1
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 June 30, 1999
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)
Delaware 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)
(858) 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 July 31, 1999 the Registrant had 20,706,588 shares of its common stock,
$.001 par value, issued and outstanding.
2
IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1999 and December 31, 1998 ................. 1
Condensed Consolidated Statements of Operations -- Three months ended June 30, 1999
and 1998 and six months ended June 30, 1999 and 1998 ..................................... 2
Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 1999 and 1998 ... 3
Notes to Condensed Consolidated Financial Statements ......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 20
Item 2. Changes in Securities......................................................................... 20
Item 3. Defaults upon Senior Securities............................................................... 20
Item 4. Submission of Matters to a Vote of Stockholders............................................... 20
Item 5. Other Information............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K.............................................................. 20
3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
June 30, December 31,
1999 1998
--------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 68,505 $ 26,929
Securities available-for-sale 144,684 46,573
Contract revenue receivables, net 1,266 2,345
Due from related party, net 19,778 17,473
Inventories 9,487 5,346
Prepaid expenses and other current assets 4,256 2,361
--------- ---------
Total current assets 247,976 101,027
Property and equipment, net 20,274 20,897
Investment and other assets 7,355 3,349
--------- ---------
$ 275,605 $ 125,273
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,493 $ 1,910
Accounts payable 1,587 1,989
Accrued expenses 12,333 10,238
Deferred revenue 346 346
--------- ---------
Total current liabilities 15,759 14,483
Notes payable, less current portion 120,394 2,095
Deferred rent and other long-term liabilities 2,801 2,267
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.001 par value 20 20
Additional paid-in capital 190,432 184,282
Accumulated other comprehensive income -
net unrealized gains (losses)
on securities available-for-sale (643) 1
Accumulated deficit (53,158) (77,875)
--------- ---------
Total stockholders' equity 136,651 106,428
--------- ---------
$ 275,605 $ 125,273
========= =========
See accompanying notes to condensed consolidated financial statements.
1
4
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three months Six months
ended June 30, ended June 30.
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues:
Revenues from unconsolidated joint business $21,045 $ 9,567 $40,324 $18,756
Contract revenues 1,249 4,496 2,481 7,141
License fees 13,000 10,000 13,000 16,300
------- ------- ------- -------
35,294 24,063 55,805 42,197
Operating costs and expenses:
Manufacturing costs 879 2,855 4,886 6,930
Research and development 9,535 7,141 17,354 14,178
Selling, general and administrative 4,859 4,542 9,253 8,441
------- ------- ------- -------
15,273 14,538 31,493 29,549
------- ------- ------- -------
Income from operations 20,021 9,525 24,312 12,648
Interest income, net 930 737 1,639 1,482
------- ------- ------- -------
Income before taxes 20,951 10,262 25,951 14,130
Income tax provision 1,043 130 1,234 130
------- ------- ------- -------
Net income $19,908 $10,132 $24,717 $14,000
======= ======= ======= =======
Earnings per share:
Basic $ 0.97 $ 0.51 $ 1.21 $ 0.71
Diluted $ 0.80 $ 0.44 $ 1.01 $ 0.60
Shares used in calculation of earnings per share:
Basic 20,517 19,805 20,399 19,722
Diluted 26,894 23,264 24,375 23,513
See accompanying notes to condensed consolidated financial statements.
2
5
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended
June 30,
--------------------------
1999 1998
--------- --------
Cash flows from operating activities:
Net cash provided by operating activities $ 24,267 $ 1,299
--------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,532) (631)
Purchase of securities available-for-sale (142,106) (30,877)
Sales and maturities of securities available-for-sale 43,358 26,938
--------- --------
Net cash used in investing activities (100,280) (4,570)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net 112,792 --
Payments on notes payable (1,080) (1,822)
Proceeds from issuance of common stock 5,877 2,063
--------- --------
Net cash provided by financing activities 117,589 241
--------- --------
Net increase (decrease) in cash and cash equivalents 41,576 (3,030)
Cash and cash equivalents, beginning of period 26,929 34,847
--------- --------
Cash and cash equivalents, end of period $ 68,505 $ 31,817
========= ========
See accompanying notes to condensed consolidated financial statements.
3
6
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The information at June 30, 1999, and for the
three and six month periods ended June 30, 1999 and 1998, is unaudited. In the
opinion of management, these condensed consolidated 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 or for any subsequent
interim period. These condensed consolidated financial statements should be read
in conjunction with IDEC Pharmaceuticals Corporation's (the "Company") Annual
Report on Form 10-K for the year ended December 31, 1998.
Inventories: Inventories are stated at the lower of cost or market. Cost
is determined in a manner that approximates the first-in, first-out (FIFO)
method. Inventories consist of the following (table in thousands):
June 30, December 31,
1999 1998
-------- ------------
Raw materials $1,625 $2,273
Work in process 2,112 273
Finished goods 5,750 2,800
------ ------
$9,487 $5,346
====== ======
Revenues from Unconsolidated Joint Business: Revenues from
unconsolidated joint business consist of the Company's share of the pretax
copromotion profits generated from its joint business arrangement with
Genentech, Inc. ("Genentech"), revenue from bulk Rituxan(R) sales to Genentech,
reimbursement from Genentech of the Company's sales force and development
expenses and royalty income from F. Hoffmann-La Roche Ltd. ("Roche") on sales of
Rituximab outside the United States. Rituxan is the trade name in the United
States for the compound Rituximab. Outside the United States, Rituximab is
marketed as MabThera (Rituximab, Rituxan and MabThera are collectively referred
to herein as Rituxan, except where otherwise indicated). The Company records
its royalty income from Roche with a one-quarter lag. Under the joint
business arrangement, all U.S. sales of Rituxan and associated costs and
expenses will be recognized by Genentech, with the Company recording its share
of the pretax copromotion profits on a quarterly basis, as defined in the
Company's collaborative agreement with Genentech (Note 2). Pretax copromotion
profits under the joint business arrangement are derived by taking U.S. net
sales of Rituxan to third-party customers less cost of sales, third-party
royalty expenses, distribution, selling and marketing expenses and joint
development expenses incurred by the Company and Genentech. Revenue from bulk
Rituxan sales is recognized when bulk Rituxan is accepted by Genentech. The
Company's profit-sharing formula with Genentech has two tiers; the higher tier
applies once a certain copromotion profit level is met. The profit-sharing
formula resets to the lower tier on an annual basis, at the beginning of each
year. During the second quarter, the Company began recording its 1999 profit
share at the higher tier.
Contract Revenues: Contract revenues consist of nonrefundable research
and development funding under collaborative agreements with the Company's
various strategic partners and other funding under contractual arrangements with
other parties. Contract research and development funding generally compensates
the Company for discovery, preclinical and clinical expenses related to the
collaborative development programs for certain products and product candidates
of the Company and is recognized at the time research and development activities
are performed under the terms of the collaborative agreements. Contract revenues
earned in excess of contract payments received are classified as contract
revenue receivables, and contract research and development funding received in
excess of amounts earned are classified as deferred revenue. Contract revenue
receivables at June 30, 1999 and December 31, 1998 are net of an allowance of
$114,000 and $775,000, respectively.
License Fees: License fees consist of nonrefundable fees from product
development milestone payments, the sale of license rights to the Company's
proprietary gene expression technology and nonrefundable fees from the sale of
product rights under collaborative development and license agreements with the
Company's strategic partners. Revenues from product development milestone
payments are recognized when the results or events stipulated in the agreement
have been achieved. License fee payments received in excess of amounts earned
are classified as deferred revenue.
4
7
Manufacturing Costs: Manufacturing costs consist of manufacturing costs
related to the production of bulk Rituxan sold to Genentech.
Earnings Per Share: Earnings per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings per Share." Basic
earnings per share excludes the dilutive effects of options, warrants and other
convertible securities compared to diluted earnings per share which reflects the
potential dilution of options, warrants and other convertible securities that
could share in the earnings of the Company. Calculations of basic and diluted
earnings per share use the weighted average number of shares outstanding during
the period.
(In thousands, except per share data)
Three months Six months
ended June 30, ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
------- ------- ------- -------
Numerator:
Net income $19,908 $10,132 $24,717 $14,000
Adjustments for interest, net of income tax effect 1,568 -- -- --
------- ------- ------- -------
Net income, adjusted 21,476 10,132 24,717 14,000
Denominator:
Weighted-average shares outstanding 20,517 19,805 20,399 19,722
Effect of dilutive securities:
Dilutive options 2,563 1,966 2,485 2,281
Convertible preferred 1,491 1,491 1,491 1,508
Warrants -- 2 -- 2
Convertible zero-coupon notes due 2019 2,323 -- -- --
------- ------- ------- -------
Dilutive potential common shares 6,377 3,459 3,976 3,791
------- ------- ------- -------
Weighted-average shares and dilutive potential
common shares 26,894 23,264 24,375 23,513
------- ------- ------- -------
Basic earnings per share $ 0.97 $ 0.51 $ 1.21 $ 0.71
Diluted earnings per share $ 0.80 $ 0.44 $ 1.01 $ 0.60
Excluded from the calculation of diluted earnings per share for the six months
ended June 30, 1999 was 1,786,000 weighted average shares of common stock from
the assumed conversion of 20-year convertible zero coupon subordinated notes
("Notes") because their effect was anti-dilutive.
Comprehensive Income: Comprehensive income for the six months ended June
30, 1999 and 1998 was $24,104,000 and $14,091,000, respectively.
NOTE 2. RELATED PARTY ARRANGEMENTS
In March 1995, the Company and Genentech entered into a collaborative
agreement for the clinical development and commercialization of the Company's
anti-CD20 monoclonal antibody, Rituxan, for the treatment of relapsed or
refractory, low-grade or follicular, CD20-positive, B-cell non-Hodgkin's
lymphomas ("B-cell non-Hodgkin's lymphomas"). Concurrent with the collaborative
agreement the Company and Genentech also entered into an expression technology
license agreement for a proprietary gene expression technology developed by the
Company and a preferred stock purchase agreement providing for certain equity
investments in the Company by Genentech. Under the terms of these agreements,
the Company has received payments totaling $58,500,000. Additionally, the
Company may be reimbursed by Genentech for certain other development and
regulatory approval expenses under the terms of the collaborative agreement.
Genentech may terminate this agreement for any reason, which would result in a
loss of Genentech's Rituxan product rights.
In addition, the Company and Genentech are copromoting Rituxan in the
United States under a joint business arrangement, with the Company receiving a
share of the pretax copromotion profits. The Company anticipates that it will
transfer all manufacturing activities for bulk Rituxan to Genentech by the end
of the third quarter of 1999. Under the Company's agreement with Genentech, the
sales price of bulk Rituxan sold to Genentech is capped at a price that is
currently less than the Company's cost to manufacture bulk Rituxan.
Included in inventories at June 30, 1999, is $5,750,000 of bulk Rituxan
inventory that is expected to be sold to Genentech.
Under the terms of separate agreements with Genentech, commercialization
of Rituxan outside the United States is the responsibility of Roche, except in
Japan, where Zenyaku Kogyo Co., Ltd. ("Zenyaku") will be responsible for
5
8
product development, marketing and sales. The Company will receive royalties on
sales outside the United States. Additionally, the Company will receive
royalties on sales of Genentech products manufactured using the Company's
proprietary gene expression system.
NOTE 3. NOTES PAYABLE
In February 1999, the Company raised approximately $112,792,000, net of
underwriting commissions and expenses of $3,766,000, through the private sale of
Notes. Upon maturity, the Notes will have an aggregate principal face value of
$345,000,000. The Notes were priced with a yield to maturity of 5.5 percent
annually. Each $1,000 aggregate principal face value Note is convertible at the
holders' option at any time through maturity into 6.734 shares of the Company's
common stock at an initial conversion price of $50.17. The Company is required
under the terms of the Notes, as of 35 business days after a change in control
occurring on or before February 16, 2004, to purchase any Note at the option of
its holder at a price equal to the issue price plus accrued original issue
discount to the date of purchase. Additionally, the holders of the Notes may
require the Company to purchase the Notes on February 16, 2004, 2009 or 2014 at
a price equal to the issue price plus the accrued original issue discount to the
date of purchase, with the Company having the option to repay the Notes plus the
accrued original issue discount in cash, the Company's common stock or a
combination thereof. The Company has the option to redeem the Notes any time on
or after February 16, 2004.
6
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
IDEC Pharmaceuticals Corporation is primarily engaged in the
commercialization, research and development of targeted therapies for the
treatment of cancer and autoimmune diseases. In November 1997, the Company
received approval from the U.S. Food and Drug Administration ("FDA") to market
its first product, Rituxan, in the United States, and in June 1998, Roche, the
Company's European marketing partner was granted marketing authorization for
Rituximab in all European Union countries. Rituxan is the trade name in the
United States for the compound Rituximab. Outside the United States, Rituximab
is marketed as MabThera (Rituximab, Rituxan and MabThera are collectively
referred to herein as Rituxan, except where otherwise indicated). Rituxan is
being copromoted in the United States under a joint business arrangement with
Genentech, with the Company receiving a share of the pretax copromotion profits.
Under the terms of separate agreements with Genentech, commercialization of
Rituxan outside the United States is the responsibility of Roche, except in
Japan where Zenyaku will be responsible for product development, marketing and
sales. The Company receives royalties on Rituxan sales outside the United
States.
Revenues for the Company include revenues from unconsolidated joint
business, contract revenues and license fees. Until the commercialization of
Rituxan, a substantial portion of the Company's revenues had been derived from
contract revenues and license fees. However, since the commercialization of
Rituxan in November 1997, the Company's revenues have depended primarily upon
the sale of Rituxan.
Revenues from unconsolidated joint business consist of the Company's
share of the pretax copromotion profits generated from its joint business
arrangement with Genentech, revenue from bulk Rituxan sales to Genentech and
reimbursement from Genentech of the Company's sales force and development
expenses. Revenues from unconsolidated joint business also include royalty
income on sales of Rituxan outside the United States. The Company records its
royalty income from Roche with a one-quarter lag. Under the joint business
arrangement, all U.S. sales of Rituxan and associated expenses will be
recognized by Genentech, with the Company recording its share of the pretax
copromotion profits on a quarterly basis, as defined in the Company's
collaborative agreement with Genentech. Pretax copromotion profits under the
joint business arrangement are derived by taking U.S. net sales of Rituxan to
third-party customers less cost of sales, third-party royalty expenses,
distribution, selling and marketing expenses and joint development expenses by
the Company and Genentech. The Company's profit-sharing formula with Genentech
has two tiers; the higher tier applies once a certain copromotion profit level
is met. The profit-sharing formula resets to the lower tier on an annual basis,
at the beginning of each year. During the second quarter, the Company began
recording its 1999 profit share at the higher tier.
Contract revenues include nonrefundable research and development funding
under collaborative agreements with the Company's various strategic partners and
other funding under contractual arrangements with other parties. Contract
research and development funding generally compensates the Company for
discovery, preclinical and clinical expenses related to the collaborative
development programs for certain products of the Company.
License fees include nonrefundable fees from product development
milestone payments, the sale of license rights to the Company's proprietary gene
expression technology and nonrefundable fees from the sale of product rights
under collaborative development and license agreements with the Company's
strategic partners.
Contract revenues and license fees may vary from period to period and
are in part dependent upon achievement of certain research and development
objectives or the consummation of new corporate alliances. The magnitude and
timing of contract revenues and license fees may influence the achievement and
level of profitability for the Company.
The Company anticipates that it will transfer all manufacturing
activities for bulk Rituxan to Genentech by the end of the third quarter of
1999. The cost of bulk Rituxan sold to Genentech is recorded as manufacturing
costs in the Company's condensed consolidated statements of operations. Under
the Company's agreement with Genentech, the sales price of bulk Rituxan sold to
Genentech is capped at a price that is currently less than the Company's cost to
manufacture bulk Rituxan. Following the transfer of all manufacturing activities
for bulk Rituxan to Genentech, the Company anticipates using its available
capacity for production of specification setting lots and commercial inventory
of ZEVALIN(TM) (formally known as IDEC-Y2B8), production of clinical material,
and some third-party contract manufacturing.
7
10
The Company has incurred increasing annual operating expenses and, with
the commercialization of Rituxan, the Company expects such trends to continue.
The Company had until 1998 incurred annual operating losses since its inception
in 1985 and the sustained profitability of the Company will be dependent upon
the continued commercial success of Rituxan, product development, revenues from
the achievement of product development objectives and licensing transactions. As
of June 30, 1999, the Company had an accumulated deficit of $53.2 million.
RESULTS OF OPERATIONS
Revenues from unconsolidated joint business for the three and six months
ended June 30, 1999 totaled $21.0 million and $40.3 million, respectively,
compared to $9.6 million and $18.8 million for the comparable periods in 1998.
Revenues from unconsolidated joint business for the three and six months ended
June 30, 1999 and 1998 reflect the financial results from the commercialization
of Rituxan through the Company's collaboration with Genentech. Included in these
revenues are the Company's share of pretax copromotion profits, bulk Rituxan
sales to Genentech, reimbursement from Genentech of the Company's Rituxan sales
force and development expenses and royalty income on sales of Rituxan outside
the United States. Under its agreement with Genentech, the Company's pretax
copromotion profit-sharing formula has two tiers. The higher tier applies once a
certain copromotion profit level is met and will reset to the lower tier on an
annual basis, at the beginning of each year. The Company began recording its
annual profits using the higher tier in the second quarter of 1999 and in the
third quarter of 1998.
Rituxan net sales to third-party customers in the United States recorded
by Genentech for the three and six months ended June 30, 1999 amounted to $68.3
million and $120.3 million, respectively, compared to $32.0 million and $67.2
million for the comparable periods in 1998. The Company believes that the growth
in sales is being driven, in part, by increased prescribing for the approved
indication and by the re-treatment of patients who responded to Rituxan therapy
and by increased use outside of the approved indication.
Contract revenues for the three and six months ended June 30, 1999
totaled $1.2 million and $2.5 million, respectively, compared to $4.5 million
and $7.1 million for the comparable periods in 1998. The decrease in contract
research revenues for the three and six months ended June 30, 1999 resulted
primarily from decreased funding under collaborative development agreements with
SmithKline Beecham p.l.c. ("SmithKline Beecham"), Seikagaku Corporation
("Seikagaku") and Eisai Co. Ltd. ("Eisai").
License fees for the three and six months ended June 30, 1999 totaled
$13.0 million compared to $10.0 million and $16.3 million for the comparable
periods in 1998. The increase in license fees for the three months ended June
30, 1999 is due to a $13.0 million upfront licensing fee from Schering AG
("Schering"), for commercialization of ZEVALIN outside the United States.
License fees for the three and six months ended June 1998 are primarily due to a
$10.0 million product development milestone payment from Genentech for European
approval of Rituxan. Contract revenues and license fees may vary from period to
period and are, in part, dependent upon achievement of certain research and
development objectives. The magnitude and timing of contract revenues and
license fees may influence the achievement and level of profitability for the
Company. The Company continues to pursue other collaborative and license
arrangements, however, no assurance can be given that any such arrangements will
be realized.
Manufacturing costs totaled $0.9 million and $4.9 million for the three
and six months ended June 30, 1999, respectively, compared to $2.9 million and
$6.9 million for the comparable periods in 1998. Manufacturing costs for 1999
and 1998 relate to production of bulk Rituxan sold to Genentech. Manufacturing
costs are recognized when Genentech accepts bulk Rituxan inventory. The decrease
in manufacturing costs for the three and six months ended June 30, 1999 is due
to the timing of bulk Rituxan sales to Genentech. The Company anticipates that
it will transfer all manufacturing activities for bulk Rituxan to Genentech by
the end of the third quarter of 1999. The Company expects to continue incurring
substantial manufacturing related costs and expenses as it anticipates using its
available capacity for production of specification setting lots and commercial
inventory of ZEVALIN, production of clinical material and some third-party
contract manufacturing.
Research and development expenses totaled $9.5 million and $17.4 million
for the three and six months ended June 30, 1999, respectively, compared to $7.1
million and $14.2 million for the comparable periods in 1998. The increase in
research and development expenses for the three and six months ended June 30,
1999 is primarily due to increased personnel expenses and clinical trial
expenses for the Company's products under development, offset in part by
decreased contract manufacturing and other outside service expenses.
8
11
The Company expects to continue incurring substantial additional research and
development expenses in the future, due to expansion or addition of research
and development programs; technology in-licensing and regulatory-related
expenses; preclinical and clinical testing of the Company's various products
under development; and production scale-up and manufacturing of products used
in clinical trials.
Selling, general and administrative expenses totaled $4.9 million and
$9.3 million for the three and six months ended June 30, 1999, respectively,
compared to $4.5 million and $8.4 million for the comparable periods in 1998.
Selling, general and administrative expenses increased in 1999 due to increased
sales and marketing expenses resulting from the commercialization of Rituxan.
Selling, general and administrative expenses necessary to support sales and
administration, expanded manufacturing capacity, expanded clinical trials,
research and development and the potential expansion of the sales and marketing
organization are expected to increase in the foreseeable future.
The Company's income tax provision totaled $1.0 million and $1.2 million
for the three and six months ended June 30, 1999, respectively, and was the
result of an alternative minimum tax system that only allows the utilization of
net operating loss carryforwards to offset 90% of taxable income. At December
31, 1998, the Company had a valuation allowance equal to its deferred tax assets
of $47.6 million since the Company had not established a pattern of profitable
operations for tax purposes. Should the Company continue to have profitable
operations for tax purposes, the Company believes that its deferred tax assets
(comprised primarily of net operating loss carryforwards and research and
experimentation credits) may become recoverable, and therefore, the Company
anticipates that it would record tax benefits relating to its deferred tax
assets in the fourth quarter of 1999. The Company's net operating loss
carryforwards available to offset future taxable income at December 31, 1998
were approximately $72.0 million for federal income tax purposes and begin to
expire in 1999. The future utilization of net operating loss carryforwards may
be limited under the Internal Revenue Code (the "IRC") due to IRC defined
ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital expenditures since
inception principally through the sale of equity securities, commercialization
of Rituxan, license fees, contract revenues, lease financing transactions and
debt and interest income. The Company expects to finance its current and planned
operating requirements principally through cash on hand, funds from its joint
business arrangement with Genentech and with funds from existing collaborative
agreements and contracts which the Company believes will be sufficient to meet
its near-term operating requirements. Existing collaborative research agreements
and contracts, however, could be canceled by the contracting parties. In
addition, the Company may, from time to time, seek additional funding through a
combination of new collaborative agreements, strategic alliances and additional
equity and debt financings or from other sources. There can be no assurance that
such additional funds will be obtained through these sources on acceptable
terms, if 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 joint business
arrangement, will be sufficient to finance the Company's currently anticipated
needs for operating and capital expenditures for the foreseeable future. If
adequate funds are not available from the joint business arrangement, operations
or additional sources of financing, the Company's business could be materially
and adversely affected.
The Company's working capital and capital requirements will depend upon
numerous factors, including: the continued commercial success of Rituxan;
progress of the Company's preclinical and clinical testing; fluctuating or
increasing manufacturing requirements and research and development programs;
timing and expense of obtaining regulatory approvals; levels of resources that
the Company devotes to the development of manufacturing, sales 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 June 30, 1999, the Company had $213.2 million in cash, cash
equivalents and securities available-for-sale compared to $73.5 million at
December 31, 1998. Sources of cash, cash equivalents and securities
available-for-sale during the six months ended June 30, 1999, include $112.8
million from the Notes offering discussed below, $24.3
9
12
million from operations and $5.9 million from the issuance of common stock
issued under employee stock option and purchase plans. Uses of cash, cash
equivalents and securities available-for-sale during the six months ended June
30, 1999, included $1.5 million used to purchase capital equipment and $1.1
million used to pay notes payable.
In February 1999, the Company raised approximately $112.8 million, net
of underwriting commissions and expenses of $3.8 million, through the private
sale of the Notes. The Notes were priced with a yield to maturity of 5.5 percent
annually. Upon maturity, the Notes will have an aggregate principal face value
of $345.0 million. Each $1,000 aggregate principal face value Note is
convertible at the holders' option at any time through maturity into 6.734
shares of the Company's common stock at an initial conversion price of $50.17.
The Company is required under the terms of the Notes, as of 35 business days
after a change in control occurring on or before February 16, 2004, to purchase
any Note at the option of its holder at a price equal to the issue price plus
accrued original issue discount to the date of purchase. Additionally, the
holders of the Notes may require the Company to purchase the Notes on February
16, 2004, 2009 or 2014 at a price equal to the issue price plus accrued original
issue discount to the date of purchase with the Company having the option to
repay the Notes plus accrued original issue discount in cash, the Company's
common stock or a combination thereof. The Company has the right to redeem the
Notes on or after February 16, 2004.
In September 1997, the Company and Cytokine Pharmasciences, Inc.,
formally known as Cytokine Networks, Inc., ("CPI") entered into a development
and license agreement. Under the terms of the development and license agreement
with CPI, the Company may make payments to CPI totaling up to $10.5 million,
subject to attainment of certain product development milestone events, of which
$3.0 million has been paid through June 30, 1999. In August 1999, the Company
announced it terminated its development of 9-aminocamptothecin ("9-AC"),
following a Phase II clinical trial. The Company concluded that 9-AC would not
yield the desired benefits to solid-tumor cancer patients. The Company acquired
9-AC from Pharmacia & Upjohn S.p.A. ("Pharmacia & Upjohn") and would have paid
$6.0 million to Pharmacia and Upjohn had it taken 9-AC into a Phase III clinical
trial and $7.0 million if 9-AC had been approved by the FDA.
YEAR 2000 COMPLIANCE
Many computer systems and software products were designed to accept and
track only two digit year entries in the date field (i.e. "99" for 1999). This
causes an ambiguity when handling dates in and after the year 2000. Some systems
also used specific dates (such as 9/9/99) to indicate special issues such as
deleted data. Some programs also miscalculate the leap year 2000. As a result,
computer systems and/or software used by many companies may need to be upgraded
to properly address such "Year 2000" issues.
The Company has an ongoing Year 2000 Program and has appointed a Year
2000 Program Manager and a Year 2000 Task Force. The Company has completed an
initial inventory and review of all system hardware, operating systems
(including manufacturing and laboratory control systems) and application
software in order to identify potential Year 2000 problems and has begun
implementing planned upgrades and testing in many systems. The Company believes
that it has corrected over 90% of identified noncompliant items. The Company
does not know the precise financial impact of making required system and
software modifications, but the Company currently expects such costs will not
exceed $2.0 million including costs already incurred. The actual financial cost
of correcting Year 2000 problems could, however, exceed this estimate. The
Company's plan also includes sending inquiries to major third party suppliers
and partners seeking assurance that they are Year 2000 compliant. The Company's
business, financial condition and results of operations could be materially
adversely affected if third party suppliers, manufacturers, service providers
and other entities do not adequately address their Year 2000 Issues or if the
Company fails to successfully complete its initiatives.
The Company is currently relying upon Genentech to provide for all Year
2000-related reviews, upgrades and contingency plans relating to the
manufacture, distribution and sale of Rituxan; however, the Company has not
received such contingency plan from Genentech. Genentech initiated contingency
planning in March 1999, and these plans are scheduled for completion in
September 1999. Any failure by Genentech to address issues which could result in
their inability to timely produce, distribute and sell Rituxan would have a
material adverse impact the Company's business.
The Company has begun to put into place contingency plans to deal with
non-Rituxan related failures resulting from Year 2000 issues. The Company
expects to complete its contingency plans during the third quarter of 1999.
10
13
RISK FACTORS
This Form 10-Q contains forward-looking statements that involve a number
of risks and uncertainties. You should be aware that such statements are
projections or estimates as to future events, which may or may not occur. When
used in this Form 10-Q, the terms "we", "our", and "us" refer to the Company.
In addition to the other information in this Form 10-Q, you should
carefully consider the following risk factors. If any of these risks actually
occur, our business, financial condition and results of operations could be
materially adversely affected. The risks and uncertainties described below are
not the only ones facing our company, and additional risks and uncertainties may
also impair our business operations.
OUR REVENUES RELY SIGNIFICANTLY ON RITUXAN SALES
Our revenues currently depend largely upon continued U.S. sales of a
single commercialized product, Rituxan. We cannot be certain that Rituxan will
continue to be accepted in the United States or in any foreign markets. A number
of factors may affect the rate and level of market acceptance of Rituxan,
including:
o the perception by physicians and other members of the health
care community of its safety and efficacy or that of competing
products, if any;
o the effectiveness of our and Genentech's sales and marketing
efforts in the United States and the effectiveness of Roche's
sales and marketing efforts in Europe;
o unfavorable publicity concerning Rituxan or comparable drugs;
o its price relative to other drugs or competing treatments;
o the availability of third party reimbursement; and
o regulatory developments related to the manufacture or continued
use of Rituxan.
We incurred annual operating losses from our inception in 1985 through
fiscal 1997. Given our current reliance upon Rituxan as the principal source of
our revenue, any material adverse developments with respect to the
commercialization of Rituxan may cause us to incur losses in the future.
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our quarterly revenues, expenses and operating results have fluctuated
in the past and are likely to fluctuate significantly in the future. Fluctuation
may result from a variety of factors, including:
o our achievement of product development objectives and
milestones;
o demand and pricing for our commercialized product Rituxan;
o our ability to utilize excess manufacturing capacity by
obtaining contract manufacturing relationships;
o timing and nature of contract manufacturing and contract
research and development payments and receipts;
o hospital and pharmacy buying decisions;
o clinical trial enrollment and expenses;
o physician acceptance of our products;
o government or private healthcare reimbursement policies;
o our manufacturing performance and capacity and that of our
partners;
o the amount and timing of sales of Rituxan by Genentech to
customers in the United States and by Roche to customers in
Europe;
o rate and success of product approvals;
o collaboration obligations and copromotion payments we make or
receive;
o foreign currency exchange rates; and
o overall economic conditions.
11
14
Our operating results during any one quarter do not necessarily suggest
those of future quarters. These results fluctuate periodically because our
revenues are driven by certain events such as achievement of product development
milestone events and the applicable profit sharing allocation between us and
Genentech, based upon our copromotion arrangement.
VOLATILITY OF OUR STOCK PRICE
The market prices for our common stock and for securities of other
companies engaged primarily in biotechnology and pharmaceutical development,
manufacture and distribution are highly volatile. For example, the market price
of our common stock fluctuated between $17 1/4 per share and $103 3/16 per share
during the twelve months ended July 31, 1999. The market price of our common
stock will likely continue to fluctuate due to a variety of factors, including:
o material public announcements;
o the announcement and timing of new product introductions by us
or others;
o technical innovations or product development by us or our
competitors;
o regulatory approvals or regulatory issues;
o developments relating to patents, proprietary rights and orphan
drug status;
o actual or potential clinical results with respect to our
products under development or those of our competitors;
o political developments or proposed legislation in the
pharmaceutical or healthcare industry;
o hedge and/or arbitrage activities by holders of our Notes;
o period to period fluctuations in our financial results; and
o market trends relating to or affecting stock prices throughout
our industry, whether or not related to results or news
regarding us or our competitors.
WE FACE UNCERTAIN RESULTS OF CLINICAL TRIALS OF OUR POTENTIAL PRODUCTS
Our future success depends in large part upon the results of clinical
trials designed to assess the safety and efficacy of our potential products. The
completion rate of these clinical trials depends significantly upon the rate of
patient enrollment. Factors that affect patient enrollment include:
o size of patient population for the targeted disease;
o eligibility criteria;
o proximity of eligible patients to clinical sites;
o clinical trial protocols; and
o the existence of competing protocols (including competitive
financial incentives for patients and clinicians) and existing
approved drugs (including Rituxan).
Our inability to enroll patients on a timely basis could result in
increased expenses and product development delays, which could have a material
adverse effect on our business, results of operations and financial condition.
Even if a trial is fully enrolled, significant uncertainties remain as to
whether it will prove successful. For example, we recently terminated our
development of 9-AC following a Phase II clinical trial. We concluded that 9-AC
would not yield the desired benefit to solid-tumor cancer patients. In addition,
IDEC-151 was first clinically tested in Phase I and Phase I/II clinical trials
for rheumatoid arthritis in collaboration with our partner, SmithKline Beecham.
In February 1999, we announced that SmithKline Beecham was discontinuing
development efforts for IDEC-151 in rheumatoid arthritis. The Company and
SmithKline Beecham are currently re-evaluating the clinical strategies for
IDEC-151, including responsibility for development and whether or not to pursue
studies in psoriasis, rheumatoid arthritis and/or other potential indications.
The FDA regulates clinical trials. Failure to comply with extensive FDA
regulations may result in delay, suspension or cancellation of a trial and/or
the FDA's refusal to accept test results. The FDA may also suspend our clinical
trials at any time if it concludes that the participants are being exposed to
unacceptable risks. Consequently, we cannot ensure that Phase I, Phase II or
Phase III testing will be completed timely or successfully, if at all, with
respect to any of our potential products. Furthermore, we cannot be certain that
patients enrolled in our clinical trials will respond to our product candidates,
that any product candidate will be safe and effective or that data derived from
12
15
the trials will be suitable for submission to the FDA or satisfactorily support
a biologics licensing application ("BLA") or a new drug application ("NDA").
WE MAY BE UNABLE TO DEVELOP AND COMMERCIALIZE NEW PRODUCTS
Our future results of operations will depend to a large extent upon our
ability to successfully commercialize new products in a timely manner. As a
result, we must continue to develop, test and manufacture new products and then
must meet regulatory standards and obtain regulatory approvals. Our products
currently in development may not receive the regulatory approvals necessary for
marketing in a timely manner, if at all. Additionally, the development and
commercialization process is time-consuming and costly, and we cannot be certain
that any of our products, if and when developed and approved, will be
successfully commercialized. Delays or unanticipated costs in any part of the
process, our inability to obtain regulatory approval for our products or to
maintain manufacturing facilities in compliance with all applicable regulatory
requirements could adversely affect our results of operations.
WE RELY HEAVILY ON CONTRACT MANUFACTURERS
We rely heavily upon third party manufacturers to manufacture
significant portions of our products and product candidates. Our own
manufacturing capacity is limited and we are capable of producing only a limited
quantity of bulk Rituxan and other product candidates. Our manufacturing
experience to date has been limited to the production of preclinical and
clinical quantities of product candidates and to approximately three years of
commercial production of bulk Rituxan. We have no fill/finish experience or
capacity and we do not have experience in the field of chelates or radioisotopes
and therefore, we rely entirely upon third parties for the manufacture of these
products and components. Consequently, we cannot ensure that either our
manufacturing facilities or our ability to sustain ongoing production of our
products will be able to meet our expectations. Nor can we be certain that we
will be able to enter into satisfactory agreements with third party
manufacturers. Our failure to enter into agreements with such manufacturers on
reasonable terms, if at all, or poor manufacturing performance on our part or
that of our third party manufacturers could have a material and adverse effect
on our business, financial condition and results of operations.
We anticipate that we will transfer all manufacturing of bulk Rituxan to
Genentech by the end of the third quarter of 1999. We currently manufacture bulk
Rituxan at a cost in excess of a fixed price, thereby decreasing our margins on
revenue received under our arrangement with Genentech, and we expect this
condition to continue until such time as we transfer all of the manufacturing of
bulk Rituxan to Genentech. We rely upon Genentech to provide a majority of
Rituxan manufacturing in order to meet worldwide requirements and to complete
all fill/finish requirements and we will rely on Genentech for all Rituxan
manufacturing after the transfer is completed. We cannot ensure that Genentech
will manufacture and fill/finish Rituxan in sufficient quantities and on a
timely and cost-effective basis or that Genentech will obtain and maintain all
required manufacturing approvals. Genentech's failure to manufacture and
fill/finish Rituxan or obtain and maintain required manufacturing approvals
could materially and adversely affect our business, results of operations and
financial condition.
We also may rely upon SmithKline Beecham to fulfill all our
manufacturing requirements for IDEC-151. ZEVALIN has multiple components that
require successful coordination among several third party contract
manufacturers. We are currently negotiating with commercial contractors to meet
our long-term manufacturing demands for fill/finish of ZEVALIN bulk product. We
cannot be certain that we will reach agreement on reasonable terms, if at all,
with our contract manufacturers or that the integration of our contract
manufacturers can be successfully coordinated.
Upon the completion in 1999 of our obligation to manufacture bulk
Rituxan, we will undertake conversion of our manufacturing facility to a
multi-product facility, where we will initially manufacture ZEVALIN and
anti-gp39 antibodies. We cannot be certain that this conversion will be
successful, that it will receive all necessary regulatory approvals, or that,
even if it is successful and such approvals are received, it will be completed
within our budgeted time and expense estimations. Our failure to successfully
convert the manufacturing facility in a timely manner could have an adverse
effect on our product development efforts and our ability to timely file our
product license
13
16
applications and could cause us to incur significant unabsorbed overhead costs.
To the extent we cannot produce our own biologics, we will need to rely on third
party manufacturers, of which there are only a limited number capable of
manufacturing biologics as contract suppliers. We cannot be certain that we
could reach agreement on reasonable terms, if at all, with those manufacturers.
WE RELY HEAVILY ON CERTAIN SUPPLIERS
Some materials used in our products and potential products, including
Rituxan and ZEVALIN, are currently available only from sole or limited number of
suppliers. In addition, the suppliers of some materials for our products must be
approved by the FDA and/or by other governmental agencies. Although we have
initiated a program for identifying alternative suppliers for certain materials,
any interruption or delay in our supply of materials or delays in the applicable
governmental approval of new suppliers or any loss of a sole source supplier
could have a material adverse effect on our business, financial condition and
results of operations.
OUR INDUSTRY IS INTENSELY COMPETITIVE
The biotechnology industry is intensely competitive. We compete with
biotechnology and pharmaceutical companies that have been established longer
than we have, have a greater number of products on the market, have greater
financial and other resources and have other technological or competitive
advantages. We also compete in the development of technologies and processes and
in acquiring personnel and technology from academic institutions, government
agencies, and other private and public research organizations. Consequently, we
cannot be certain that we will be able to produce or acquire rights to new
products with commercial potential. In addition, we cannot be certain that one
or more of our competitors will not receive patent protection that dominates,
blocks or adversely affects our product development or business; will benefit
from significantly greater sales and marketing capabilities; or will not develop
products that are accepted more widely than ours. We are aware that a competitor
recently filed a BLA for a radiolabeled murine antibody product for the
treatment of low-grade non-Hodgkin's lymphomas. We are also aware of other
potentially competitive biologic therapies for non-Hodgkin's lymphomas in
development.
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE
We have limited experience with commercial sales and marketing, based
entirely upon our launch and subsequent sales of Rituxan. Outside the United
States, our strategy is to pursue and to rely solely upon collaborations with
established pharmaceutical companies for marketing, distribution and sale of our
products. We currently have no plans to directly market outside the United
States. Since we currently rely upon copromotion partners in the United States
and rely exclusively on third parties outside the United States, we cannot be
certain that our products will be marketed and distributed in accordance with
our expectations or that our market research or sales forecasts will be
accurate. We also cannot be certain that we will ever be able to develop our own
sales and marketing capabilities to an extent that we would not need to rely on
third party efforts, or that we will be able to maintain satisfactory
arrangements with the third parties on whom we rely.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS OR SECURE RIGHTS TO THIRD PARTY PATENTS
Our ability and the abilities of our partners to obtain and maintain
patent and other protection for our products will affect their success. We are
assigned or have rights to or have exclusive access to a number of U.S. and
foreign patents, patents pending and patent applications. However, we cannot be
certain that such patent applications will be approved, or that any of our
patent rights will be upheld in a court of law if challenged. We also cannot be
certain that our patent rights will provide competitive advantages for our
products or will not be challenged, infringed upon or circumvented by our
competitors.
Because of the large number of patent filings in the biopharmaceutical
field, our competitors may have filed applications or been issued patents and
may obtain additional patents and proprietary rights relating to products or
processes competitive with or similar to ours. We cannot be certain that U.S. or
foreign patents do not exist or will
14
17
not issue that would materially and adversely affect our ability to
commercialize our products and product candidates.
In addition to patents, we rely on trade secrets and proprietary
know-how that we seek to protect, in part, through confidentiality agreements
with our partners, employees and consultants. It is possible that such parties
will breach our agreements or that courts may not enforce the agreements,
leaving us without adequate remedies. We also cannot be certain that our trade
secrets will not become known or be independently developed or patented by our
competitors.
We are aware that an opposition has been recently filed in the European
patent office to a granted European application that has been licensed to us,
which application contains claims relating to the use of anti-gp39 antibodies as
a therapeutic. Also, we are aware of an opposition that was recently filed to a
granted European patent application which names us as the applicant and which
relates to PROVAX and therapeutic use thereof. If either or both of the
oppositions is successful, in whole or in part, it could result in the scope of
some or all of the granted claims being limited, some or all of the granted
claims being lost, and/or the granted patent application(s) not proceeding to a
patent.
We are aware of several third party patents and patent applications (to
the extent they issue as patents) that, if successfully asserted against us, may
materially affect our ability to make, use, offer to sell, sell and import our
products. These third party patents and, patent applications may include,
without limitation:
o U.S. patent and patent applications and foreign counterparts
filed by Bristol-Myers Company that relate to antibodies to a B7
antigen;
o a U.S. patent assigned to Columbia University, which we
believe has been exclusively licensed to Biogen, related to
monoclonal antibodies to the 5C8 antigen found on T cells. We
believe the 5C8 antigen and gp39, the target for our anti-gp39
antibodies and our collaboration with Eisai, are the same
protein expressed on the surface of T cells;
o a number of issued U.S. and foreign patents that relate to
various aspects of radioimmunotherapy of cancer and to methods
of treating patients with anti-CD4 antibodies; and
o three U.S. patents and foreign counterparts, assigned to
Burroughs Wellcome, relating to therapeutic uses of CHO
glycosylated antibodies.
The owners, or licensees of the owners, of these patents and patent
applications (to the extent they issue as patents) may assert that one or more
of our products infringe one or more claims of such patents. Such owners or
licensees of foreign counterparts to these patents and any other foreign patents
may assert that one or more of our products infringe one or more claims of such
patents. Specifically, if legal action is commenced against us or our partners
to enforce any of these patents and patent applications (to the extent they
issue as patents) and the plaintiff in such action prevails, we could be
prevented from practicing the subject matter claimed in such patents or patent
applications.
We are aware that on May 28, 1999, Glaxo Wellcome, Inc. filed a patent
infringement lawsuit against Genentech in the U.S. District Court in Delaware.
According to Genentech's Form 10-Q for the quarter ended June 30, 1999, that
suit asserts that Genentech infringes four U.S. patents owned by Glaxo Wellcome.
Two of the patents relate to the use of specific kinds of monoclonal antibodies
for the treatment of human disease, including cancer. The other two patents
asserted against Genentech relate to preparations of specific kinds of
monoclonal antibodies which are made more stable and the methods by which such
preparations are made. Genentech believes that the suit relates to the
manufacture, use and sales of their Herceptin product and Rixutan. Based upon
the nature of the claims made and the information available to Genentech,
Genentech believes that the outcome of these actions is not likely to have a
material adverse effect on their financial position, results of operations or
cash flow, but that if an unfavorable ruling were to occur in any quarterly
period, there exists the possibility of a material impact on Genentech's net
income of that period. If the suit relates to the manufacture, use and sale of
Rixutan, and depending on the suit's outcome, it could have a material adverse
effect on our business, financial condition and results of operations.
If our intellectual property rights are challenged, we may be required
or may desire to obtain licenses to patents and other intellectual property held
by third parties to develop, manufacture and market our products. However, we
cannot be certain that we will be able to obtain these licenses on commercially
reasonable terms, if at all, or that any licensed patents or intellectual
property will be valid or enforceable. In addition, the scope of intellectual
property protection is subject to scrutiny and change by courts and other
governmental bodies. Litigation and other proceedings concerning patents and
proprietary technologies can be protracted, expensive and distracting to
management and companies may sue competitors as a way of delaying the
introduction of competitors' products. Any litigation, including any
interference proceeding to determine priority of inventions, oppositions to
patents in foreign countries or litigation against our partners, may be costly
and time-consuming and could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY BE UNABLE TO MAINTAIN THIRD PARTY RESEARCH AND DEVELOPMENT RELATIONSHIPS
Funding of research and development efforts depends largely upon various
arrangements with strategic partners and others who provide us with funding and
who perform research and development with respect to our products. Such
strategic partners may generally terminate their arrangement with us at any
time. These parties may develop
15
18
products that compete with ours, and we cannot be certain that they will perform
their contractual obligations or that any revenues will be derived from such
arrangements. If one or more of our strategic partners fail to achieve certain
product development objectives, such failure could have a material adverse
effect on our ability to fund related programs and develop products.
FAILURE TO OBTAIN PRODUCT APPROVALS OR COMPLY WITH GOVERNMENT REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS
As pharmaceutical manufacturers, our partners and we are subject to
extensive, complex, costly and evolving governmental rules, regulations and
restrictions administered by the FDA, by other federal and state agencies, and
by governmental authorities in other countries. In the United States, our
products cannot be marketed until after they are approved by the FDA. Obtaining
an FDA approval involves the submission, among other information, of the results
of preclinical and clinical studies on the product, and requires substantial
time, effort and financial resources. Rituxan is our only product that has
received FDA approval, and we cannot be certain that any of our product
candidates will be approved either in the United States or in other countries in
a timely fashion, if at all. Both before and after approval, we are subject to
numerous other FDA requirements, and to government inspection at all times. Our
failure to meet or comply with any rules, regulations or restrictions of the FDA
or other agencies could result in fines, unanticipated expenditures, product
delays, non-approval or recall, interruption of production and even criminal
prosecution. Although we have instituted internal compliance programs, we cannot
be certain that such programs will meet regulatory agency standards or that any
lack of compliance will not have a material adverse effect on our business,
financial condition or results of operations.
OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY CLAIMS
Our design, development and manufacture of products involves an inherent
risk of exposure to product liability claims and related adverse publicity.
Insurance coverage is expensive and difficult to obtain, and we may be unable to
obtain coverage in the future on acceptable terms, if at all. Although we
currently maintain product liability insurance for our products in the amounts
we believe to be commercially reasonable, we cannot be certain that the coverage
limits of our insurance policies or those of our strategic partners will be
adequate. If we are unable to obtain sufficient insurance at an acceptable cost
or if a claim is brought against us, whether fully covered by insurance or not,
our business, results of operations and financial condition could be materially
adversely affected.
FAILURE TO ADEQUATELY ADDRESS THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR
BUSINESS
We have assessed and continue to assess the potential impact of the
situation commonly referred to as the Year 2000 Issue. The Year 2000 Issue
concerns the inability of many information systems and computer software
products to properly recognize and process date sensitive information. As a
result information systems and computer software used by many companies may need
to be modified and upgraded.
We have an ongoing Year 2000 Program and have appointed a Year 2000
Program Manager and a Year 2000 Task Force. We have completed an initial
inventory and review of all system hardware, operating systems (including
manufacturing and laboratory control systems) and application software in order
to identify potential Year 2000 problems and we have begun implementing planned
upgrades and testing in many systems. We believe that we have corrected over 90%
of identified noncompliant items. We do not know the precise financial impact of
making the required system and software modifications, but we currently expect
such costs will not exceed $2.0 million including costs already incurred. The
actual financial cost of correcting Year 2000 problems could, however, exceed
this estimate. Our plan also includes sending inquiries to our major third
party suppliers and partners seeking assurance that they are Year 2000
compliant. Our business, financial condition and results of operations could
be materially adversely affected if third party suppliers, manufacturers,
service providers and other entities do not adequately address their Year 2000
Issues or if we fail to successfully complete our initiatives.
We are currently relying upon Genentech to provide for all Year
2000-related reviews, upgrades and contingency plans relating to the
manufacture, distribution and sale of Rituxan; however, we have not received
such contingency plan from Genentech. Genentech initiated contingency planning
in March 1999, and these plans are scheduled for completion in September 1999.
Any failure by Genentech to address
16
19
issues which could result in their inability to timely produce, distribute and
sell Rituxan would have a material adverse impact on our business.
We have begun to put into place contingency plans to deal with
non-Rituxan related failures resulting from Year 2000 issues. We expect to
complete our contingency plans during the third quarter of 1999.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL OR TO REPURCHASE THE ZERO COUPON
SUBORDINATED CONVERTIBLE NOTES
We expend and will likely continue to expend substantial funds to
complete the research, development, manufacturing and marketing of our potential
future products. Consequently, we may seek to raise capital through
collaborative arrangements, strategic alliances, and/or equity and debt
financings or from other sources. We may be unable to raise additional capital
on commercially acceptable terms, if at all, and if we raise capital through
equity financing then existing stockholders may have their ownership interests
diluted. If we are unable to generate adequate funds from operations or from
additional sources, then our business, results of operations and financial
condition may be materially and adversely affected.
If we undergo certain events constituting a change of control prior to
February 16, 2004, we will be obligated to repurchase all outstanding Notes at
the option of the holder. However, it is possible that we will not have
sufficient funds at that time, will not be able to raise sufficient funds, or
that restrictions in our indebtedness will not allow such repurchases. In
addition, certain major corporate events that would increase our indebtedness,
such as leveraged recapitalizations, would not constitute a change of control
under the Indenture entered into in connection with the offering of the Notes.
FUTURE TRANSACTIONS MAY ADVERSELY AFFECT OUR BUSINESS OR THE MARKET PRICE OF
SECURITIES
We regularly review potential transactions related to technologies,
products or product rights and businesses complementary to our business. Such
transactions could include mergers, acquisitions, strategic alliances,
off-balance sheet financings, licensing agreements or copromotion agreements. We
may choose to enter into one or more of such transactions at any time, which may
cause substantial fluctuations to the market price of securities that we have
issued. Moreover, depending upon the nature of any transaction, we may
experience a charge to earnings, which could also have a material adverse impact
upon the market price of securities that we have issued.
WE RELY UPON CERTAIN KEY PERSONNEL
Our success will depend, to a great extent, upon the experience,
abilities and continued services of our executive officers and key scientific
personnel. We do not carry key-man life insurance on any of our officers or
personnel. If we lose the services of any of these officers or key scientific
personnel, we could suffer a material adverse effect on our business, financial
condition and results of operations. Our success also will depend upon our
ability to attract and retain other highly qualified scientific, managerial,
sales and manufacturing personnel and our ability to develop and maintain
relationships with qualified clinical researchers. Competition for such
personnel and relationships is intense and we compete with numerous
pharmaceutical and biotechnology companies as well as with universities and
non-profit research organizations. We cannot be certain that we will be able to
continue to attract and retain qualified personnel or develop and maintain
relationships with clinical researchers.
WE ARE SUBJECT TO UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
Our ability to commercialize products depends in part on the extent to
which patients are reimbursed by governmental agencies, private health insurers
and other organizations, such as health maintenance organizations, for the cost
of such products and related treatments. Our business, results of operations and
financial condition could be materially adversely affected if health care payers
and providers implement cost-containment measures and governmental agencies
implement healthcare reform.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS
Our business and the business of several of our strategic partners,
including Genentech, involves the controlled use of hazardous materials,
chemicals, biologics and radioactive compounds. Biologics manufacture is
extremely
17
20
susceptible to product loss due to microbial or viral contamination, material
equipment failure, or vendor or operator error. Although we believe that our
safety procedures for handling and disposing of such materials complies with
state and federal standards, there will always be the risk of accidental
contamination or injury. In addition, certain microbial or viral contamination
may cause the closure of the respective manufacturing facility for an extended
period of time. By law, radioactive materials may only be disposed of at state
approved facilities. We currently store our radioactive materials on-site
because the approval of a disposal site in California for all California-based
companies has been delayed indefinitely. If and when a disposal site is
approved, we may incur substantial costs related to the disposal of such
material. If liable for an accident, or if we suffer an extended facility
shutdown, we could incur significant costs, damages and penalties that could
have a material adverse effect on our business, financial condition and results
of operations.
THE ZERO COUPON SUBORDINATED CONVERTIBLE NOTES LEVERAGED US CONSIDERABLY
As a result of issuing the Notes in February 1999, we raised
approximately $112.8 million, net of underwriting commissions and expenses of
$3.8 million by incurring indebtedness of $345.0 million at maturity. As a
result of this indebtedness, our principal and interest obligations increased
substantially. The degree to which we are leveraged could materially adversely
affect our ability to obtain future financing and could make us more vulnerable
to industry downturns and competitive pressures. Our ability to meet our debt
obligations will be dependent upon our future performance, which will be
subject to financial, business and other factors affecting our operations, many
of which are beyond our control. The holders of the Notes may require us to
purchase the Notes on February 16, 2004, 2009, 2014 at a price equal to the
issue price plus accrued original issue discount to the date of purchase. We
have the option to repay the Notes plus accrued original issue discount in cash,
our common stock or a combination thereof. We have the right to redeem the Notes
on or after February 16, 2004.
In addition, in the event of our insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up or upon our default in payment with
respect to any indebtedness or an event of default with respect to such
indebtedness resulting in the acceleration thereof, our assets will be available
to pay the amounts due on the Notes only after all our senior indebtedness has
been paid in full. Moreover, holders of common stock would only receive the
assets remaining after payment of all indebtedness and preferred stock, if any.
WE HAVE ADOPTED SEVERAL ANTITAKEOVER MEASURES AND THE ZERO COUPON SUBORDINATED
CONVERTIBLE NOTES MAY HAVE FURTHER ANTITAKEOVER EFFECT
We have taken a number of actions that could have the effect of
discouraging a takeover attempt that might be beneficial to stockholders who
wish to receive a premium for their shares from a potential bidder. For example,
we reincorporated into Delaware, which subjects us to Section 203 of the
Delaware General Corporation Law, providing that the Company may not enter into
a "business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in the manner
prescribed in the code section. In addition, we have adopted a Stockholder
Rights Plan that would cause substantial dilution to a person who attempts to
acquire our company on terms not approved by our Board of Directors. In
addition, our Board of Directors has the authority to issue, without vote or
action of stockholders, up to 8,000,000 shares of preferred stock and to fix the
price, rights, preferences and privileges of those shares. Any such preferred
stock could contain dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences or other rights superior
to the rights of holders of common stock. The Board of Directors has no present
intention of issuing any additional shares of preferred stock (227,514 shares
of non-voting convertible preferred stock were outstanding as of June 30, 1999)
, but reserves the right to do so in the future. In addition, our copromotion
arrangement with Genentech provides Genentech with the option to buy the rights
to Rituxan in the event that we undergo a change of control, which may limit
our attractiveness to potential acquirors.
We are required by the terms of the Notes, as of 35 business days after
a change in control occurring on or before February 16, 2004, to purchase any
Note at the option of its holder and at a price equal to the issue price plus
accrued original issue discount to the date of repurchase. This feature of the
Notes may have an antitakeover effect.
18
21
WE HAVE NOT PAID AND DO NOT PLAN TO PAY DIVIDENDS
We have never declared or paid cash dividends on our common stock. We
currently plan to retain any earnings for use in our business and therefore do
not anticipate paying any dividends in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to a variety of risks, including changes in
interest rates affecting the return on its investments and the cost of its debt.
At June 30, 1999 there have not been any material changes in market risk as
reported by the Company in its Annual Report on Form 10-K for the year ended
December 31, 1998 except as to the market risk associated with the Notes issued
in February 1999.
Due to the fixed rate nature of the Notes, an immediate 10% change in
interest rates would not have a material impact on the Company's financial
condition or the results of its operations.
Underlying market risk exists related to an increase in the Company's
stock price or an increase in interest rates which may make conversion of the
Notes to common stock beneficial to the Notes holder. Conversion of the Notes
would have a dilutive effect on the Company's earnings per share and book value
per common share.
19
22
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 A VOTE OF SECURITY HOLDERS.
On May 20, 1999, the Company held its Annual Meeting of
Stockholders at which the stockholders approved all of the proposals
listed below:
(1) The election of William H. Rastetter, Ph.D., Charles C. Edwards,
M.D., and The Honorable Lynn Schenk to the Board of Directors to
serve for a three-year term ending in the year 2002, or until
their successors shall have been duly elected or appointed or
until their earlier death, resignation or removal.
(2) The amendment to the Company's 1988 Stock Option Plan to
increase the total number of common shares authorized for
issuance thereunder from 6,335,000 shares to a total of
7,135,000 shares.
(3) The amendment to the Company's 1995 Employee Stock Purchase Plan
to increase the total number of common shares authorized for
issuance thereunder from 495,000 shares to a total of 695,000
shares.
(4) The selection of KPMG LLP as the Company's independent public
accountants for the fiscal year ending December 31, 1999.
The following directors received the number of votes set
opposite their respective names:
For Election Withheld
------------ --------
William H. Rastetter, Ph.D. 18,416,461 179,013
Charles C. Edwards, M.D. 18,423,730 171,744
The Honorable Lynn Schenk 18,414,574 180,900
The proposal to amend the 1988 Stock Option Plan received
11,694,771 affirmative votes (for the amendment), 6,848,143 negative
votes (against the amendment) and 52,560 votes abstained. The proposal
did not receive any broker nonvotes.
The proposal to amend the 1995 Employee Stock Purchase Plan
received 16,903,120 affirmative votes (for the amendment), 1,642,778
negative votes (against the amendment) and 49,576 votes abstained. This
proposal did not receive any broker nonvotes.
The proposal to select KPMG LLP as the Company's independent
public accountants received 18,542,584 affirmative votes (for the
selection), 27,390 negative votes (against the selection), and 25,500
votes abstained. This proposal did not receive any broker nonvotes.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
20
23
The following exhibits are referenced.
Exhibit
Number Description
------ -----------
10.10* Collaboration & License Agreement between the Company
and Schering Aktiengesellschaft dated June 9, 1999.
10.30 IDEC Pharmaceuticals Corporation. Deferred Compensation
Plan, dated January 1, 1999.
10.50 (1) Amended and Restated 1988 Stock Option Plan (Amended and
restated May 20, 1999).
10.51 (1) Amended and Restated 1995 Employee Stock Purchase Plan
(Amended and restated May 20, 1999).
11.1 Reference is made to Note 1 of the Condensed Consolidated
Financial Statements.
27.1 Financial Data Schedule.
----------
* Confidential treatment requested as to certain portions of this
agreement.
(1) Incorporated by reference to exhibits 99.1 and 99.4,
respectively, to the Company's Registration Statement on Form
S-8, File No. 333-81625.
(b) Reports on Form 8-K. None
21
24
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: August 13, 1999 By: /s/ William H. Rastetter
------------------------- -------------------------------------
William H. Rastetter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 By: /s/ Phillip M. Schneider
------------------------- -------------------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22