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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-19311
IDEC PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
California 33-0112644
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Torreyana Road, San Diego, CA 92121
(Address of principal executive offices) (Zip code)
(619) 550-8500
(Registrant's telephone number, including area code)
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 ___
As of October 31, 1996, the Registrant had 18,016,354 shares of its common
stock, no par value issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1996 and December 31, 1995 .......... 1
Condensed Consolidated Statements of Operations -- Three months ended September 30, 1996 and
1995 and nine months ended September 30, 1996 and 1995 .................................. 2
Condensed Consolidated Statements of Cash Flows -- Nine months ended September 30, 1996 and
1995 .................................................................................... 3
Notes to Condensed Consolidated Financial Statements ....................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 12
Item 2. Changes in Securities ...................................................................... 12
Item 3. Defaults upon Senior Securities ............................................................ 12
Item 4. Submission of Matters to a Vote of Shareholders ............................................ 12
Item 5. Other Information .......................................................................... 12
Item 6. Exhibits and Reports on Form 8-K ........................................................... 12
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1996 1995
--------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 53,105 $ 18,828
Securities available-for-sale 22,971 5,182
Current portion of note receivable 761 640
Contract research revenue receivables 2,850 1,455
Inventories 1,729 --
Prepaid expenses and other current assets 2,944 1,333
--------- --------
Total current assets 84,360 27,438
Property and equipment, net 17,921 17,955
Restricted marketable security -- 750
Note receivable, less current portion 672 1,249
Deposits and other assets 341 234
--------- --------
$ 103,294 $ 47,626
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,656 $ 3,248
Trade payable - clinical materials -- 238
Accounts payable 1,291 970
Accrued expenses 4,105 4,280
--------- --------
Total current liabilities 9,052 8,736
Notes payable, less current portion 5,386 6,598
Other long-term liabilities 2,402 1,123
Shareholders' equity (Note 2):
Convertible preferred stock, no par value 26,586 14,086
Common stock, no par value 142,426 93,554
Additional paid-in capital 2,449 2,379
Unrealized gains on securities available-for-sale -- 10
Accumulated deficit (85,007) (78,860)
--------- --------
Total shareholders' equity 86,454 31,169
--------- --------
$ 103,294 $ 47,626
========= ========
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three months Nine months
ended September 30, ended September 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Sales $ -- $ -- $ 1,505 $ --
Contract research revenues 2,902 1,375 8,902 6,924
License fees -- 1,000 9,500 6,000
-------- -------- -------- --------
2,902 2,375 19,907 12,924
Operating expenses:
Cost of sales -- -- 1,384 --
Research and development 6,292 5,347 19,011 16,280
General and administrative 1,844 1,672 5,305 4,677
Acquired technology rights -- -- -- 11,437
-------- -------- -------- --------
8,136 7,019 25,700 32,394
-------- -------- -------- --------
Loss from operations (5,234) (4,644) (5,793) (19,470)
Interest income (expense), net 730 (279) (354) (484)
-------- -------- -------- --------
Net loss $ (4,504) $ (4,923) $ (6,147) $(19,954)
======== ======== ======== ========
Net loss per common share $ (0.26) $ (0.32) $ (0.38) $ (1.37)
======== ======== ======== ========
Shares used in computing net loss
per common share 17,528 14,869 16,127 14,550
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine months ended
September 30,
------------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net cash used in operating activities $ (5,926) $ (7,967)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,993) (848)
Purchase of securities available-for-sale (31,324) (6,888)
Sales and maturities of securities available-for-sale 14,274 2,492
-------- --------
Net cash used in investing activities (19,043) (5,244)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable 1,790 2,785
Payments on notes payable (2,557) (3,321)
Net proceeds from issuance of common stock 47,513 210
Proceeds from issuance of preferred stock 12,500 7,149
-------- --------
Net cash provided by financing activities 59,246 6,823
-------- --------
Net increase (decrease) in cash and cash equivalents 34,277 (6,388)
Cash and cash equivalents, beginning of period 18,828 13,691
-------- --------
Cash and cash equivalents, end of period $ 53,105 $ 7,303
======== ========
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The information at September 30, 1996, and for the three and nine months ended
September 30, 1996 and 1995, is unaudited. In the opinion of management, these
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results for the interim
periods presented. Interim results are not necessarily indicative of results for
a full year. These financial statements should be read in conjunction with IDEC
Pharmaceuticals Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995, which was filed with the United States Securities and
Exchange Commission on April 1, 1996.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined in a
manner which approximates the first-in, first-out (FIFO) method.
New Accounting Standards
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement
123"). Statement 123 allows companies to expand the use of fair value
accounting for stock compensation plans or requires companies that elect to
retain the current approach for recognizing stock-based compensation expense to
make annual pro forma disclosures of the Company's operating results as if they
had adopted the fair value method. Management of the Company has retained the
current approach for recognizing stock-based compensation which did not have a
financial effect on the Company's consolidated financial statements and will
report the annual pro forma disclosures in the notes to the fiscal 1996
consolidated financial statements.
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("Statement 121"). Statement 121
requires impairment of losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The adoption of Statement 121 did not have a material effect on
the Company's consolidated financial statements for the three and nine months
ended September 30, 1996.
NOTE 2. SHAREHOLDERS' EQUITY
Common Stock
In June 1996, the Company completed a public offering of 2,070,000 shares of its
common stock resulting in net proceeds of approximately $46,300,000.
Convertible Preferred Stock
The Company issued 23,000 shares of its Series A-3 Nonvoting Convertible
Preferred Stock ("Series A-3 Preferred Stock") in March 1996, and 100,000 shares
of its Series A-6 Nonvoting Convertible Preferred Stock ("Series A-6 Preferred
Stock") in May 1996, to Genentech, Inc. pursuant to the terms of a preferred
stock purchase agreement. The preferred stock purchase agreement was entered
into concurrently with a collaboration agreement in March 1995. The Series A-3
Preferred Stock and Series A-6 Preferred Stock are recorded on the balance sheet
at their liquidation preference per share of $217 and $75, respectively. Each
share of Series A-3 Preferred Stock is convertible at any time into ten shares
of common stock. Each share of Series A-6 Preferred Stock is convertible into
the number of shares of common stock equal to 75 divided by the average closing
price of the Company's common stock as reported by the Nasdaq National Market
for the 20 trading days following the earlier of (i) the FDA approval date for
IDEC-C2B8 or (ii) September 16, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Since its inception, IDEC Pharmaceuticals Corporation (the "Company") has been
primarily engaged in the research and development of products for the long-term
management of immune system cancers and autoimmune and inflammatory diseases. To
date, the Company has not received any revenues from the commercial sale of its
products. The Company has funded its operations primarily through the sale of
equity securities as well as through contract research and license fee revenues
received in connection with collaborative arrangements entered into with the
Company's strategic partners. For the nine months ended September 30, 1996 and
the year ended December 31, 1995, the Company recognized contract research and
license fee revenues of $18.4 million and $23.6 million, respectively.
The Company has incurred increasing annual operating expenses and, as the
Company moves closer to product commercialization, it expects such trends to
continue. The Company has incurred annual operating losses since its inception
in 1985, and anticipates that such operating losses will continue for at least
the next one to two years. As of September 30, 1996, the Company had an
accumulated deficit of $85.0 million.
RESULTS OF OPERATIONS
Contract research revenues for the three and nine months ended September 30,
1996 totaled $2.9 million and $8.9 million, respectively, compared to $1.4
million and $6.9 million for the comparable periods in 1995. The increase in
contract research revenues for the three and nine months ended September 30,
1996 is due primarily to revenue from a new collaboration entered into with
Eisai Co., Ltd. in December 1995, partially offset by decreased revenues from
SmithKline Beecham, p.l.c. ("SmithKline Beecham") as a result of the planned
transfer of clinical development of IDEC-CE9.1 to SmithKline Beecham in late
1995.
License fees for the nine months ended September 30, 1996 totaled $9.5 million
compared to $6.0 million for the comparable period in 1995. The increase in the
license fees is due primarily to $4.5 million received for the license to Chugai
Pharmaceutical Co., Ltd. of the Company's proprietary gene expression technology
for the manufacture of recombinant proteins.
Sales and costs of sales for the nine months ended September 30, 1996 were a
result of the Company completing a contract manufacturing arrangement during the
second quarter of 1996.
Research and development expenses equaled $6.3 million and $5.3 million for the
third quarters of 1996 and 1995, respectively, and $19.0 million and $16.3
million for the nine months ended September 30, 1996 and 1995, respectively. The
increase in research and development expenses for the three months ended
September 30, 1996, is primarily due to increased personnel costs related to the
completion of the Phase III trial, preparation of the Biologics License
Application and the preparation for building of commercial inventory of the
Company's lead product candidate, IDEC-C2B8. The increase in research and
development expenses for the nine months ended September 30, 1996 is primarily
due to a $1.3 million expense for access to certain patent rights related to
IDEC-C2B8, increased personnel costs related to the completion of the Phase III
trial, preparation of the Biologics License Application and the preparation for
building of commercial inventory of the Company's lead product candidate,
IDEC-C2B8. The Company expects to continue incurring substantial additional
research and development costs in the future, due to expansion of research and
development programs; patent and regulatory related costs; preclinical and
clinical testing of the Company's various products under development; production
scale-up and manufacturing of products used in clinical trials; and
pre-commercialization-related manufacturing costs.
General and administrative expenses were $1.8 million and $1.7 million for the
third quarters of 1996 and 1995, respectively, and $5.3 million and $4.7 million
for the nine months ended September 30, 1996 and 1995, respectively. General and
administrative expenses for the nine months ended September 30, 1996, increased
due to higher personnel costs to support expanded manufacturing operations,
completion of the Phase III trial and preparation of the Biologics License
Application for IDEC-C2B8. General and administrative costs necessary to support
expanded manufacturing operations, expanded product development efforts and the
creation of a marketing and sales organization are expected to continue to
increase in the foreseeable future.
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Beginning in 1988, the Company obtained funds from ML/MS Associates, L.P.
("ML/MS") for the development of the Company's lymphoma products. In connection
with such funding, ML/MS obtained rights in such products. In March 1995, the
Company repurchased such rights by the issuance of 1.0 million shares of its
common stock and 69,375 shares of 10% Series B Nonvoting Cumulative Convertible
Preferred Stock to ML/MS. In March 1995, the Company recorded a noncash charge
of $11.4 million, representing the purchase of the acquired technology rights.
Net interest income totaled $0.7 million for the three months ended September
30, 1996 compared to net interest expense of $0.3 million for the three months
ended September 30, 1995. Net interest expense totaled $0.3 million for the nine
months ended September 30, 1996 compared to $0.5 million for the comparable
period in 1995. Net interest income was generated for the three months ended
September 30, 1996 from the increase in cash, cash equivalents and securities
available-for-sale resulting from the completion of a public offering of 2.1
million shares in June 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures since inception
principally through the sale of equity securities, license fees, contract
research revenues, lease financing transactions and interest income. The Company
expects to finance its current and planned operating requirements principally
through cash on hand and with funds from existing collaborative agreements and
contracts which the Company believes will be sufficient to meet its near-term
operating requirements. Existing agreements and contracts, however, could be
canceled by the contracting parties. In addition, the Company may pursue
additional capital through a combination of new collaborative agreements,
strategic alliances, equity and debt financings. However, no assurance can be
provided that additional capital will be obtained through these sources on
favorable terms or at all. Should the Company not enter into any such
arrangements, the Company anticipates its cash, cash equivalents and securities
available-for-sale, together with the existing agreements and contracts, will be
sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures through early commercialization of its first product.
If adequate funds are not available from additional sources of financing, the
Company's business could be adversely affected.
The Company's working capital and capital requirements will depend upon numerous
factors, including the progress of the Company's preclinical and clinical
testing; manufacturing; research and development programs; timing and cost of
obtaining regulatory approvals; levels of resources that the Company devotes to
the development of manufacturing and marketing capabilities; technological
advances; status of competitors; and the ability of the Company to establish
collaborative arrangements with other organizations.
Until required for operations, the Company's policy under established guidelines
is to keep its cash reserves in bank deposits, certificates of deposit,
commercial paper, corporate notes, United States government instruments and
other readily marketable debt instruments, all of which are investment-grade
quality.
At September 30, 1996, the Company had $76.1 million in cash, cash equivalents
and securities available-for-sale compared to cash, cash equivalents and
securities available-for-sale of $24.0 million at December 31, 1995. Sources of
cash, cash equivalents and securities available-for-sale for the nine months
ended September 30, 1996 include $12.5 million from the issuance of convertible
preferred stock, $47.5 million from the issuance of common stock (including
approximately $1.2 million from the exercise of stock options and from common
stock issued under an employee stock purchase plan) and $1.8 million from
funding under an existing lease line. Uses of cash, cash equivalents and
securities available-for-sale during the nine months ended September 30, 1996
include $5.9 million used in operations, $2.0 million used to purchase capital
equipment and $2.6 million used to pay notes payable.
In June 1996, the Company completed a public offering of 2,070,000 shares of its
common stock resulting in net proceeds of approximately $46.3 million. In May
1996, the Company issued 100,000 shares of its Series A-6 Convertible Preferred
Stock and in March 1996, the Company issued 23,000 shares of its Series A-3
Convertible Preferred Stock pursuant to terms of a preferred stock purchase
agreement with Genentech, Inc. ("Genentech") resulting in proceeds of $12.5
million.
In August 1995, the Company completed funding under a $10.0 million lease
financing agreement to finance both equipment and facility improvements. Terms
of the financing agreement require final principal payments of $1.1 million and
$0.4 million in July 1998 and January 1999, respectively.
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This quarterly report contains predictions, estimates and other forward-looking
statements that involve a number of risks and uncertainties. While this outlook
represents management's current judgment on the future direction of the
business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested above. The Company undertakes
no obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances arising after the
date hereof.
RISK FACTORS
Uncertainties Associated with Clinical Trials
The Company has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety, efficacy and applicability of its
potential products. The rate of completion of the Company's clinical trials is
dependent upon, among other factors, the rate of patient enrollment. Patient
enrollment is a function of many factors, including the nature of the Company's
clinical trial protocols, existence of competing protocols, size of the patient
population, proximity of patients to clinical sites and eligibility criteria for
the study. Delays in patient enrollment will result in increased costs and
delays, which could have a material adverse effect on the Company. The Company
cannot assure that patients enrolled in the Company's clinical trials will
respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the United States Food
and Drug Administration ("FDA") regulations applicable to such testing can
result in delay, suspension or cancellation of such testing, and/or refusal by
the FDA to accept the results of such testing. In addition, the FDA may suspend
clinical trials at any time if it concludes that the subjects or patients
participating in such trials are being exposed to unacceptable health risks.
Further, there can be no assurance that human clinical testing will show any
current or future product candidate to be safe and effective or that data
derived therefrom will be suitable for submission to the FDA or will support the
Company's submission of a Biologics License Application ("BLA").
Reliance on Third Party Development and Marketing Efforts
The Company has adopted a research, development and product commercialization
strategy that is dependent upon various arrangements with strategic partners and
others. The success of the Company's products is substantially dependent upon
the success of these outside parties in performing their obligations, which
include, but are not limited to, providing funding, performing research and
development, fulfilling long-term manufacturing demands and marketing,
distribution and sales with respect to the Company's products. The Company's
strategic partners may also develop products that may compete with the Company.
Although the Company believes that its partners have an economic incentive to
succeed in performing their contractual obligations, the amount and timing of
resources that they devote to these activities is not within the control of the
Company. There can be no assurance that these parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements. The Company has entered into collaborative agreements with
Genentech, Zenyaku Kogyo, Ltd. ("Zenyaku"), SmithKline Beecham, Mitsubishi
Chemical Corporation ("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and
Eisai Co., Ltd. ("Eisai"). These agreements generally may be terminated at any
time by the strategic partner, typically on short notice to the Company. If one
or more of these partners elect to terminate their relationship with the
Company, or if the Company or its partners fail to achieve certain milestones,
it could have a material adverse effect on the Company's ability to fund the
related programs and to develop any products that may have resulted from such
collaborations. There can be no assurance that these collaborations will be
successful. In addition, some of the Company's current partners have certain
rights to control the planning and execution of product development and clinical
programs, and there can be no assurance that such partners' rights to control
aspects of such programs will not impede the Company's ability to conduct such
programs in accordance with the schedules currently contemplated by the Company
for such programs and will not otherwise impact the Company's strategy.
Lengthy Regulatory Process; No Assurance of Regulatory Approvals
The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of the Company's products are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are regulated by the
FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in
the case of biologics, the Public Health Service Act. At the
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present time, the Company believes that its products will be regulated by the
FDA as biologics. Manufacturers of biologics may also be subject to state
regulations.
The steps required before a biologic may be approved for marketing in the United
States generally include (i) preclinical laboratory tests and animal tests, (ii)
the submission to the FDA of an Investigational New Drug application ("IND") for
human clinical testing, which must become effective before human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the product, (iv) the submission to the FDA
of a BLA, (v) FDA review of the BLA, and (vi) satisfactory completion of a FDA
inspection of the manufacturing facility or facilities at which the product is
made to assess compliance with Good Manufacturing Practices ("GMP"). The testing
and approval process requires substantial time, effort and financial resources
and there can be no assurance that any approval will be granted on a timely
basis, if at all. There can be no assurance that Phase I, Phase II or Phase III
testing will be completed successfully within any specific time period, if at
all, with respect to any of the Company's potential products. Furthermore, the
FDA may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
health risk.
The results of the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a BLA requesting approval to market the
product. Before approving a BLA, the FDA will inspect the facilities at which
the product is manufactured, and will not approve the product unless GMP
compliance is satisfactory. The FDA may deny a BLA if applicable regulatory
criteria are not satisfied, may require additional testing or information,
and/or may require postmarketing testing and surveillance to monitor the safety
or efficacy of a product. There can be no assurance that FDA approval of any BLA
submitted by the Company will be granted on a timely basis if at all. Also, if
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which it may be marketed.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the BLA
review process, or thereafter (including after approval) may result in various
adverse consequences, including the FDA's delay in approving or refusal to
approve a product, withdrawal of an approved product from the market, and/or the
imposition of criminal penalties against the manufacturer and/or license holder.
For example, license holders are required to report certain adverse reactions to
the FDA, and to comply with certain requirements concerning advertising and
promotional labeling for their products. Also, quality control and manufacturing
procedures must continue to conform to GMP regulations after approval, and the
FDA periodically inspects manufacturing facilities to assess compliance with
GMP. Accordingly, manufacturers must continue to expend time, monies and effort
in the area of production and quality control to maintain GMP compliance. In
addition, discovery of problems may result in restrictions on a product,
manufacturer or holder, including withdrawal of the product from the market.
Also, new government requirements may be established that could delay or prevent
regulatory approval of the Company's products under development.
The Company will also be subject to a variety of foreign regulations governing
clinical trials and sales of its products. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries. The approval process varies from country to country
and the time may be longer or shorter than that required for FDA approval. At
least initially, the Company intends, to the extent possible, to rely on foreign
licensees to obtain regulatory approval for marketing its products in foreign
countries.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects fewer than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting a BLA. After the FDA
grants orphan drug designation, the generic identity of the therapeutic agent
and its potential orphan use are publicly disclosed by the FDA. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process. If a product that has an orphan drug
designation subsequently receives FDA approval for the indication for which it
has such designation, the product is entitled to orphan exclusivity, i.e., the
FDA may not approve any other applications to market the same drug for the same
indication, except in certain very limited circumstances, for a period of seven
years.
In 1994, the Company obtained orphan drug designation for IDEC-C2B8, IDEC-Y2B8
and IDEC-In2B8 from the FDA to treat low-grade B-cell lymphoma. There can be no
assurance that any of these compounds will receive orphan exclusivity for the
low-grade B-cell lymphoma indication, and it is possible that competitors of the
Company
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could obtain approval, and attendant orphan drug exclusivity, for these same
compounds for the low-grade B-cell lymphoma indication, thus precluding the
Company from marketing its products for the same indication in the United
States. In addition, even if the Company does obtain orphan exclusivity for any
of its compounds for low-grade B-cell lymphoma, there can be no assurance that
competitors will not receive approval of other, different drugs or biologics for
low-grade B-cell lymphoma. Although obtaining FDA approval to market a product
with orphan drug exclusivity can be advantageous, there can be no assurance that
the scope of protection or the level of marketing exclusivity that is currently
afforded by orphan drug designation will remain in effect in the future.
Additional Financing Requirements and Uncertain Access to Capital Markets
The Company has expended and will continue to expend substantial funds to
complete the research, development, manufacturing and marketing of its products.
The Company may seek additional funding for these purposes through a combination
of new collaborative arrangements, strategic alliances, additional equity or
debt financings or from other sources. There can be no assurance that such
additional funds will be available on acceptable terms, if at all. Even if
available, the cost of funds may result in substantial dilution to current
shareholders. If adequate funds are not available from operations or additional
sources of financing, the Company's business could be materially and adversely
affected.
Limited Manufacturing Experience
The Company has not yet commercialized any therapeutic products. To conduct
clinical trials on a timely basis, to obtain regulatory approval and to be
commercially successful, the Company must manufacture its products either
directly or through third parties in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. Although the Company has
produced its products in the laboratory, scaled its production process to pilot
levels and has the ability to manufacture limited commercial quantities of
certain of its products, the Company has not received regulatory approval for
such production. The Company anticipates that production of its products in
commercial quantities will create technical as well as financial challenges for
the Company. The Company has limited experience in manufacturing, and no
assurance can be given as to the ultimate performance of the Company's
manufacturing facility in San Diego, its suitability for approval for commercial
production or the Company's ability to make a successful transition to
commercial production.
The Company is dependent upon Genentech to fulfill long-term manufacturing
demands for its IDEC-C2B8 product and SmithKline Beecham to fulfill all of the
manufacturing requirements for IDEC-CE9.1. Genentech is currently constructing a
larger manufacturing plant to satisfy such long-term demands. The Company is
considering the addition of another manufacturing facility to meet its long-term
requirements for additional products under development. Failure by the Company
or its strategic partners to establish additional manufacturing capacity on a
timely basis would have a material adverse effect on the Company.
Patents and Proprietary Rights
The Company's success will depend, in large part, on its ability to maintain a
proprietary position in its products through patents, trade secret and orphan
drug designation. The Company holds one issued and one allowed United States
patent, 18 United States patent applications and numerous corresponding foreign
patent applications, and has licenses to patents or patent applications of other
entities. No assurance can be given, however, that the patent applications of
the Company or the Company's licensors will be issued or that any issued patents
will provide competitive advantages for the Company's products or will not be
successfully challenged or circumvented by its competitors. Moreover, there can
be no assurance that any patents issued to the Company or the Company's
licensors will not be infringed by others or will be enforceable against others.
In addition, there can be no assurance that the patents, if issued, would not be
held invalid or unenforceable by a court of competent jurisdiction. Enforcement
of the Company's patents may require substantial financial and human resources.
Moreover, the Company may have to participate in interference proceedings if
declared by the United States Patent and Trademark Office to determine priority
of inventions, which typically take several years to resolve and could result in
substantial cost to the Company.
A substantial number of patents have already been issued to other biotechnology
and biopharmaceutical companies. Particularly in the monoclonal antibody field,
competitors may have filed applications for or have been issued patents and are
likely to obtain additional patents and proprietary rights relating to products
or processes competitive with or similar to those of the Company. To date, no
consistent policy has emerged regarding the breadth of claims allowed in
biopharmaceutical patents, however, patents may issue with claims that conflict
with the Company's
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own patent filings or read on its own products. There can be no assurance that
patents do not already exist in the United States or in foreign countries or
that patents will not be issued that would entail substantial costs to challenge
and that, if unsuccessfully challenged, would have a material adverse effect on
the Company's ability to market its products. Specifically, the Company is aware
of several patents and patent applications which may affect the Company's
ability to make, use and sell its products. Accordingly, the Company expects
that commercializing monoclonal antibody-based products may require licensing
and/or cross-licensing of patents with other companies in this field. There can
be no assurance that the licenses, which might be required for the Company's
processes or products, would be available, if at all, on commercially acceptable
terms. The ability to license any such patents and the likelihood of
successfully contesting infringement or validity of such patents are uncertain
and the costs associated therewith may be significant. If the Company is
required to acquire rights to valid and enforceable patents but cannot do so at
a reasonable cost, the Company's ability to manufacture or market its products
would be materially adversely affected.
The owners, or licensees of the owners, of these patents may assert that one or
more of the Company's products infringe one or more claims of such patents. If
legal action is commenced against the Company to enforce any of these patents
and the plaintiff in such action prevails, the Company could be prevented from
practicing the subject matter claimed in such patents. In such event or under
other appropriate circumstances, the Company may attempt to obtain licenses to
such patents. However, no assurance can be given that any owner would license
the patents to the Company at all or on terms that would permit
commercialization of the Company's products. An inability to commercialize such
products could have a material adverse effect on the Company's operations and
ability to pursue its long-term objectives.
Limited Sales and Marketing Experience
Commercialization of the Company's products is expensive and time-consuming. The
Company has adopted a strategy of pursuing collaborative agreements with
strategic partners that provide for co-promotion of certain of the Company's
products. In the event that the Company elects to participate in co-promotion
efforts in the United States or Canada, and in those instances where the Company
has retained exclusive marketing rights in specified territories, the Company
will need to build a sales and marketing capability in the targeted markets. The
Company currently has a limited marketing staff and no sales personnel. There
can be no assurance that the Company will be able to establish a successful
direct sales and marketing capability in any or all targeted markets or that it
will be successful in gaining market acceptance for its products. To the extent
that the Company enters into co-promotion or other licensing arrangements, any
revenues received by the Company will be dependent on the efforts of third
parties and there can be no assurance that such efforts will be successful.
Outside of the United States and Canada, the Company has adopted a strategy to
pursue collaborative arrangements with established pharmaceutical companies for
marketing, distribution and sale of its products. There can be no assurance that
any of these companies or their sublicensees will successfully market,
distribute or sell the Company's products or that the Company will be able to
establish and maintain successful co-promotion or distribution arrangements.
Failure to establish a sales capability in the United States or outside the
United States may have a material adverse effect on the Company.
History of Operating Losses; Accumulated Deficit
The Company has incurred annual operating losses since its inception in 1985. As
of September 30, 1996, the Company's accumulated deficit was approximately $85.0
million. The Company anticipates that it will continue to incur operating losses
over at least the next one to two years. Such losses have been and will be
principally the result of the various costs associated with the Company's
research and development, clinical and manufacturing activities. The Company has
not generated operating profits from the sale of its products. All revenues to
date have resulted from collaborative research, development and licensing
arrangements, contract manufacturing arrangements, research grants and interest
income. The Company has no products approved by the FDA or any foreign authority
and does not expect to achieve profitable operations on an annual basis unless
product candidates now under development receive FDA or foreign regulatory
approval and are thereafter commercialized successfully.
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Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. In addition, the market price of the Company's common stock, like the
stock prices of many publicly traded biotechnology companies, has been highly
volatile. Announcements of technological innovations or new commercial products
by the Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and foreign countries, public
concern as to the safety of biotechnology products and economic and other
external factors, as well as period-to-period fluctuations in financial results
may have a significant impact on the market price of the Company's common stock.
It is likely that, in some future quarter, the Company's operating results will
be below the expectations of public market analysts and investors. In such
event, the price of the Company's common stock would likely be materially
adversely affected.
Uncertainties Regarding Health Care Reimbursement and Reform
The future revenues and profitability of biopharmaceutical companies as well as
the availability of capital may be affected by the continuing efforts of
government and third-party payors to contain or reduce costs of health care
through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government controls. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition or prospects.
The Company's ability to commercialize its products successfully will depend in
part on the extent which appropriate reimbursement levels for the cost of such
products and related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third-party payors are increasingly challenging the
prices charged for medical products and services. Also, the trend toward managed
health care in the United States and the concurrent growth of organizations such
as HMOs, which could control or significantly influence the purchase of health
care services and products, as well as legislative proposals to reform health
care or reduce government insurance programs may all result in lower prices for
the Company's products. The cost containment measures that health care payors
and providers are instituting and the effect of any health care reform could
materially adversely affect the Company's ability to operate profitably.
Product Liability Exposure
Clinical trials, manufacturing, marketing and sale of any of the Company's or
its strategic partners' pharmaceutical products or processes licensed by the
Company may expose the Company to product liability claims. The Company
currently carries limited product liability insurance. There can be no assurance
that the Company or its strategic partners will be able to continue to maintain
or obtain additional insurance or, if available, that sufficient coverage can be
acquired at a reasonable cost. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products developed by the Company or its strategic partners. A
product liability claim or recall would have a material adverse effect on the
business and financial condition of the Company.
Environmental Concerns
The Company's research and development involves the controlled use of hazardous
materials, chemicals and radioactive compounds. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. In addition, disposal of radioactive materials used by the Company
in its research efforts may only be made at approved facilities. Approval of a
site in California has been delayed indefinitely. The Company currently stores
such radioactive materials on site. The Company may incur substantial cost to
comply with environmental regulations.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SHAREHOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are referenced.
Exhibit
Number Description
------- -----------
10.1 Lease Agreement between the Company and All Spectrum
Services, Inc., dated August 13, 1996.
27.1 Financial Data Schedule
(b) Reports on Form 8-K. None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEC PHARMACEUTICALS CORPORATION
Date: November 13, 1996 By: /s/ William H. Rastetter
----------------------- ------------------------
William H. Rastetter
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 By: /s/ Phillip M. Schneider
----------------------- ------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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