1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------
Commission file number 0-19612
IMCLONE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 04-2834797
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
180 VARICK STREET, NEW YORK, NY 10014
(Address of principal executive offices) (Zip Code)
(212) 645-1405
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of May 8, 2001
Common Stock, par value $.001 67,241,491 Shares
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IMCLONE SYSTEMS INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 (unaudited)
and December 31, 2000 1
Unaudited Consolidated Statements of Operations - Three
months ended March 31, 2001 and 2000 2
Unaudited Consolidated Statements of Cash Flows - Three
months ended March 31, 2001 and 2000 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports on Form 8-K 14
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PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
ASSETS MARCH 31, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents...................................... $ 1,986 $ 60,325
Securities available for sale.................................. 224,685 236,844
Prepaid expenses............................................... 3,463 2,628
Note receivable - officer...................................... 290 282
Other current assets........................................... 8,466 7,138
------------- ------------
Total current assets.................... 238,890 307,217
------------- ------------
Property and equipment:
Land........................................................... 2,140 2,111
Building and building improvements............................. 11,031 10,989
Leasehold improvements......................................... 7,922 7,863
Machinery and equipment........................................ 10,389 9,995
Furniture and fixtures......................................... 1,417 1,311
Construction in progress....................................... 51,880 37,436
------------- ------------
Total cost.............................. 84,779 69,705
Less accumulated depreciation and amortization............... (17,679) (17,105)
------------- ------------
Property and equipment, net............. 67,100 52,600
------------- ------------
Patent costs, net .................................................. 1,204 1,168
Deferred financing costs, net....................................... 6,692 7,114
Investment in equity securities and other assets.................... 1,063 3,392
------------- ------------
$ 314,949 $ 371,491
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 6,695 $ 12,729
Accrued expenses ............................................... 13,434 11,374
Interest payable................................................ 1,206 4,444
Deferred revenue................................................ 6,337 2,434
Fees potentially refundable to corporate partner................ -- 28,000
Current portion of long-term liabilities ....................... 566 626
Preferred stock called for redemption and dividends payable..... -- 25,764
------------- ------------
Total current liabilities............... 28,238 85,371
------------- ------------
Long-term debt ..................................................... 242,200 242,200
Other long-term liabilities, less current portion .................. 345 488
------------- ------------
Total liabilities....................... 270,783 328,059
------------- ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value; authorized 4,000,000
shares; 200,000 Series A Convertible shares called for
redemption and classified as a current liability at
December 31, 2000.......................................... -- --
Common stock, $.001 par value; authorized 120,000,000 shares;
issued 66,685,341 and 65,818,362 at March 31, 2001 and
December 31, 2000, respectively, outstanding 66,496,091,
and 65,767,545 at March 31, 2001 and December 31, 2000,
respectively............................................... 67 66
Additional paid-in capital...................................... 286,848 283,268
Accumulated deficit............................................. (245,003) (243,808)
Treasury stock, at cost; 189,250 and 50,817 shares at
March 31, 2001 and December 31, 2000, respectively......... (4,100) (492)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale........... 6,354 4,398
------------- ------------
Total stockholders' equity.............. 44,166 43,432
------------- ------------
$ 314,949 $ 371,491
============= ============
See accompanying notes to consolidated financial statements
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IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000 (1)
--------- ----------
Revenues:
License fees and milestone revenues .............................. $ 24,096 $ 81
Research and development funding and royalties.................... 648 166
--------- ----------
Total revenues...................................... 24,744 247
--------- ----------
Operating expenses:
Research and development ........................................ 21,845 11,101
Marketing, general and administrative ............................ 3,728 3,126
--------- ----------
Total operating expenses ............................ 25,573 14,227
--------- ----------
Operating loss ........................................................ (829) (13,980)
--------- ----------
Other:
Interest income................................................... (4,565) (3,187)
Interest expense.................................................. 3,313 1,221
Loss on securities and investment................................. 1,618 2
--------- ----------
Net interest and other (income) expense............... 366 (1,964)
--------- ----------
Loss before cumulative effect of change in
accounting policy........................... (1,195) (12,016)
Cumulative effect of change in accounting policy for the
recognition of upfront non-refundable fees........................ -- (2,596)
--------- ----------
Net loss......................................... (1,195) (14,612)
Preferred dividends (including assumed incremental yield
attributible to beneficial conversion feature of $254 for
the three months ended March 31, 2000............................. -- 702
--------- ----------
Net loss to common stockholders.................. $ (1,195) $ (15,314)
========= ==========
Net loss per common share:
Basic and diluted:
Loss before cumulative effect of change in accounting policy.. $ (0.02) $ (0.21)
Cumulative effect of change in accounting policy.............. -- (0.05)
--------- ----------
Net loss......................................... $ (0.02) $ (0.26)
========= ==========
Weighted average shares outstanding.................................... 66,258 59,936
========= ==========
(1) Restated - See note 11
See accompanying notes to consolidated financial statements
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IMCLONE SYSTEMS INCORPORATED
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
March 31,
-----------------------
2001 2000(1)
---------- ---------
Cash flows from operating activities:
Net loss ............................................................................. $ (1,195) $ (14,612)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ..................................................... 606 499
Amortization of deferred financing costs........................................... 422 140
Expense associated with issuance of options and warrants........................... 421 1,114
Loss on securities and investments.... ............................................ 18 2
Write-down of investment in Valigen N.V............................................ 1,600 --
Changes in:
Prepaid expenses ............................................................... (835) (3,340)
Note receivable - officer....................................................... (8) --
Other current assets ........................................................... (611) (2,859)
Other assets ................................................................... 12 (5)
Interest payable ............................................................... (3,238) 1,180
Accounts payable ............................................................... (6,034) 934
Accrued expenses ............................................................... 2,060 (91)
Deferred revenue................................................................ (97) 2,555
Fees potentially refundable to corporate partner................................ (24,000) 4,000
---------- ---------
Net cash used in operating activities ........................... (30,879) (10,483)
---------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment ............................................ (15,074) (5,039)
Purchases of securities available for sale......................................... (11,456) (291,740)
Sales and maturities of securities available for sale ............................. 25,554 77,705
Additions to patents .............................................................. (69) --
---------- ---------
Net cash used in investing activities ........................... (1,045) (219,074)
---------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants .............................. 1,204 6,194
Proceeds from issuance of common stock under the employee stock purchase plan ..... 178 68
Proceeds from issuance of 5 1/2% convertible subordinated notes.................... -- 240,000
Deferred financing costs........................................................... -- (8,111)
Proceeds from repayment of note receivable by officer - stockholder,
including interest............................................................... -- 145
Purchase of treasury stock......................................................... (1,830) --
Payment of preferred stock dividends............................................... (5,764) --
Redemption of series A preferred stock............................................. (20,000) --
Payments of other liabilities ..................................................... (203) (243)
---------- ---------
Net cash (used in) provided by financing activities ............. (26,415) 238,053
---------- ---------
Net (decrease) increase in cash and cash equivalents ............ (58,339) 8,496
Cash and cash equivalents at beginning of period ........................................ 60,325 12,016
---------- ---------
Cash and cash equivalents at end of period .............................................. $ 1,986 $ 20,512
========== =========
(1) Restated - See note 11
See accompanying notes to consolidated financial statements
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IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements of ImClone Systems Incorporated ("ImClone"
or the "Company") as of March 31, 2001 and for the three months ended March 31,
2001 and 2000 are unaudited. In the opinion of management, these unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, as filed with the Securities and Exchange
Commission ("SEC").
Results for the interim periods are not necessarily indicative of results for
the full years.
(2) SEGMENT INFORMATION
The Company is a biopharmaceutical company advancing oncology care by developing
a portfolio of targeted biologic treatments, which address the unmet medical
needs of patients with a variety of cancers. The Company's three programs
include growth factor blockers, cancer vaccines and anti-angiogenesis
therapeutics. A substantial portion of the Company's efforts and resources are
devoted to research and development conducted on its own behalf and through
collaborations with corporate partners and academic research and clinical
institutions. The Company has not derived any commercial revenue from product
sales. The Company is operated as one business and is comprehensively managed by
a single management team that reports to the Chief Operating Officer. The
Company does not operate separate lines of business or separate business
entities with respect to any of its product candidates. Except for contract
services (see Note 4) and clinical trials conducted by independent investigators
on its behalf, the Company does not conduct any of its operations outside of the
United States. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by geographic area and
does not have separately reportable segments.
(3) FOREIGN CURRENCY TRANSACTIONS
Gains and losses from foreign currency transactions, such as those resulting
from the translation and settlement of receivables and payables denominated in
foreign currencies, are included in the consolidated statement of operations.
The Company does not currently use derivative financial instruments to manage
the risks associated with foreign currency fluctuations. The Company recorded
losses on foreign currency transactions of approximately $2,000 for the three
months ended March 31, 2001. The Company recorded no gains or losses on foreign
currency transactions for the three months ended March 31, 2000. Gains and
losses from foreign currency transactions are included as a component of
operating expenses.
(4) CONTRACT SERVICES
In December 1999, the Company entered into a development and manufacturing
services agreement with Lonza Biologics PLC ("Lonza"). Under the agreement,
Lonza is responsible for process development and scale-up to manufacture the
Company's lead interventional therapeutic product candidate for cancer,
IMC-C225. These steps are being taken to assure that its manufacturing process
will produce bulk material that conforms with the Company's reference material.
The Company has incurred approximately $3,600,000 in the three months ended
March 31, 2001 and $5,277,000 from inception through March 31, 2001 for services
provided under the development and manufacturing services agreement. In
September 2000, the Company entered into a three-year commercial manufacturing
services agreement with Lonza relating to IMC-C225. The Company has incurred
approximately $1,800,000 in the three months ended March 31, 2001 and $7,200,000
from inception through March 31, 2001 for services provided under the commercial
manufacturing services agreement. Under these two agreements, Lonza will
manufacture IMC-C225 at the 5,000 liter scale under cGMP conditions and deliver
it to the Company over a term ending no later than December 2003. The costs
associated with both of these agreements are included in research and
development expenses when incurred and will continue to be so classified until
such time as IMC-C225 may be approved for sale. In the event of such approval,
the costs associated with manufacturing IMC-C225 for commercial sale will be
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included in inventory and expensed when sold. In the event the commercial
manufacturing services agreement is terminated by the Company, the Company will
be required to pay 85% of the stated costs for each of the first ten batches
cancelled, 65% of the stated costs for each of the next ten batches cancelled
and 40% of the stated costs for any remaining batches cancelled. These amounts
are subject to mitigation should Lonza use its manufacturing capacity caused by
such termination for another customer.
The Company is building a new product launch manufacturing facility adjacent to
its pilot manufacturing facility in New Jersey. This new facility will contain
three 10,000 liter fermentors and will be dedicated to the commercial production
of IMC-C225. This 80,000 square foot facility will cost approximately $51
million and is being built on land purchased in December 1999. The Company has
incurred approximately $46,977,000 in engineering, capitalized interest,
pre-construction and construction costs associated with the new manufacturing
facility through March 31, 2001. The costs incurred to date associated with the
construction of the facility have been paid from the Company's cash reserves,
which were primarily obtained through the issuance of debt and equity
securities.
(5) INVESTMENT IN VALIGEN N.V.
In May 2000, the Company made an equity investment in ValiGen N.V. ("ValiGen"),
a private biotechnology company specializing in therapeutic target
identification and validation using the tools of genomics and gene expression
analysis. The Company purchased 705,882 shares of ValiGen's series A preferred
stock and received a five-year warrant to purchase 388,235 shares of ValiGen's
common stock at an exercise price of $12.50 per share. The aggregate purchase
price was $7,500,000. The Company's investment represents approximately 6% of
ValiGen's outstanding equity. The Company has assigned a value of $594,000 to
the warrant based on the Black-Scholes Pricing Model. The ValiGen preferred
stock contains voting rights identical to holders of ValiGen's common stock.
Each share of ValiGen preferred stock is convertible into one share of ValiGen
common stock. The Company may elect to convert the ValiGen preferred stock at
any time; provided, that the ValiGen preferred stock will automatically convert
into ValiGen common stock upon the closing of an initial public offering of
ValiGen's common stock with gross proceeds not less than $20,000,000. The
Company recorded its original investment in ValiGen using the cost method of
accounting. The Company recognized write-downs of its investment in ValiGen of
approximately $5,125,000 in December 2000 and $1,600,000 in March 2001
determined based on the modified equity method of accounting. The March 2001
write-down is included in loss on securities and investment in the accompanying
consolidated statement of operations. The investment is classified as a
long-term asset included in Investment in equity securities and other assets in
the consolidated balance sheet. The Company's Chief Executive Officer is a
member of ValiGen's Board of Directors.
(6) LONG-TERM DEBT
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
2001 2000
------------- --------------
5-1/2% Convertible Subordinated Notes due March 1, 2005...... $ 240,000,000 $ 240,000,000
11-1/4% Industrial Development Revenue Bond due May 1, 2004. 2,200,000 2,200,000
------------- --------------
$ 242,200,000 $ 242,200,000
============= ==============
In February 2000, the Company completed a private placement of $240,000,000 in
convertible subordinated notes due March 1, 2005. The Company received net
proceeds from this offering of approximately $231,500,000, after deducting
offering costs. Accrued interest on the notes was approximately $1,100,000 at
March 31, 2001 and $4,400,000 at December 31, 2000. The holders may convert all
or a portion of the notes into common stock at any time on or before March 1,
2005 at a conversion price of $55.09 per share, subject to adjustment under
certain circumstances. The notes are subordinated to all existing and future
senior indebtedness. The Company may redeem any or all of the notes at any time
prior to March 6, 2003, at a redemption price equal to 100% of the principal
amount plus accrued and unpaid interest to the redemption date if the closing
price of the common stock has exceeded 150% of the conversion price for at least
20 trading days in any consecutive 30-trading day period, provided the Company
makes an additional
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payment of $152.54 per $1,000 aggregate principal amount of notes, minus the
amount of any interest actually paid thereon prior to the redemption notice
date. On or after March 6, 2003, the Company may redeem any or all of the notes
at specified redemption prices, plus accrued and unpaid interest to the day
preceding the redemption date. The Company was required to file with the SEC and
obtain the effectiveness of a shelf registration statement covering resales of
the notes and the underlying common stock. Such registration statement was
declared effective in July 2000. Upon the occurrence of a "fundamental change"
as defined in the agreement, holders of the notes may require the Company to
redeem the notes at a price equal to 100% of the principal amount to be
redeemed.
(7) TREASURY STOCK
The Company's employee stock option plans permit option holders to pay for the
exercise price of stock options and any related income tax withholding with
shares of the Company's common stock that have been owned by the option holders
for at least six months. During the three months ended March 31, 2001, 138,433
shares of common stock were delivered to the Company in payment of the
aggregate exercise price and related income tax withholding associated with the
exercise of stock options to purchase an aggregate of 240,000 shares of common
stock. The 138,433 shares delivered to the Company had a value of approximately
$3,608,000 determined by multiplying the closing price of the common stock on
the date of delivery by the number of shares presented for payment. These have
been included as treasury stock in the consolidated balance sheet at March 31,
2001.
(8) NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share are computed based on the net loss
for the relevant period, adjusted in 2000 for cumulative series A convertible
preferred stock dividends and the assumed incremental yield attributable to the
beneficial conversion feature in the preferred stock, divided by the weighted
average number of common shares outstanding during the period. Potentially
dilutive securities, including convertible preferred stock, convertible debt,
options and warrants, have not been included in the diluted loss per common
share computation because they are anti-dilutive.
(9) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2001 2000
------------- --------------
Net loss....................................................... $ (1,195,000) $ (14,612,000)
Other comprehensive income:
Unrealized holding gain arising during the period......... 1,938,000 650,000
Less: Reclassification adjustment for realized loss
included in net loss.............................
(18,000) (2,000)
------------- --------------
Total other comprehensive income..................... 1,956,000 652,000
------------- --------------
Total comprehensive income (loss)............................. $ 761,000 $ (13,960,000)
============= ===============
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(10) COLLABORATIVE AGREEMENTS
In December 1998, the Company entered into a development and license agreement
with Merck KGaA with respect to its lead interventional therapeutic product
candidate for cancer, IMC-C225. In exchange for exclusive rights to market
IMC-C225 outside of North America (exclusive of Japan) and co-development
rights in Japan, the Company can receive $30,000,000, of which $28,000,000 has
been received as of March 31, 2001, in up-front fees and cash-based milestone
payments assuming achievement of defined milestones. An additional $30,000,000
can be received assuming the achievement of further milestones for which Merck
KGaA will receive equity in the Company. The equity underlying these milestone
payments will be priced at varying premiums to the then market price of the
common stock depending upon the timing of the achievement of the respective
milestones. Merck KGaA will pay the Company a royalty on future sales of
IMC-C225 outside of North America, if any. Merck KGaA has also agreed not to
own greater than 19.9% of the Company's voting securities through December 3,
2002. This agreement may be terminated by Merck KGaA in various instances,
including (1) at its discretion on any date on which a milestone is achieved
(in which case no milestone payment will be made), or (2) during a one-year
period after first commercial sale of IMC-C225 in Merck KGaA's territory, upon
Merck KGaA's reasonable determination that the product is economically
unfeasible (in which case Merck KGaA is entitled to receive back 50% of the
up-front and cash-based milestone payments then paid to date, but only out of
revenues received, if any, based upon a royalty rate applied to the gross
profit from IMC-C225 sales or IMC-C225 license fees in the United States and
Canada). Under the agreement, the Company is entitled to Merck KGaA's guaranty
of the Company's obligations under a $30 million credit facility relating to
the construction of the product launch manufacturing facility for the
commercial production of IMC-C225. To date, the Company has not utilized this
guaranty. In the event of termination of the agreement, and in the event the
guaranty is utilized, the Company will be required to use its best reasonable
efforts to cause the release of Merck KGaA as guarantor. The $28,000,000 in
payments received were originally recorded as fees potentially refundable to
corporate partner and not as revenue due to the fact that they were refundable
to Merck KGaA in the event a condition relating to obtaining certain collateral
license agreements was not satisfied. In March 2001, this condition was
satisfied and $24,000,000 in milestone payments has been recognized as revenue
by the Company during the three months ended March 31, 2001. The remaining
$4,000,000 represents the up-front payment associated with the agreement and
has been recorded as deferred revenue. This amount is being recognized as
revenue over an 18-year period which represents the patent lives of IMC-C225.
The Company recognized approximately $55,000 of the up-front payment as revenue
during the three months ended March 31, 2001.
(11) REVENUE RECOGNITION
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
summarizes certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company adopted SAB 101 in the fourth quarter of its fiscal year ended December
31, 2000, implementing a change in accounting policy effective January 1, 2000
with respect to revenue recognition associated with non-refundable fees
received upon entering into research and licensing arrangements. Beginning
January 1, 2000, non-refundable fees received upon entering into license and
other collaborative agreements where the Company has continuing involvement are
recorded as deferred revenue and recognized ratably over the estimated service
period. In previous years, prior to SAB 101, non-refundable upfront fees from
licensing and other collaborative agreements were recognized as revenue when
received, provided all contractual obligations of the Company relating to such
fees had been fulfilled. Amounts originally reported for the first quarter of
2000 have been restated herein to reflect the adoption of SAB 101.
The adoption of SAB 101 resulted in a non-cash cumulative effect of a change in
accounting policy related to nonrefundable upfront licensing fees received in
connection with the development and commercialization agreement with Merck KGaA
with respect to its principal cancer vaccine product candidate BEC2. The
cumulative effect represents revenues originally recorded upon receipt of such
payments that now are recorded as deferred revenue and will be recognized over
the life of the related patent(s). The Company recognized revenue of $41,000
associated with this change in accounting policy in the three months ended March
31, 2001. During the three months ended March 31, 2000, the impact of the change
in accounting policy increased net loss by $2,555,000, or $0.04 per share,
comprising the $2,596,000 cumulative effect of
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the change described above, net of $41,000 of related deferred revenue that was
recognized during the period.
In March 2001, the Company satisfied a condition relating to obtaining certain
collateral license agreements associated with the IMC-C225 development and
license agreement with Merck KGaA. The satisfaction of this condition allowed
for the recognition of $24,000,000 in previously received milestone payments and
initiated revenue recognition, as prescribed under SAB 101, of the $4,000,000
up-front payment received in connection with this agreement over the patent
lives of IMC-C225. The Company recognized approximately $55,000 of revenue
associated with the up-front payment during the three months ended March 31,
2001.
As of March 31, 2001, the Company had approximately $6,337,000 in deferred
revenue recorded on the consolidated balance sheet. This included $2,392,000
associated with the BEC2 development and commercialization agreement and
$3,945,000 related to the IMC-C225 development and license agreement with Merck
KGaA.
(12) RELATED PARTY TRANSACTIONS
The Company has accepted from its President and Chief Executive Officer, a full
recourse, unsecured promissory note dated as of December 21, 2000 in the
principal amount of $282,200. The note is payable upon the earlier of June 21,
2001 or demand by the Company and bears interest at an annual rate of 10 1/2%
for the period that the loan is outstanding. The total amount due the Company,
including interest, was approximately $290,000 at March 31, 2001.
(13) ACCOUNTING FOR DERIVATIVE AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"), which establishes new accounting and
reporting guidelines for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS No. 133
was subsequently amended by SFAS Nos. 137 and 138. SFAS No. 133 requires the
recognition of all derivative financial instruments as either assets or
liabilities in the consolidated balance sheet and measurement of those
derivatives at fair value. The Company has reviewed SFAS No. 133 and its
operations relative to SFAS No. 133 and concluded that it does not have or use
derivative instruments. Accordingly, the adoption of SFAS No. 133 did not have
an effect on the results of operations or the financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis by our management is provided to identify
certain significant factors that affected our financial position and operating
results during the periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 and 2000
REVENUES.
Revenues for the three months ended March 31, 2001 and 2000 were $24,744,000 and
$247,000, respectively, an increase of $24,497,000. Revenues for the three
months ended March 31, 2001 primarily included $24,000,000 in milestone revenue
from our development and license agreement with Merck KGaA for IMC-C225. These
milestone payments were received in prior periods and originally recorded as
fees potentially refundable to corporate partner because they were refundable in
the event a condition relating to obtaining certain collateral license
agreements was not satisfied. This condition was satisfied in March 2001. In
addition, the Company recognized $55,000 of the $4,000,000 up-front payment
received upon entering into this agreement. This revenue is being recognized
ratably over the patent lives of IMC-C225. Under this agreement, an additional
$2,000,000 in cash-based milestone payments and $30,000,000 in equity-based
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milestones may be received upon the achievement of additional milestones.
Finally, revenues for the three months ended March 31, 2001 included $648,000 in
royalty revenue from our strategic corporate alliance with Abbott Laboratories
("Abbott") in diagnostics and $41,000 in license fee revenue from our strategic
corporate alliance with Merck KGaA for our principal cancer vaccine product
candidate, BEC2. Revenues for the three months ended March 31, 2000 primarily
included (1) $166,000 in royalty revenue from our strategic alliance with Abbott
in diagnostics and (2) $41,000 in license fee revenue from our strategic
corporate alliance with Merck KGaA for BEC2. The license fee revenue related to
the BEC2 agreement has been recognized in both periods as a direct result of a
change in accounting policy with respect to revenue recognition.
OPERATING EXPENSES: RESEARCH AND DEVELOPMENT.
Total operating expenses for the three months ended March 31, 2001 and 2000 were
$25,573,000 and $14,227,000, respectively, an increase of $11,346,000, or 80%.
Research and development expenses for the three months ended March 31, 2001 and
2000 were $21,845,000 and $11,101,000, respectively, an increase of $10,744,000
or 97%. Such amounts for the three months ended March 31, 2001 and 2000
represented 85% and 78%, respectively, of total operating expenses. Research and
development expenses include costs associated with our in-house and
collaborative research programs, product and process development expenses,
costs to manufacture our product candidates, particularly IMC-C225, prior to
any approval that we may obtain of a product candidate for commercial sale,
quality assurance and quality control costs, costs to conduct our clinical
trials and associated regulatory activities. Research and development expenses
for the three months ended March 31, 2001 and 2000 have been reduced by
$3,251,000 and $824,000, respectively, for clinical trial and contract
manufacturing costs that are reimbursable by Merck KGaA. The increase in
research and development expenses for the three months ended March 31, 2001 was
primarily attributable to (1) the costs associated with newly initiated and
ongoing clinical trials of IMC-C225, (2) costs related to the manufacturing
services agreements with Lonza, (3) expenditures in the functional areas of
product development, manufacturing, clinical and regulatory affairs associated
with IMC-C225 and (4) increased expenditures associated with discovery
research. We expect research and development costs to increase in future
periods as we continue to manufacture IMC-C225 prior to any approval of the
product that we may obtain for commercial sale. Should such approval be
obtained, the subsequent costs associated with manufacturing IMC-C225 for
commercial sale will be included in inventory and expensed when sold. We expect
research and development costs associated with discovery research, product
development and clinical trials also to continue to increase in future periods.
OPERATING EXPENSES: MARKETING, GENERAL AND ADMINISTRATIVE.
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. Such expenses for the three months ended March 31, 2001 and 2000 were
$3,728,000 and $3,126,000, respectively, an increase of $602,000, or 19%. The
increase in marketing, general and administrative expenses primarily reflected
costs associated with our marketing efforts and additional administrative
staffing required to support our commercialization efforts of IMC-C225. We
expect marketing, general and administrative expenses to increase in future
periods to support our continued commercialization efforts of IMC-C225.
INTEREST INCOME, INTEREST EXPENSE AND OTHER (INCOME) EXPENSE.
Interest income was $4,565,000 for the three months ended March 31, 2001
compared with $3,187,000 for the three months ended March 31, 2000, an increase
of $1,378,000, or 43%. The increase was primarily attributable to a higher
average portfolio of securities available for sale during the three months ended
March 31, 2001 as a result of the February 2000 private placement of 5 1/2%
convertible subordinated notes. Interest expense was $3,313,000 and $1,221,000
for the three months ended March 31, 2001 and 2000, respectively, an increase of
$2,092,000 or 171%. The increase was primarily attributable to the convertible
subordinated notes. Interest expense for both periods included (1) interest on
the convertible subordinated notes, (2) interest on an outstanding Industrial
Development Revenue Bond issued in 1990 (the "1990 IDA Bond") with a principal
amount of $2,200,000 and (3) interest recorded on various capital lease
obligations under a 1996 financing agreement and a 1998 financing agreement with
Finova Technology Finance, Inc. ("Finova"). Interest expense for the three
months ended March 31, 2001 and 2000 were offset by capitalizing interest costs
of $494,000 and $154,000, respectively, during the construction period of the
Company's new
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product launch manufacturing facility. We recorded losses on securities and
investment for the three months ended March 31, 2001 in the amount of $1,618,000
as compared with losses of $2,000 for the three months ended March 31, 2000. The
net losses on securities and investment for the three months ended March 31,
2001 included a $1,600,000 write-down of our investment in ValiGen N.V.
NET LOSSES.
We had a net loss to common stockholders of $1,195,000 or $0.02 per share for
the three months ended March 31, 2001 compared with $15,314,000 or $0.26 per
share for the three months ended March 31, 2000. Included in the loss for the
three months ended March 31, 2000 was a non-cash charge of $2,596,000 related to
the cumulative effect of a change in accounting policy (see note 10 to the
accompanying consolidated financial statements). Excluding the effect of this
change in accounting policy, the net loss to common stockholders for the three
months ended March 31, 2000 would have been $12,718,000 or $0.21 per share. The
decrease in the net losses and per share net loss to common stockholders was due
to the increase in revenues and the other factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, our principal sources of liquidity consisted of cash and cash
equivalents and securities available for sale of approximately $226,671,000.
From inception through March 31, 2001 we have financed our operations through
the following means:
- Public and private sales of equity securities and convertible notes in
financing transactions have raised approximately $489,400,000 in net
proceeds
- We have earned approximately $58,500,000 from license fees, contract
research and development fees and royalties from collaborative
partners. Additionally, we have approximately $6,337,000 in deferred
revenue related to up-front payments received from our BEC2
development and commercialization agreement and our IMC-C225
development and license agreement with Merck KGaA. These amounts are
being recognized as revenue over the respective patent lives of the
product candidates (See note 11 of the consolidated financial
statements)
- We have earned approximately $36,700,000 in interest income
- The sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an
aggregate of $6,300,000, the proceeds of which have been used for the
acquisition, construction and installation of our research and
development facility in New York City, and of which $2,200,000 is
outstanding
We may from time to time consider a number of strategic alternatives designed to
increase shareholder value, which could include joint ventures, acquisitions and
other forms of alliances as well as the sale of all or part of the Company.
The 1990 IDA Bond in the outstanding principal amount of $2,200,000 becomes due
in 2004. We incur annual interest on the 1990 IDA Bond aggregating $248,000. In
order to secure our obligations to the New York Industrial Development Agency
("NYIDA") under the 1990 IDA Bond, we have granted the NYIDA a security interest
in facility equipment purchased with the bond proceeds.
In February 2000, we completed a private placement of $240,000,000 in 5 1/2%
convertible subordinated notes due March 1, 2005. We received net proceeds of
approximately $231,500,000, after deducting offering expenses. Accrued interest
on the notes was approximately $1,100,000 at March 31, 2001. A holder may
convert all or a portion of a note into common stock at any time on or before
March 1, 2005 at a conversion price of $55.09 per share, subject to adjustment
under certain circumstances. We may redeem some or all of the notes prior to
March 6, 2003 if specified common stock price thresholds are met. On or after
March 6, 2003, we may redeem some or all of the notes at specified redemption
prices.
In December 1999, we entered into a development and manufacturing services
agreement with Lonza. Under the agreement, Lonza is responsible for process
development and scale-up to manufacture IMC-C225. These steps were taken to
assure that its manufacturing process will produce bulk material that
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conforms with our reference material. As of March 31, 2001, we had incurred
approximately $5,277,000 for services provided under the development and
manufacturing services agreement. In September 2000, we entered into a
three-year commercial manufacturing services agreement with Lonza relating to
IMC-C225. As of March 31, 2001, we had incurred approximately $7,200,000 for
services provided under the commercial manufacturing services agreement. Under
these two agreements, Lonza is manufacturing IMC-C225 at the 5,000 liter
scale under cGMP conditions and is delivering it to us over a term ending no
later than December 2003. The costs associated with both of these agreements are
included in research and development expenses when incurred and will continue to
be so classified until such time as IMC-C225 may be approved for sale. In the
event of such approval, the subsequent costs associated with manufacturing
IMC-C225 for commercial sale will be included in inventory and expensed when
sold. In the event the commercial manufacturing services agreement is
terminated by us, we will be required to pay 85% of the stated costs for each
of the first ten batches cancelled, 65% of the stated costs for each of the
next ten batches cancelled and 40% of the stated costs for any remaining
batches cancelled. These amounts are subject to mitigation should Lonza use its
manufacturing capacity caused by such termination for another customer.
We cannot be certain that we will be able to enter into agreements for
commercial supply with other third-party manufacturers on terms acceptable to
us. Even if we are able to enter into such agreements, we cannot be certain that
we will be able to produce or obtain sufficient quantities for commercial sale
of our products. Any delays in producing or obtaining commercial quantities of
our products could have a material effect on our business, financial condition
and results of operations.
We have obligations under various capital leases for certain laboratory, office
and computer equipment and also certain building improvements, primarily under
1996 and 1998 financing agreements with Finova. These agreements allowed us to
finance the lease of equipment and make certain building and leasehold
improvements to existing facilities. Each lease has a fair market value purchase
option at the expiration of its 42- or 48-month term. We have entered into
twelve individual leases under the financing agreements aggregating a total cost
of $3,695,000. These financing arrangements are now expired.
We rent our New York facility under an operating lease that expires in December
2004. We have completed renovations of the facility to better suit our needs at
a cost of approximately $2,800,000.
Under our IMC-C225 agreement with Merck KGaA, we developed in consultation with
Merck KGaA, a production concept for our new product launch manufacturing
facility for the commercial production of IMC-C225. The agreement provides that
Merck KGaA is to provide us, subject to certain conditions, a guaranty of a
$30,000,000 credit facility for the build-out of this facility. As of May 10,
2001, this guaranty has not been provided, and we are exploring ways in which
we might alter that portion of the agreement. We are currently erecting this
facility adjacent to our pilot manufacturing facility in New Jersey, which
supplies IMC-C225 to support our clinical trials. We broke ground on the new
facility in January 2000 and estimate that the total cost will be approximately
$51,000,000. We have incurred approximately $46,977,000 in engineering,
capitalized interest, pre-construction and construction costs associated with
the product launch manufacturing facility through March 31, 2001. We are
funding the cost of this facility through a combination of cash on hand and, if
advisable, equipment financing transactions.
Total capital expenditures made during the three months ended March 31, 2001
were $15,074,000 of which (1) $333,000 primarily related to the purchase of
equipment for and leasehold improvement costs associated with our corporate
office and research laboratories in our New York facility; (2) $10,951,000
related to engineering and construction costs of the product launch
manufacturing facility being erected adjacent to our pilot manufacturing
facility in New Jersey; (3) $3,276,000 related to the conceptual design and
preliminary engineering plans for a second commercial manufacturing facility,
which we may build in the future on land purchased in 2000; and (4) the
remaining $514,000 related to improving and equipping our pilot manufacturing
facility.
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To prepare for the marketing and sale of IMC-C225 in the U.S. and Canada we
hired a Vice President of Marketing and Sales in 1998 and have hired directors
of marketing, field sales and sales operations, each with experience in the
commercial launch of a monoclonal antibody cancer therapeutic. We expect to hire
regional sales managers and to arrange for the hiring or contracting of a sales
force prior to the commencement of IMC-C225 sales, if any.
We believe that our existing cash on hand and amounts to which we are entitled,
subject to the negotiation of a final credit facility, should enable us to
maintain our current and planned operations through at least 2002. We are also
entitled to reimbursement for certain research and development expenditures and
to certain milestone payments, including $2,000,000 in cash-based milestone
payments and $30,000,000 in equity-based milestone payments from our IMC-C225
development and license agreement with Merck KGaA. These payments are to be made
subject to our attaining research and development milestones, and certain other
conditions. There can be no assurance that we will achieve the unachieved
milestones. Our future working capital and capital requirements will depend upon
numerous factors, including, but not limited to:
- progress and cost of our research and development programs,
pre-clinical testing and clinical trials
- our corporate partners fulfilling their obligations to us
- timing and cost of seeking and obtaining regulatory approvals
- timing and cost of manufacturing scale-up and effective
commercialization activities and arrangements
- level of resources that we devote to the development of marketing and
sales capabilities
- costs involved in filing, prosecuting and enforcing patent claims
- technological advances
- status of competitors
- our ability to maintain existing and establish new collaborative
arrangements with other companies to provide funding to support these
activities
In order to fund our capital needs after 2002, we will require significant
levels of additional capital which we intend to raise through additional
arrangements with corporate partners, equity or debt financings, or from other
sources including the proceeds of product sales, if any. There is no assurance
that we will be successful in consummating any such arrangements or product
sales. If adequate funds are not available, we may be required to significantly
curtail our planned operations.
At December 31, 2000, we had net operating loss carryforwards for United States
federal income tax purposes of approximately $303,000,000, which expire at
various dates from 2001 through 2020. At December 31, 2000 we had research
credit carryforwards of approximately $8,000,000, which expire at various dates
from 2009 through 2020. Under Section 382 of the Internal Revenue Code of 1986,
as amended, a corporation's ability to use net operating loss and research
credit carryforwards may be limited if
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the corporation experiences a change in ownership of more than 50 percentage
points within a three-year period. Since 1986, we have experienced at least two
such ownership changes. As a result, we are only permitted to use in any one
year approximately $5,200,000 of our available net operating loss carryforwards
that relate to periods before these ownership changes. Similarly, we are limited
in using our research credit carryforwards. We are in the process of determining
whether the November 1999 public stock offering and the February 2000 private
placement of convertible subordinated notes will be viewed as additional
ownership changes that would further limit the use of our net operating losses
and research credit carryforwards.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS--SAFE HARBOR STATEMENT
Those statements contained herein that do not relate to historical information
are forward-looking statements. There can be no assurance that the future
results covered by such forward-looking statements will be achieved. Actual
results may differ materially due to the risks and uncertainties inherent in
the Company's business, including without limitation, the risks and
uncertainties associated with completing pre-clinical and clinical trials of
the Company's compounds that demonstrate such compounds' safety and
effectiveness; obtaining additional financing to support the Company's
operations; obtaining and maintaining regulatory approval for such compounds
and complying with other governmental regulations applicable to the Company's
business; obtaining the raw materials necessary in the development of such
compounds; consummating collaborative arrangements with corporate partners for
product development; achieving milestones under collaborative arrangements with
corporate partners; developing the capacity and ability to manufacture, as well
as market and sell the Company's products, either directly or with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; obtaining adequate reimbursement from third-party payors; attracting
and retaining key personnel; obtaining and protecting proprietary rights; and
those other factors set forth in "Risk Factors" in the Company's most recent
Registration Statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our holdings of financial instruments comprise a mix of securities that
may include U.S. corporate debt, foreign corporate debt, U.S. government debt,
foreign government/agency debt or guaranteed debt and commercial paper. All such
instruments are classified as securities available for sale. Generally, we do
not invest in portfolio equity securities or commodities or use financial
derivatives for trading purposes. Our debt security portfolio represents funds
held temporarily pending use in our business and operations. We manage these
funds accordingly. We seek reasonable assuredness of the safety of principal and
market liquidity by investing in investment grade fixed income securities while
at the same time seeking to achieve a favorable rate of return. Our market risk
exposure consists principally of exposure to changes in interest rates. Our
holdings are also exposed to the risks of changes in the credit quality of
issuers. We invest in securities that have a range of maturity dates. Typically,
those with a short-term maturity are fixed-rate, highly liquid, debt instruments
and those with longer-term maturities are highly liquid debt instruments with
fixed interest rates or with periodic interest rate adjustments. We also have
certain foreign exchange currency risk. See note 3 of the consolidated financial
statements. The table below presents the principal amounts and related weighted
average interest rates by year of maturity for our investment portfolio as of
March 31, 2001:
2006 AND
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
------ ----------- ---------- -------------- ------------- ---------------- -------------- -------------
Fixed Rate -- $1,533,000 $243,000 $10,246,000 -- $82,275,000 $94,297,000 $100,301,000
Average
Interest Rate -- 7.82% 6.00% 6.58% -- 6.47% 6.50% --
Variable Rate -- -- -- $15,830,000(1) $31,349,000(1) $76,855,000(1) $124,034,000 $124,384,000
Average
Interest Rate -- -- -- 5.32% 5.61% 5.80% 5.69% --
------ ----------- ---------- -------------- ------------- ---------------- -------------- -------------
-- $1,533,000 $243,000 $26,076,000 $31,349,000 $159,130,000 $218,331,000 $224,685,000
====== =========== ========== ============== ============= ================ ============== =============
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(1) These holdings consist of U.S. corporate and foreign corporate floating
rate notes. Interest on the securities is adjusted monthly, quarterly or
semi-annually, depending on the instrument, using prevailing interest
rates. These holdings are highly liquid and we consider the potential for
loss of principal to be minimal.
Our 5 1/2% convertible subordinated notes in the principal amount of
$240,000,000 due March 1, 2005 and other long-term debt have fixed interest
rates. The fair value of fixed interest rate instruments is affected by changes
in interest rates and in the case of the convertible notes by changes in the
price of the Company's common stock. The fair value of the 5 1/2% convertible
subordinated notes (which have a carrying value of $240,000,000) was
approximately $206,100,000 at March 31, 2001.
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2001, we issued an aggregate of 508,000
shares of unregistered common stock to holders of warrants upon exercise of
such warrants for a total purchase price of $392,830 which were consummated as
private sales under Section 4(2) of the Securities Act of 1933, as amended.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
None.
(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.
IMCLONE SYSTEMS INCORPORATED
(Registrant)
Date: May 10, 2001 By /s/ Samuel D. Waksal
---------------------------------------
Samuel D. Waksal
President and Chief Executive Officer
Date: May 10, 2001 By /s/ Paul A. Goldstein
---------------------------------------
Paul A. Goldstein
Vice President, Financial Operations
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