Agreement dated September 1, 1989 between the Company and NTIS 10.18(5) Form of Stock Option Agreement, as amended E-1 10.19(3) Convertible Preferred Stock and Warrant Purchase Agreement between HCV, Everest Trust and the Company dated January 12, 1990 with form of Warrant 10.20(3) Restated Stockholders' Agreement dated May 15, 1991 10.21(3) Lease Agreement between Clopper Road Associates and the Company dated February 14, 1991 10.22(7) 1991 Stock Option Plan 10.23(3) Sublease between the Company and Pharmavene, Inc. 10.24(4) Agreement between New England Deaconess Hospital Corporation and the Company, dated as of August 1, 1991 10.25(1)(4) Research Collaboration Agreement between Merck and the Company effective as of November 27, 1991 10.26(1)(4) Co-promotion Agreement between Merck and the Company effective as of November 27, 1991 10.27(1)(4) License Agreement between Merck and the Company effective as of November 27, 1991 10.28(1)(5) Letter Agreement between Merck and the Company, dated January 26, 1993 10.29(1)(5) Termination, Purchase and Royalty Agreement between CLI and the Company, dated December 24, 1992 10.29.1(1)(12) Amendment to Termination, Purchase and Royalty Agreement between Connaught Technology Corporation and MedImmune, Inc. dated December 31, 1995 10.30(1)(5) Research and License Agreement between Cell Genesys, Inc. and the Company, dated April 29, 1992 10.31(a)(5) Unredacted pages 2-5 of Exhibit 10.31 10.31(5) Form of 1993 Non-Employee Director Stock Option Plan 10.32(1)(8) Sponsored Research and License Agreement between Georgetown University and the Company dated February 25, 1993 10.33(1)(8) License Agreement between Roche Diagnostic Systems, Inc. and the Company dated March 8, 1993 10.34(1)(8) Pip/Tazo Co-Promotion Agreement between American Cyanamid Company and the Company dated November 8, 1993 10.34.1(12) Agreement dated October 26, 1995 between American Cyanamid Company and the Company 10.35(1)(8) RSVIG Co-Development and Co-Promotion Agreement between American Cyanamid Company and the Company dated November 8, 1993 10.35.1(12) Agreement dated October 26, 1995 between American Cyanamid Company and the Company 10.36(1)(8) RSV MAB Co-Development and Co-Promotion Agreement between American Cyanamid Company and the Company dated November 8, 1993 10.36.1(12) Agreement dated October 26, 1995 between American Cyanamid Company and the Company 10.37(1)(8) RSV Vaccine Co-Development and Co-Promotion Agreement between American Cyanamid Company and the Company dated November 8, 1993 10.37.1(12) Agreement dated October 26, 1995 between American Cyanamid Company and the Company E-2 10.38(1)(10) Fraction II + III Paste Supply Agreement between Baxter Healthcare Corporation and the Company dated September 1, 1994 10.39(11) Employment Agreement between David P. Wright and the Company dated January 2, 1995 10.40(11) Employment Agreement between Bogdan Dziurzynski and the Company dated February 1, 1995 10.41(11) Employment Agreement between Wayne T. Hockmeyer and the Company dated February 1, 1995 10.42(11) Employment Agreement between David M. Mott and the Company dated February 1, 1995 10.43(11) Employment Agreement between Franklin H. Top, Jr. and the Company dated February 1, 1995 10.44(11) Employment Agreement between James F. Young and the Company dated February 1, 1995 10.45(1)(11) License Agreement between Symbicom AB and the Company dated May 20, 1994 10.46(1)(11) License Agreement between the University of Kentucky Research Foundation and the Company effective June 10, 1994 10.47(1)(11) Research and Development Agreement between the University of Kentucky Research Foundation and the Company effective June 10, 1994 10.48(1)(11) Research and License Agreement between Washington University and the Company effective July 1, 1994 10.49(1)(11) Research and License Agreement between Washington University and the Company effective March 1, 1995 10.50(1)(9) License Agreement between Baxter Healthcare Corporation and MedImmune, Inc. effective June 2, 1995 10.51(1)(9) Stock Purchase Agreement between Baxter Healthcare Corporation and MedImmune, Inc. dated June 22, 1995 10.52(2)(10) Alliance Agreement between BioTransplant, Inc. and MedImmune, Inc. dated October 2, 1995 10.53(12) Stock Purchase Agreement dated October 25, 1995 between MedImmune, Inc. And American Home Products 10.54(2)(12) Collaboration and License Agreement dated as of July 27, 1995 between MedImmune, Inc. And Human Genome Sciences, Inc. 10.55(12) Stipulation of Settlement in reference to MedImmune, Inc. Securities Litigation, Civil Action No. PJM93-3980 10.56(2)(13) Plasma Supply Agreement dated effective as of February 8, 1996, by and between DCI Management Group, Inc. and MedImmune, Inc. 10.58(2)(13) License and Research Support Agreement dated as of April 16, 1996, between The Rockefeller University and MedImmune, Inc. 10.59(14) First Amendment of Lease Between Clopper Road Associates and MedImmune, Inc. dated June 8, 1993. 10.60(14) Second Amendment of Lease Between Clopper Road Associates and MedImmune, Inc. dated June 30, 1993. E-3 10.61(14) Third Amendment of Lease between Clopper Road Associates and MedImmune, Inc. effective as of January 1, 1995. 10.62(14) Fourth Amendment of Lease between Clopper Road Associates and MedImmune, Inc. dated October 3, 1996. 10.63(14) Fifth Amendment of Lease between Clopper Road Associates and MedImmune, Inc. dated October 3, 1996. 10.64(1)(14) Engineering, Procurement, Construction and Validation Services Agreement between MedImmune, Inc. and Fluor Daniel, Inc. effective as of July 31, 1996. 10.65(2)(14) Research and License Agreement between OraVax Merieux Co. and MedImmune, Inc. effective as of November 1, 1996. 10.66 (15) Employment Agreement between Wayne T. Hockmeyer and MedImmune, Inc. effective April 1, 1997. 10.67 (15) Employment Agreement between David M. Mott and MedImmune, Inc. effective April 1, 1997. 10.68 (15) Employment Agreement between Franklin H. Top and MedImmune, Inc. effective April 1, 1997. 10.69 (15) Employment Agreement between David P. Wright and MedImmune, Inc. effective April 1, 1997. 10.70 (15) Employment Agreement between James F. Young and MedImmune, Inc. effective April 1, 1997. 10.71 (15) Employment Agreement between Bogdan Dziurzynski and MedImmune, Inc. effective April 1, 1997. 10.72 (16) Master Loan & Security Agreement, dated June 16, 1997 by and between Transamerica and MedImmune, Inc. 10.73 (1)(16) Patent License Agreement, (MEDI-493) dated July 17, 1997 by and between Protein Design Labs and MedImmune, Inc. 10.74 (1) Patent License Agreement, (MEDI-507) dated July 17, 1997 by and between Protein Design Labs and MedImmune, Inc. 10.75 (17) Sixth Amendment of Lease between ARE-QRS Corp. and MedImmune, Inc. dated September 10, 1997. 10.76(1)(17) Co-Promotion Agreement between Abbott Laboratories and MedImmune, Inc. dated November 26, 1997 10.77(1)(17) Contract Research and Development Agreement between MedImmune, Inc. and Dr. Karl Thomae GmbH dated November 27, 1997. 10.78(1)(17) Manufacturing Agreement between MedImmune, Inc. and Dr. Karl Thomae GmbH dated November 27, 1997. 10.79(1)(17) Distribution Agreement between MedImmune, Inc. and Abbott International, Ltd. dated November 26, 1997. 10.80(1)(17) License Agreement between Loyola University of Chicago and MedImmune, Inc. dated December 3, 1997. 10.81(1)(17) Research Collaboration and License Agreement between SmithKline Beecham and MedImmune, Inc. dated December 10, 1997. 10.82 (18) Termination of MEDI-SB Letter Agreement of October 10, 1996 10.83 (18) Second Amendment between MedImmune, Inc. and Lonza Biologics PLC of 228 Bath Road, Slough, Berkshire SL1 4DY England E-4 10.84 Employment Agreement between Wayne T. Hockmeyer and MedImmune, Inc. effective November 1, 1998. 10.85 Employment Agreement between Melvin Booth and MedImmune, Inc. effective November 1, 1998. 10.86 Employment Agreement between David M. Mott and MedImmune, Inc. effective November 1, 1998. 10.87 Employment Agreement between Franklin H. Top and MedImmune, Inc. effective November 1, 1998. 10.88 Employment Agreement between David P. Wright and MedImmune, Inc. effective November 1, 1998. 10.89 Employment Agreement between James F. Young and MedImmune, Inc. effective November 1, 1998. 10.90 Employment Agreement between Bogdan Dziurzynski and MedImmune, Inc. effective November 1, 1998. 10.91 (2) License Agreement between Connaught Laboratories, Inc. and MedImmune, Inc. effective November 20, 1998. 10.92 (2) Termination of Purchase and Royalty Agreement Second Amendment between Connaught Technology Corporation and MedImmune, Inc. effective September 30, 1998. 10.93 Purchase Contract Agreement between Aid Association and MedImmune, Inc. effective November 25, 1998. 10.94 Seventh Amendment of Lease between ARE-QRS CORP. and MedImmune, Inc. effective August 1, 1998. 23.1 Consent of Independent Accountants ______________ (1) Confidential treatment has been granted by the SEC. The copy filed as an exhibit omits the information subject to the confidentiality grant. (2) Confidential treatment has been requested. The copy filed as an exhibit omits the information subject to the confidentiality request. (3) Incorporated by reference to exhibit filed in connection with the Company's Registration Statement No. 33-39579. (4) Incorporated by reference to exhibit filed in connection with the Company's Registration Statement No. 33-43816. (5) Incorporated by reference to exhibit filed in connection with the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (6) Incorporated by reference to exhibit filed in connection with the Company's Annual Report on Form 10-K for the year ended December 31, 1991. (7) Incorporated by reference to exhibit filed in connection with the Company's Registration Statement No. 33-46165. (8) Incorporated by reference to exhibit filed in connection with the Company's Annual Report on Form 10-K for the year ended December 31, 1993. (9) Incorporated by reference to exhibit filed in connection with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. E-5 (10) Incorporated by reference to exhibit filed in connection September 30, 1995. (11) Incorporated by reference to exhibit filed with the Company's Annual Report on Form 10-K for December 31, 1994. (12) Incorporated by reference to exhibit filed with the Company's Annual Report on Form 10-K for December 31, 1995. (13) Incorporated by reference to exhibit filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1996. (14) Incorporated by reference to exhibit filed with the Company's Annual Report on Form 10-K for December 31, 1996. (15) Incorporated by reference to exhibit filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1997. (16) Incorporated by reference to exhibit filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1997. (17) Incorporated by reference to exhibit filed with the Company's annual Report on Form 10-K for December 31, 1997. (18) Incorporated by reference to exhibit filed with the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998. (19) Incorporated by reference to Exhibit 99.2 filed with the Company's Registration Statement on Form 8A/A, filed with the Securities and Exchange Commission on December 1, 1998. E-6