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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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 SEPTEMBER 30, 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 (IRS employer
incorporation or organization) identification no.)
180 VARICK STREET, NEW YORK, NY 10014
(Address of principal executive offices) (Zip code)
(212) 645-1405
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] 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 NOVEMBER 9, 2001
----- ----------------------------------
Common Stock, par value $.001 72,871,466 Shares
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IMCLONE SYSTEMS INCORPORATED
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001 (unaudited) and December 31, 2000................... 2
Unaudited Consolidated Statements of Operations - Three and nine months ended
September 30, 2001 and 2000.......................................................................... 3
Unaudited Consolidated Statements of Cash Flows - Nine months ended
September 30, 2001 and 2000.......................................................................... 4
Notes to Consolidated Financial Statements........................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................... 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................... 26
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 80,588 $ 60,325
Securities available for sale........................................................ 268,319 236,844
Prepaid expenses..................................................................... 5,404 2,628
Note receivable - officer............................................................ 306 282
Notes receivable from officers and directors......................................... 35,847 --
Other current assets (including amounts due from BMS of $518 at September 30, 2001).. 7,692 7,138
------------- -------------
Total current assets............................................................ 398,156 307,217
------------- -------------
Property and equipment:
Land ................................................................................ 2,723 2,111
Building and building improvements................................................... 49,813 10,989
Leasehold improvements............................................................... 8,214 7,863
Machinery and equipment.............................................................. 32,477 9,995
Furniture and fixtures............................................................... 2,002 1,311
Construction in progress............................................................. 19,067 37,436
------------- -------------
Total cost...................................................................... 114,296 69,705
Less accumulated depreciation and amortization.................................... (20,507) (17,105)
------------- -------------
Property and equipment, net..................................................... 93,789 52,600
------------- -------------
Patent costs, net....................................................................... 1,646 1,168
Deferred financing costs, net........................................................... 5,835 7,114
Investment in equity securities and other assets........................................ 381 3,392
------------- -------------
$ 499,807 $ 371,491
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 10,485 $ 12,729
Accrued expenses..................................................................... 21,680 11,374
Interest payable..................................................................... 1,207 4,444
Deferred revenue (including deferred revenue from BMS of $11,789 at
September 30,2001).............................................................. 12,174 2,434
Fees potentially refundable to Merck KGaA............................................ -- 28,000
Current portion of long-term liabilities............................................. 486 626
Preferred stock called for redemption and dividends payable.......................... -- 25,764
------------- -------------
Total current liabilities....................................................... 46,032 85,371
------------- -------------
Deferred revenue (including deferred revenue from BMS of $187,824 at
September 30, 2001).............................................................. 193,585 --
Long-term debt.......................................................................... 242,200 242,200
Other long-term liabilities, less current portion....................................... 141 488
------------- -------------
Total liabilities............................................................... 481,958 328,059
------------- -------------
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 72,537,160 and 65,818,362 at September 30, 2001 and December
31, 2000, respectively, outstanding 72,347,910 and 65,767,545
at September 30, 2001 and December 31, 2000, respectively......................... 73 66
Additional paid-in capital........................................................... 332,336 283,268
Accumulated deficit.................................................................. (315,578) (243,808)
Treasury stock, at cost; 189,250 and 50,817 shares at
September 30, 2001 and December 31, 2000, respectively............................ (4,100) (492)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale.................................. 5,118 4,398
------------- -------------
Total stockholders' equity...................................................... 17,849 43,432
------------- -------------
$ 499,807 $ 371,491
============= =============
See accompanying notes to consolidated financial statements
2
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000(1) 2001 2000(1)
---- ------- ---- -------
Revenues:
License fees and milestone revenues (including BMS
revenue of $387 in the three and nine months ended
September 30, 2001)....................................... $ 2,244 $ 289 $ 29,476 $ 411
Research and development funding and royalties............... 667 523 1,430 849
------------- ------------ ------------ -----------
Total revenues............................................ 2,911 812 30,906 1,260
------------- ------------ ------------ -----------
Operating expenses:
Research and development..................................... 24,040 12,557 69,631 36,401
Marketing, general and administrative........................ 5,405 3,487 15,356 10,395
Expenses associated with BMS acquisition, stockholder
and commercial agreements................................. 16,050 - 16,050 -
------------ ------------ ------------ -----------
Total operating expenses.................................. 45,495 16,044 101,037 46,796
------------- ------------ ------------ -----------
Operating loss.................................................. (42,584) (15,232) (70,131) (45,536)
------------- ------------ ------------ -----------
Other:
Interest income.............................................. (3,244) (6,002) (11,071) (15,354)
Interest expense............................................. 3,532 3,729 10,042 8,617
Loss (gain) on securities and investments.................... (1,800) (54) 2,668 (70)
------------- ------------ ------------ -----------
Net interest and other (income) expense................... (1,512) (2,327) 1,639 (6,807)
------------- ------------ ------------ -----------
Loss before cumulative effect of change in accounting policy.... (41,072) (12,905) (71,770) (38,729)
Cumulative effect of change in accounting policy
for the recognition of up-front non-refundable fees.......... -- -- -- (2,596)
------------- ------------ ------------ -----------
Net loss.................................................. (41,072) (12,905) (71,770) (41,325)
------------- ------------ ------------ -----------
Preferred dividends (including assumed incremental yield
attributable to beneficial conversion feature of $259 for
the three months ended September 30, 2000 and $769 for
the nine months ended September 30, 2000).................... -- 712 -- 2,117
------------- ------------ ------------ -----------
Net loss to common stockholders........................... $ (41,072) $ (13,617) $ (71,770) $ (43,442)
============= ============ ============ ===========
Net loss per common share:
Basic and diluted:
Loss before cumulative effect of change in
accounting policy....................................... $ (0.57) $ (0.21) $ (1.05) $ (0.66)
Cumulative effect of change in
accounting policy....................................... -- -- -- (0.04)
------------- ------------ ------------ -----------
Basic and diluted net loss per common share..................... $ (0.57) $ (0.21) $ (1.05) $ (0.70)
============= ============ ============ ===========
Weighted average shares outstanding............................. 71,534 64,331 68,301 62,298
============= ============ ============ ===========
(1) Restated - See note 12
See accompanying notes to consolidated financial statements
3
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000(1)
---- -------
Cash flows from operating activities:
Net loss ............................................................................... $ (71,770) $ (41,325)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ....................................................... 3,517 1,865
Amortization of deferred financing costs ............................................ 1,279 1,004
Expense associated with issuance of options and warrants ............................ 952 3,593
Gain on securities available for sale ............................................... (2,707) (70)
Write-down of investment in ValiGen N.V. ............................................ 4,375 --
Write-off of convertible promissory note receivable from A.C.T. Group, Inc. ......... 1,000 --
Accrued interest on note receivable - officer ....................................... (24) --
Accrued interest on notes receivable from officers and directors .................... (606) --
Changes in:
Prepaid expenses .................................................................. (2,776) (3,314)
Other current assets .............................................................. 163 350
Other assets ...................................................................... (81) 8
Interest payable .................................................................. (3,237) 1,160
Accounts payable .................................................................. (2,244) 1,907
Accrued expenses .................................................................. 10,306 799
Deferred revenue (including amounts from BMS of $199,613
for the nine months ended September 30, 2001) .................................. 203,325 2,475
Fees potentially refundable to Merck KGaA ......................................... (28,000) 6,000
--------- ---------
Net cash provided by (used in) operating activities ............................. 113,472 (25,548)
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment ................................................. (44,591) (22,583)
Purchases of securities available for sale ............................................. (158,497) (340,755)
Sales and maturities of securities available for sale .................................. 130,449 142,362
Investment in ValiGen N.V .............................................................. (2,000) (7,500)
Loan to A.C.T. Group, Inc. ............................................................. (1,000) --
Additions to patents ................................................................... (593) (88)
--------- ---------
Net cash used in investing activities ........................................... (76,232) (228,564)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants ................................... 7,333 15,434
Proceeds from issuance of common stock under the employee stock purchase plan .......... 531 275
Proceeds from issuance of common stock to corporate partner ............................ 3,240 --
Proceeds from issuance of 5 1/2% convertible subordinated notes ........................ -- 240,000
Deferred financing costs ............................................................... -- (8,512)
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 .......................................................... (487) (705)
--------- ---------
Net cash (used in) provided by financing activities ............................. (16,977) 246,637
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................ 20,263 (7,475)
Cash and cash equivalents at beginning of period .......................................... 60,325 12,016
--------- ---------
Cash and cash equivalents at end of period ................................................ $ 80,588 $ 4,541
========= =========
(1) Restated - See note 12
See accompanying notes to consolidated financial statements
4
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The consolidated financial statements of ImClone Systems Incorporated
("ImClone Systems" or the "Company") as of September 30, 2001 and for the three
and nine months ended September 30, 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 $24,000 for
the three months ended September 30, 2001 and gains of approximately $17,000 for
the three months ended September 30, 2000. The Company recorded losses on
foreign currency transactions of approximately $27,000 for the nine months ended
September 30, 2001 and gains of approximately $21,000 for the nine months ended
September 30, 2000. Gains and losses from foreign currency transactions are
included as a component of operating expenses.
(4) MANUFACTURING CONTRACT SERVICES AND FACILITIES
In December 1999, the Company entered into a development and
manufacturing services agreement with Lonza Biologics PLC ("Lonza"). This
agreement was amended in April 2001 to include additional services. Under the
agreement, Lonza is responsible for process development and scale-up to
manufacture the Company's lead interventional therapeutic product candidate for
cancer, ERBITUX(TM) and is manufacturing ERBITUX in bulk form under current Good
Manufacturing Practices ("cGMP") conditions. These steps were taken to assure
that the manufacturing process would produce bulk material that conforms with
the Company's reference material and to support, in part, the Company's
regulatory filing with the Food and Drug Administration (the "FDA"). The Company
incurred approximately $27,000 for services provided under the development and
manufacturing services agreement during the three months ended September 30,
2001. Approximately $3,627,000 was incurred in the nine months ended September
30, 2001 and $5,304,000 from inception through September 30, 2001 for services
provided under this agreement. In September 2000, the Company entered into a
three-year commercial manufacturing services agreement with Lonza relating to
ERBITUX. This agreement was amended in June 2001 and again in September 2001 to
include additional services. The Company recorded a reduction to expenses of
$2,475,000 under this agreement in the three months ended September 30, 2001 as
a result of reductions to prior billings. Approximately $2,400,000 was incurred
in the nine months ended September 30, 2001 and $7,800,000 from inception
through September 30, 2001 for services provided under this agreement. Under
these two agreements,
5
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Lonza will manufacture ERBITUX 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 ERBITUX may be approved for sale or until the Company obtains
obligations from its corporate partners for supply of such product. In the event
of such approval or obligations from its corporate partners, subsequent costs
associated with manufacturing ERBITUX for commercial sale will be included in
inventory and expensed when sold. In the event the commercial manufacturing
services agreement is terminated without cause by the Company (i.e., batches of
bulk product are cancelled 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 each of the next six batches cancelled. The batch cancellation
provisions for the subsequent batches contained in the amendment to the
commercial manufacturing services agreement require the Company to pay 100% of
the stated costs of cancelled batches scheduled within six months of the
cancellation, 85% of the stated costs of cancelled batches scheduled between six
and twelve months following the cancellation and 65% of the stated costs of
cancelled batches scheduled between twelve and eighteen months following the
cancellation. These amounts are subject to mitigation should Lonza use its
manufacturing capacity caused by such termination for another customer.
In October 2001, the Company entered into an agreement in principle
with Lonza to manufacture ERBITUX at the 2,000 liter scale for use in clinical
trials by Merck KGaA. The Company has incurred approximately $1,763,000 during
the three and nine months ended September 30, 2001 for services provided under
this agreement. The expenditures associated with this agreement are included in
other current assets in the consolidated balance sheet at September 30, 2001
because they are reimbursable by Merck KGaA.
The Company has built a product launch manufacturing facility on its
campus in Somerville, New Jersey. It is expected that the necessary
commissioning and validation of the product launch facility will be completed by
the end of 2001. The facility is approximately 80,000 square feet, contains
three 10,000 liter fermentors and is being dedicated to the commercial
production of ERBITUX. The cost of the facility was approximately $53,000,000,
excluding capitalized interest of approximately $1,966,000. The cost for the
facility has come from the Company's cash reserves, which were primarily
obtained through the issuance of debt and equity securities. The product launch
facility was put in operation in July 2001 and the Company commenced
depreciation at that time.
The Company has completed conceptual design and preliminary engineering
plans and begun detailed design plans for a second commercial manufacturing
facility to be built on the Company's Somerville, New Jersey campus. The
multi-product facility will be approximately 250,000 square feet and contain up
to 10 fermentors with a total capacity of 110,000 liters. The cost of this
facility, for two completely fitted out suites and a third suite with utilities
only, is expected to be approximately $250,000,000, excluding capitalized
interest. The actual amount may change depending upon various factors. We have
incurred approximately $16,091,000 in conceptual design, engineering and
capitalized interest costs through September 30, 2001.
(5) TRANSACTION WITH A.C.T. GROUP, INC.
During the second quarter of 2001, the Company made a $1,000,000 loan
to A.C.T. Group, Inc. ("A.C.T. Group") and received its convertible promissory
note and five-year warrant to purchase its common stock as consideration. A.C.T.
Group is engaged in the research and development of technologies enabling the
genetic manipulation of cells to produce transgenic animals for pharmaceutical
protein production. A.C.T. Group also is developing transgenic cloned cells and
tissues for application in cell and organ transplant therapy. The promissory
note is due November 30, 2001, does not bear interest, and is payable as
follows: (i) if, prior to November 30, 2001, A.C.T. Group sells a stated minimum
amount of its series B convertible preferred stock ("A.C.T. Group series B
stock"), A.C.T. Group will issue to ImClone Systems shares of A.C.T. Group
series B stock at a 20% discount to the price at which they are sold; (ii) if,
prior to November 30, 2001, A.C.T. Group has not sold the series B stock but
enters into a binding agreement with respect to a merger or other transaction in
which its stockholders receive securities of another entity with a stated
minimum amount of cash, A.C.T. Group will issue to ImClone Systems shares of its
common stock valued at $1.60 per share; and (iii) if neither of the events
described in (i) or (ii) occurs, the note will be payable on November 30, 2001
in cash, or at the option of A.C.T. Group, common stock valued at $1.60 per
share. If common stock is used to repay the promissory note, ImClone Systems
will have the right at that time to purchase up to an additional $1,000,000
worth of A.C.T. Group common stock at $1.60 per share.
6
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The warrant to purchase common stock entitles ImClone Systems to buy
$1,000,000 worth of A.C.T. Group common stock beginning with the earlier of
November 30, 2001 or the closing of the sale, if any, of the A.C.T. Group series
B stock. The exercise prices are the same as the convertible promissory note
repayment provisions. Due to the uncertainty regarding the ultimate collection
of the note and the absence of a readily determinable market value for A.C.T.
Group's common and preferred stock, ImClone Systems recorded a $1,000,000
write-down of the note during the quarter ended June 30, 2001. The write-down is
included in loss on securities and investments in the accompanying consolidated
statement of operations for the nine months ended September 30, 2001. The
Company's Chief Executive Officer is a member of A.C.T. Group's Board of
Directors.
(6) INVESTMENT IN VALIGEN N.V.
In May 2000, the Company made an equity investment in ValiGen N.V.
("ValiGen"), a private biotechnology company specializing in therapeutic target
identification and validation using the tools of genomics and gene expression
analysis. The Company purchased 705,882 shares of ValiGen's series A preferred
stock and received a five-year warrant to purchase 388,235 shares of ValiGen's
common stock at an exercise price of $12.50 per share. The aggregate purchase
price was $7,500,000. The Company assigned a value of $594,000 to the warrant
based on the Black-Scholes Pricing Model. The ValiGen series A preferred stock
contains voting rights identical to holders of ValiGen's common stock. Each
share of ValiGen series A preferred stock is convertible into one share of
ValiGen common stock. The Company may elect to convert the ValiGen series A
preferred stock at any time; provided, that the ValiGen preferred stock will
automatically convert into ValiGen common stock upon the closing of an initial
public offering of ValiGen's common stock with gross proceeds not less than
$20,000,000. The Company also received certain protective rights and customary
registration rights under this arrangement. The Company recorded this original
investment in ValiGen using the cost method of accounting. During the second
quarter of 2001, the Company purchased 160,000 shares of ValiGen's series B
preferred stock for $2,000,000. The terms of the series B preferred stock are
substantially the same as the series A preferred stock. The investment in
ValiGen represents approximately 7% of ValiGen's outstanding equity. As of June
30, 2001, the Company has completely written-off its investment in ValiGen. The
Company recorded write-downs of approximately $5,125,000 in December 2000,
$1,600,000 in March 2001 and $2,775,000 in June 2001, determined based on the
modified equity method of accounting. The March 2001 and June 2001 write-downs
are included in loss on securities and investment for the nine months ended
September 30, 2001 in the accompanying consolidated statements of operations.
The investment is classified as a long-term asset included in Investment in
equity securities and other assets in the December 31, 2000 consolidated balance
sheet. In the spring of 2001, the Company also entered into a no-cost discovery
agreement with ValiGen to evaluate certain of its technology. The Company's
Chief Executive Officer is a member of ValiGen's Board of Directors.
(7) LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, 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 September 30, 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 of the Company. 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 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.
7
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
(8) TREASURY STOCK
The Company's employee stock option plans generally 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 nine months ended
September 30, 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 shares have been included as treasury stock in the
consolidated balance sheet at September 30, 2001.
(9) 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.
(10) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive income (loss):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net loss....................................... $ (41,072,000) $ (12,905,000) $ (71,770,000) $ (41,325,000)
Other comprehensive income (loss):
Unrealized holding gain arising
during the period........................ 1,473,000 1,622,000 3,427,000 2,183,000
Less: Reclassification adjustment for
realized gain included in net loss....... 1,800,000 54,000 2,707,000 70,000
--------------- --------------- --------------- ---------------
Total other comprehensive income (loss).. (327,000) 1,568,000 720,000 2,113,000
--------------- --------------- --------------- ---------------
Total comprehensive loss....................... $ (41,399,000) $ (11,337,000) $ (71,050,000) $ (39,212,000)
=============== =============== =============== ===============
(11) COLLABORATIVE AGREEMENTS
MERCK KGaA
In December 1998, the Company entered into a development and license
agreement with Merck KGaA with respect to ERBITUX. In exchange for exclusive
rights to market ERBITUX outside of North America (exclusive of Japan) and
co-development rights in Japan, the Company received $30,000,000 in up-front
fees and cash-based milestone payments as of September 30, 2001. The agreement
provides that 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 ERBITUX 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 ERBITUX in Merck
KGaA's territory, upon Merck KGaA's reasonable determination that the product is
economically
8
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ERBITUX sales or ERBITUX license fees in the United States and Canada). Of
the cash based milestone payments received through September 30, 2001,
$2,000,000 was received and recognized as revenue in the quarter ended June 30,
2001. A total of $28,000,000 was received prior to March 31, 2001 and 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 was 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 ERBITUX. The Company recognized approximately $56,000 and
$167,000 of the up-front payment as revenue during the three and nine months
ended September 30, 2001, respectively. In August 2001, the Company received its
first equity based milestone payment totaling $5,000,000 and accordingly issued
to Merck KGaA 63,027 shares of its common stock. The number of shares issued for
this milestone payment was determined using a price of $79.33 per share, which
represented the closing price of the stock on the day the milestone was
achieved, plus a 50 percent premium based on the achievement being earlier than
specified in the agreement. The Company recognized revenue representing the
excess of the amount paid by Merck KGaA for these shares over the fair value of
the Company's common stock of approximately $1,760,000 associated with this
milestone payment during the three months ended September 30, 2001.
In August 2001, the Company and Merck KGaA amended this agreement to
provide, among other things, that Merck KGaA may manufacture ERBITUX for supply
in its territory and may utilize a third party to do so upon ImClone Systems'
reasonable acceptance. The amendment further released Merck KGaA from its
obligations under the agreement relating to providing a guaranty under a
$30,000,000 credit facility relating to the build-out of the product launch
manufacturing facility. In addition, the amendment provides that the companies
have co-exclusive rights to ERBITUX in Japan, including the right to sublicense
and Merck KGaA waived its right of first offer in the case of a proposed
sublicense by the Company of ERBITUX in the Company's territory. In
consideration for the amendment, the Company agreed to a limited reduction in
royalties payable by Merck KGaA on sales of ERBITUX in Merck KGaA's territory.
BRISTOL-MYERS SQUIBB COMPANY
On September 19, 2001, the Company entered into an acquisition
agreement providing for the tender offer by Bristol-Myers Squibb Biologics
Company, a Delaware corporation ("BMS Biologics") which is a wholly owned
subsidiary of Bristol-Myers Squibb Company, a Delaware corporation ("BMS"), to
purchase up to 14,392,003 shares of the Company's common stock for $70.00 per
share, net to the seller in cash. The tender offer by BMS Biologics allowed for
present or former employees and directors of the Company who hold exercisable
options to purchase shares of the Company's common stock having exercise prices
less than $70.00 per share to conditionally exercise any or all of those
options and tender the underlying shares in the tender offer. In connection
with the acquisition agreement, the Company, BMS and BMS Biologics entered into
a stockholder agreement, dated as of September 19, 2001 (the "stockholder
agreement"), pursuant to which the Company, BMS and BMS Biologics agreed to
various arrangements regarding the respective rights and obligations of the
Company, BMS and BMS Biologics with respect to, among other things, the
ownership of shares of the Company's common stock by BMS and BMS Biologics.
Concurrently with the execution of the acquisition agreement and the
stockholder agreement, the Company, BMS and E.R. Squibb & Sons, L.L.C., a
Delaware limited liability company and a wholly owned subsidiary of BMS ("E.R.
Squibb"), entered into a development, promotion, distribution and supply
agreement (the "commercial agreement"), pursuant to which, among other things,
BMS, E.R. Squibb and the Company are (a) co-developing and co-promoting the
biologic pharmaceutical product ERBITUX in the United States and Canada, and
(b) co-developing and co-promoting ERBITUX (together with Merck KGaA) in Japan.
9
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ACQUISITION AGREEMENT
On October 29, 2001 BMS Biologics accepted for payment pursuant to the
tender offer 14,392,003 shares of the Company's common stock on a pro rata basis
from all tendering shareholders and those conditionally exercising stock
options.
STOCKHOLDER AGREEMENT
Pursuant to the stockholder agreement, the Company's Board of Directors
(the "Board") will be increased from ten to twelve members. BMS will have the
right to have the Company nominate two directors (each a "BMS director") so long
as its ownership interest in the Company is 12.5% or greater. If BMS' ownership
interest is 5% or greater but less than 12.5%, BMS will have the right to have
the Company nominate one BMS director, and if BMS' ownership interest is less
than 5%, BMS will have no right to nominate a BMS director. Based on the number
of shares of common stock acquired pursuant to the tender offer, BMS has the
right to have the Company nominate two directors. Currently BMS has designated
Peter S. Ringrose, M.A., Ph.D., BMS's Chief Scientific Officer, Andrew G.
Bodnar, M.D., J.D., BMS's Vice President, Medical and External Affairs, as the
initial BMS directors. Such individuals will be put before the Board for vote
thereon at the Company's next regularly scheduled Board meeting.
If the size of the Board is increased to a number greater than twelve, the
number of BMS directors will be increased, subject to rounding, such that the
number of BMS directors is proportionate to the lesser of BMS' then-current
ownership interest in the Company and 19.9%. BMS has agreed to waive this right
until the Company's next annual meeting of stockholders to the extent the
Company chooses to increase the Board to 13 members.
Notwithstanding the foregoing, BMS will have no right to have the Company
nominate any BMS directors if (i) the Company has terminated the commercial
agreement due to a material breach by BMS or (ii) BMS' ownership interest in the
Company remains below 5% for 45 consecutive days.
Voting of Shares. During the period in which BMS has the right to have the
Company nominate at least one BMS director, BMS and its affiliates are required
to vote all of their shares in the same proportion as the votes cast by all of
the Company's other stockholders with respect to the election or removal of
non-BMS directors.
Committees of the Board of Directors. During the period in which BMS has
the right to have the Company nominate at least one BMS director, BMS also has
the right, subject to certain exceptions, to have one member of each committee
of the Board be a BMS director.
Approval Required for Certain Actions. Until September 19, 2006 or, if
earlier, the occurrence of any of (i) a reduction in BMS's ownership interest in
the Company to below 5% for 45 consecutive days, (ii) a transfer or other
disposition of the Company's shares of common stock by BMS or any of its
affiliates such that BMS and its affiliates own or have control over less than
75% of the maximum number of shares of the Company's common stock owned by BMS
and its affiliates at any time after September 19, 2001, (iii) an acquisition by
a third party of more than 35% of the outstanding shares of the Company's common
stock, (iv) a termination of the commercial agreement by BMS due to significant
regulatory or safety concerns regarding ERBITUX, or (v) a termination of the
commercial agreement by the Company due to a material breach by BMS, the Company
may not take any action that constitutes a prohibited action under the
stockholder agreement without the consent of the BMS directors. Such prohibited
actions include (i) issuing additional shares or securities convertible into
shares in excess of 21,473,002 shares of the Company's common stock in the
aggregate, subject to certain exceptions; (ii) incuring additional indebtedness
if the total of (A) the principal amount of indebtedness incurred since
September 19, 2001 and then-outstanding, and (B) the net proceeds from the
issuance of any redeemable preferred stock then-outstanding, would exceed the
amount of indebtedness for borrowed money of the Company outstanding as of
September 19, 2001 by more than $500 million; (iii) acquiring any business if
the aggregate consideration for such acquisition, when taken together with the
aggregate consideration for all other acquisitions consummated during the
previous twelve months, is in excess of 25% of the aggregate value of the
Company at the time the Company enters into the binding agreement relating to
such acquisition; (iv) disposing of all or any substantial portion of the
non-cash assets of the Company; (v) entering into non-competition agreements
that would be binding on BMS, its affiliates or any BMS director; (vi) taking
certain actions that would have a discriminatory effect on BMS or any of its
affiliates as a stockholder of the Company; and (vii) issuing capital stock with
more than one vote per share.
10
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Limitation on Additional Purchases of Shares and Other Actions. Subject to
the exceptions set forth below, until September 19, 2006 or, if earlier, the
occurrence of any of (i) an acquisition by a third party of more than 35% of the
Company's outstanding shares, (ii) the first anniversary of a reduction in BMS's
ownership interest in the Company to below 5% for 45 consecutive days, or (iii)
the Company taking a prohibited action under the stockholder agreement without
the consent of the BMS directors, neither BMS nor any of its affiliates will
acquire beneficial ownership of any shares of the Company's common stock or take
any of the following actions: (i) encourage any proposal for a business
combination with, or an acquisition of shares of the Company; (ii) participate
in the solicitation of proxies from holders of shares of the Company's common
stock; (iii) form or participate in any "group" (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934) with respect to shares of the
Company's common stock; (iv) enter into any voting arrangement with respect to
shares of the Company's common stock; or (v) seek any amendment or waiver to
these restrictions.
The following are exceptions to the standstill restrictions described
above: (i) BMS Biologics may acquire beneficial ownership of shares of the
Company's common stock either in the open market or from the Company pursuant to
the option described below, so long as, after giving effect to any such
acquisition of shares, BMS's ownership interest would not exceed 19.9%; (ii) BMS
may make, subject to certain conditions, a proposal to the Board to acquire
shares of the Company's common stock if the Company provides material non-public
information to a third party in connection with, or begins active negotiation
of, an acquisition by a third party of more than 35% of the outstanding shares;
(iii) BMS may acquire shares of the Company's common stock if such acquisition
has been approved by a majority of the non-BMS directors; and (iv) BMS may make,
subject to certain conditions, including that an acquisition of shares be at a
premium of at least 25% to the prevailing market price, non-public requests to
the Board to amend or waive any of the standstill restrictions described above.
Certain of the exceptions to the standstill provisions described above will
terminate upon the occurrence of: (i) a reduction in BMS's ownership interest
in the Company to below 5% for 45 consecutive days, (ii) a transfer or other
disposition of shares of the Company's common stock by BMS or any of its
affiliates such that BMS and its affiliates own or have control over less than
75% of the maximum number of shares owned by BMS and its affiliates at any time
after September 19, 2001, (iii) a termination of the commercial agreement by
BMS due to significant regulatory or safety concerns regarding ERBITUX, or (iv)
a termination of the commercial agreement by the Company due to a material
breach by BMS.
Option to Purchase Shares in the Event of Dilution. BMS Biologics has the
right under certain circumstances to purchase additional shares of common stock
from the Company at market prices, pursuant to an option granted to BMS by the
Company, in the event that BMS's ownership interest is diluted (other than by
any transfer or other disposition by BMS or any of its affiliates). BMS can
exercise this right (i) once per year, (ii) if the Company issues shares of
common stock in excess of 10% of the then-outstanding shares in one day, and
(iii) if BMS's ownership interest is reduced to below 5% or 12.5%. BMS
Biologics's right to purchase additional shares of common stock from the Company
pursuant to this option will terminate on September 19, 2006 or, if earlier,
upon the occurrence of (i) an acquisition by a third party of more than 35% of
the outstanding shares, or (ii) the first anniversary of a reduction in BMS's
ownership interest in the Company to below 5% for 45 consecutive days.
Transfers of Shares. Until September 19, 2004, neither BMS nor any of its
affiliates may transfer any shares of the Company's common stock or enter into
any arrangement that transfers any of the economic consequences associated with
the ownership of shares. After September 19, 2004, neither BMS nor any of its
affiliates may transfer any shares or enter into any arrangement that transfers
any of the economic consequences associated with the ownership of shares, except
(i) pursuant to registration rights granted to BMS with respect to the shares,
(ii) pursuant to Rule 144 under the Securities Act of 1933, as amended or (iii)
for certain hedging transactions. Any such transfer is subject to the following
limitations: (i) the transferee may not acquire beneficial ownership of more
than 5% of the then-outstanding shares of common stock; (ii) no more than 10% of
the total outstanding shares of common stock may be sold in any one registered
underwritten public offering; and (iii) neither BMS nor any of its affiliates
may transfer shares of common stock (except for registered firm commitment
underwritten public offerings pursuant to the registration rights described
below) or enter into hedging transactions in any twelve-month period that would,
individually or in the aggregate, have the effect of reducing the economic
exposure of BMS and its affiliates by the equivalent of more than 10% of the
maximum number of shares of common stock owned by BMS and its affiliates at any
time after September 19, 2001. Notwithstanding the foregoing, BMS Biologics may
transfer all but not less than all of the shares of common stock owned by it to
BMS, E.R. Squibb or another wholly owned subsidiary of BMS.
Registration Rights. The Company has granted BMS customary registration
rights with respect to shares of common stock owned by BMS or any of its
affiliates.
11
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
COMMERCIAL AGREEMENT
Rights Granted to E.R. Squibb. Pursuant to the commercial agreement, the
Company granted to E.R. Squibb (i) the exclusive right to distribute, and the
co-exclusive right to develop and promote (together with the Company) any
prescription pharmaceutical product using the compound ERBITUX (the "product")
in the United States and Canada (collectively, "North America"), (ii) the
co-exclusive right to develop, distribute and promote (together with the Company
and Merck KGaA and its affiliates) the product in Japan, and (iii) the
non-exclusive right to use the Company's registered trademarks for the product
in North America and Japan (collectively, the "territory") in connection with
the foregoing. In addition, the Company has agreed not to grant any right or
license to any third party or otherwise permit any third party to develop
ERBITUX for animal health or any other application outside the human health
field without the prior consent of E.R. Squibb (which consent may not be
unreasonably withheld).
Rights Granted to the Company. Pursuant to the commercial agreement, E.R.
Squibb has granted to the Company and its affiliates a license, without the
right to grant sublicenses (other than to Merck KGaA and its affiliates for use
in Japan and to any third party for use outside the territory), to use solely
for the purpose of developing, using, manufacturing, promoting, distributing and
selling ERBITUX or the product, any process, know-how or other invention
developed solely by E.R. Squibb or BMS that has general utility in connection
with other products or compounds in addition to ERBITUX or the product ("E.R.
Squibb Inventions").
Up-Front and Milestone Payments. The commercial agreement provides for
up-front and milestone payments by E.R. Squibb to the Company of $1,000,000,000
in the aggregate, with $200,000,000 paid upon signing of the commercial
agreement, $300,000,000 payable upon acceptance by the FDA of the initial
regulatory filing for the product and $500,000,000 payable upon receipt of
marketing approval from the FDA. All such payments are non-refundable. The
upfront payment of $200,000,000, which was received in September 2001, has been
recorded as deferred revenue (see Note 12) and is being recognized as revenue
over the term of the agreement. The Company recognized approximately $387,000 of
this up-front payment as revenue during the three months ended September 30,
2001.
Distribution Fees. The commercial agreement provides that E.R. Squibb shall
pay the Company distribution fees based on a percentage of "annual net sales" of
the product, (as defined in the commercial agreement), by E.R. Squibb in North
America. The base distribution fee rate is 39% of net sales in North America.
Pursuant to the commercial agreement, this rate will increase in the event that
net sales exceed certain specified levels.
In the event that a third party acquires more than a 35% ownership interest
in the Company at any time prior to (or announces such acquisition prior to and
consummates any time after) the earliest to occur of (i) September 19, 2006,
(ii) the date which is 45 days after any date on which BMS's ownership interest
in the Company is less than 5%, or (iii) a transfer or other disposition of
shares of the Company's common stock by BMS or any of its affiliates such that
BMS and its affiliates own or have control over less than 75% of the maximum
number of shares of the Company's common stock owned by BMS and its affiliates
at any time after September 19, 2001, the distribution fee payable by E.R.
Squibb for North America shall be adjusted to a flat rate of 39% of all future
annual net sales.
The commercial agreement also provides that the distribution fees for the
sale of the product in Japan by E.R. Squibb or the Company shall be equal to 50%
of operating profit or loss with respect to such sales for any calendar month.
In the event of an operating profit, E.R. Squibb shall pay the Company the
amount of such distribution fee, and in the event of an operating loss, the
Company shall credit E.R. Squibb the amount of such distribution fee.
Development of the Product. Responsibilities associated with clinical and
other ongoing studies will be apportioned between the parties as determined by
the product development committee described below. The clinical development
plans agreed to by the parties pursuant to the commercial agreement set forth
the activities to be undertaken by the parties for the purpose of obtaining
marketing approvals, providing market support and developing new indications and
formulations of the product. After the transition of the clinical and other
studies, each party will be primarily responsible for performing the studies
designated to it in the clinical development plans. In North America, the
Company and E.R. Squibb will each be responsible for 50% of the cost of
non-registrational clinical studies, and E.R. Squibb will be responsible for
100% of the cost of registrational clinical studies. E.R. Squibb and the Company
will each be responsible for 50% of the cost of all studies in Japan (whether
required or not required by the applicable regulatory agency). Except as
otherwise agreed upon by the parties, the Company will own all registrations for
the product. However, E.R. Squibb will be primarily responsible for the
regulatory activities in the territory after the product has been registered in
each country in the territory.
12
IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS--(CONTINUED)
Distribution and Promotion of the Product. Pursuant to the commercial
agreement, E.R. Squibb has agreed to use all commercially reasonable efforts to
launch, promote and sell the product in the territory with the objective of
maximizing the sales potential of the product and promoting the therapeutic
profile and benefits of the product in the most commercially beneficial manner.
In connection with its responsibilities for distribution, marketing and sales of
the product in the territory, E.R. Squibb will perform all relevant functions,
including but not limited to the provision of all sales force personnel,
marketing (including all advertising and promotional expenditures), warehousing
and physical distribution of the product. However, the Company has the right, at
its election and sole expense, to co-promote with E.R. Squibb the product in the
territory. If the Company exercises this co-promotion option, it is entitled (at
its sole expense) to have its sales force and medical liaison personnel
participate in the promotion of the product consistent with the marketing plan
agreed by the parties, provided that E.R. Squibb will retain the exclusive
rights to sell and distribute the product. Except to the extent the Company
exercises the co-promotion option, E.R. Squibb will be responsible for 100% of
the distribution, sales and marketing costs in North America, and E.R. Squibb
and the Company will each be responsible for 50% of the distribution, sales,
marketing costs and other related costs and expenses in Japan.
Manufacture and Supply. The commercial agreement provides that the Company
will be responsible for the manufacture and supply of all requirements of
ERBITUX in bulk form ("API") for clinical and commercial use in the territory,
and that E.R. Squibb will purchase all of its requirements of API for commercial
use from the Company. The Company will supply API for clinical use at the
Company's fully burdened manufacturing cost, and will supply API for commercial
use at the Company's fully burdened manufacturing cost plus a mark-up of 10%.
The parties intend to negotiate the Company's use of process development at
one of BMS's facilities for the support of a non-commercial supply of API. Upon
the expiration, termination or assignment of any existing agreements between the
Company and third party manufacturers, E.R. Squibb will be responsible for
processing API into the finished form of the product.
Management. The parties have formed the following committees for purposes
of managing their relationship and their respective rights and obligations under
the commercial agreement:
- a joint executive committee (the "JEC"), which consists of certain
senior officers of each party. The JEC is co-chaired by a
representative of each of the Company and BMS. The JEC is responsible
for, among other things, managing and overseeing the development and
commercialization of ERBITUX and the product pursuant to the terms of
the commercial agreement, approving the annual budgets and multi-year
expense forecasts, and resolving disputes, disagreements and deadlocks
arising in the other committees;
- a product development committee (the "PDC"), which consists of members
of senior management of each party with expertise in pharmaceutical
drug development and/or marketing. The PDC is chaired by a
representative of the Company. The PDC is responsible for, among other
things, managing and overseeing the development and implementation of
the clinical development plans, comparing actual versus budgeted
clinical development and regulatory expenses, and reviewing the
progress of the registrational studies;
- a joint commercialization committee (the "JCC"), which consists of
members of senior management of each party with clinical experience
and expertise in marketing and sales. The JCC is chaired by a
representative of BMS. The JCC is responsible for, among other things,
overseeing the preparation and implementation of the marketing plans,
coordinating the sales efforts of E.R. Squibb and the Company, and
reviewing and approving the marketing and promotional plans for the
product in the territory; and
- a joint manufacturing committee (the "JMC"), which consists of members
of senior management of each party with expertise in manufacturing.
The JMC is chaired by a representative of the Company (except where a
determination is made that a long-term inability to supply API exists,
in which case the JMC will be co-chaired by representatives of E.R.
Squibb and the Company). The JMC is responsible for, among other
things, overseeing and coordinating the manufacturing and supply of
API and the product, and formulating and directing the manufacturing
strategy for the product.
Any matter which is the subject of a deadlock (i.e., no consensus
decision) in the PDC, the JCC or the JMC will be referred to the JEC for
resolution. Subject to certain exceptions, deadlocks in the JEC will be resolved
as follows: (i) if the matter was also the subject of a deadlock in the PDC, by
the co-chairperson of the JEC designated by the Company, (ii) if the matter was
also the subject of a deadlock in the JCC, by the co-chairperson of the JEC
designated by BMS, or (iii) if the
13
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
matter was also the subject of a deadlock in the JMC, by the co-chairperson of
the JEC designated by the Company. All other deadlocks in the JEC will be
resolved by arbitration.
Right of First Offer. E.R. Squibb has a right of first offer with respect
to the Company's 2C6 anti-VEGF receptor monoclonal antibody (or any humanized or
chimeric version thereof or any substitute therefore) should the Company decide
to enter into a partnering arrangement with a third party with respect to 2C6
(or any humanized or chimeric version thereof or any substitute therefore) at
any time prior to the earlier to occur of September 19, 2006 and the first
anniversary of the date which is 45 days after any date on which BMS's ownership
interest in the Company is less than 5%. If the Company decides to enter into a
partnering arrangement during such period, it must notify E.R. Squibb. If E.R.
Squibb notifies the Company that it is interested in such an arrangement, the
Company will provide its proposed terms to E.R. Squibb and the parties will
negotiate in good faith for 90 days to attempt to agree on the terms and
conditions of such an arrangement. If the parties do not reach agreement during
this period, E.R. Squibb must propose the terms of an arrangement which it is
willing to enter into, and if the Company rejects such terms it may enter into
an agreement with a third party with respect to such a partnering arrangement
(provided that the terms of any such agreement may not be more favorable to the
third party than the terms proposed by E.R. Squibb).
Right of First Negotiation. If, at any time during the restricted period
(as defined below), the Company is interested in establishing a partnering
relationship with a third party involving certain compounds or products not
related to ERBITUX, the product or 2C6, the Company must notify E.R. Squibb and
E.R. Squibb will have 90 days to enter into a non-binding heads of agreement
with the Company with respect to such a partnering relationship. In the event
that E.R. Squibb and the Company do not enter into a non-binding heads of
agreement, the Company is free to negotiate with third parties without further
obligation to E.R. Squibb. The "restricted period" means the period from
September 19, 2001 until the earliest to occur of (i) September 19, 2006, (ii) a
reduction in BMS's ownership interest in the Company to below 5% for 45
consecutive days, (iii) a transfer or other disposition of shares of the
Company's common stock by BMS or any of its affiliates such that BMS and its
affiliates own or have control over less than 75% of the maximum number of
shares of the Company's common stock owned by BMS and its affiliates at any time
after September 19, 2001, (iv) an acquisition by a third party of more than 35%
of the outstanding Shares, (v) a termination of the commercial agreement by BMS
due to significant regulatory or safety concerns regarding ERBITUX, or (vi) a
termination of the commercial agreement by the Company due to a material breach
by BMS.
Restriction on Competing Products. During the period from the date of the
commercial agreement until September 19, 2008, the parties have agreed not to,
directly or indirectly, develop or commercialize a competing product (defined as
a product that has as its only mechanism of action an antagonism of the EGF
receptor) in any country in the territory. In the event that any party proposes
to commercialize a competing product or purchases or otherwise takes control of
a third party which has developed or commercialized a competing product, then
such party must either divest the competing product within 12 months or offer
the other party the right to participate in the commercialization and
development of the competing product on a 50/50 basis (provided that if the
parties cannot reach agreement with respect to such an agreement, the competing
product must be divested within 12 months).
Ownership. The commercial agreement provides that the Company will own all
data and information concerning ERBITUX and the product and (except for the E.R.
Squibb Inventions) all processes, know-how and other inventions relating to the
product and developed by either party or jointly by the parties. E.R. Squibb
will, however, have the right to use all such data and information, and all such
processes, know-how or other inventions, in order to fulfill its obligations
under the commercial agreement.
Product Recalls. If E.R. Squibb is required by any regulatory authority to
recall the product in any country in the territory (or if the JCC determines
such a recall to be appropriate), then the Company and E.R. Squibb shall bear
the costs and expenses associated with such a recall (i) in North America, in
the proportion of 39% for the Company and 61% for E.R. Squibb and (ii) in Japan,
in the proportion for which each party is entitled to receive operating profit
or loss (unless the predominant cause for such a recall is the fault of either
party, in which case all such costs and expenses shall be borne by such party).
Mandatory Transfer. Each of BMS and E.R. Squibb has agreed under the
commercial agreement that in the event it sells or otherwise transfers all or
substantially all of its pharmaceutical business or pharmaceutical oncology
business, it must also transfer to the transferee its rights and obligations
under the commercial agreement.
14
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Indemnification. Pursuant to the commercial agreement, each party has
agreed to indemnify the other for (i) its negligence, recklessness or wrongful
intentional acts or omissions, (ii) its failure to perform certain of its
obligations under the agreement, and (iii) any breach of its representations and
warranties under the agreement.
Termination. Unless earlier terminated pursuant to the termination rights
discussed below, the commercial agreement expires with regard to the product in
each country in the territory on the later of September 19, 2018 and the date on
which the sale of the product ceases to be covered by a validly issued or
pending patent in such country. The commercial agreement may be also be
terminated prior to such expiration as follows:
- by either party, in the event that the other party materially
breaches any of its material obligations under the commercial
agreement and has not cured such breach within 60 days;
- by E.R. Squibb, if the JEC determines that there exists a
significant concern regarding a regulatory or patient safety
issue that would seriously impact the long-term viability of the
Product; or
- by either party, in the event that the JEC does not approve
additional clinical studies that are required by the FDA in
connection with the submission of the initial regulatory filing
with the FDA within 90 days of receiving the formal
recommendation of the PDC concerning such additional clinical
studies.
The Company incurred approximately $16,050,000 in advisor fees
associated with consummating the acquisition agreement, the stockholder
agreement and the commercial agreement with BMS and its affiliates through
September 30, 2001. These costs have been expensed during the three and nine
months ended September 30, 2001 and included as a separate line item in
operating expenses in the consolidated statement of operations.
(12) 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 three and nine
months ended September 30, 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
$40,000 associated with this change in accounting policy in the three months
ended September 30, 2001 and $122,000 in the nine months ended September 30,
2001. During the three months ended September 30, 2000, the impact of the change
in accounting policy decreased net loss by $39,000. This amount represented a
portion of deferred revenue that was recognized during the period as a result of
the change in accounting policy. During the nine months ended September 30,
2000, the impact of the change in accounting policy increased net loss by
$2,475,000, or $0.04 per share, comprising the $2,596,000 cumulative effect of
the change described above, net of $121,000 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 ERBITUX development
and license agreement with Merck KGaA. The satisfaction of this condition
allowed for the recognition of $24,000,000 in previously received milestone
payments and initiated revenue recognition, as prescribed under SAB 101, of the
$4,000,000 up-front payment received in connection with this agreement over the
patent lives of ERBITUX. The Company recognized approximately $56,000 of revenue
associated with the up-front payment during the three months ended September 30,
2001 and approximately $167,000 of revenue during the nine months ended
September 30, 2001.
15
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 2001, the Company had approximately $205,759,000 in
deferred revenue recorded on its consolidated balance sheet. This included
$199,613,000 associated with the ERBITUX commercial agreement with BMS and E.R.
Squibb, $3,834,000 related to the ERBITUX development and license agreement with
Merck KGaA and $2,312,000 associated with the BEC2 development and
commercialization agreement with Merck KGaA.
(13) CERTAIN RELATED PARTY TRANSACTIONS
The Company 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 was payable upon the earlier of June 21,
2001 or demand by the Company and bore interest at 10.5% (the prime lending rate
plus 1% on the date of the note) for the period that the loan was outstanding.
The Company extended the term of the note to December 21, 2001. The total amount
due the Company, including interest, was approximately $306,000 at September 30,
2001. As of November 14, 2001, the principal amount of this note and accrued
interest thereon has been paid in full.
In July 2001, the Company accepted a promissory note from each of its
President and Chief Executive Officer, Executive Vice President and Chief
Operating Officer and Chairman of the Board, and in August 2001 the Company
accepted a promissory note from a member of its Board of Directors, in payment
of the aggregate exercise price associated with the exercise of stock options
and warrants they held to purchase a total of approximately 4,473,000 shares of
the Company's common stock. The President and Chief Executive Officer's
promissory note was in the amount of $18,178,750; the Executive Vice President
and Chief Operating Officer's promissory note was in the amount of $15,747,550;
the Chairman of the Board's promissory note was in the amount of $1,228,065;
and the other Board member's promissory note was in the amount of $87,000. The
unsecured promissory notes were full-recourse, were payable on the earlier of
one year from the date of the notes or on demand by the Company and bore
interest at the prime lending rate plus 1% (7.75% on the date of the note).
Interest was payable quarterly and the interest rate adjusted quarterly during
the term of each note to the then current prime lending rate plus 1%. The total
amount due the Company including interest, was approximately $35,847,000 at
September 30, 2001. On October 31, 2001, the Company made demand for repayment
by November 23, 2001, of the principal amount of the notes and accrued interest
thereon. As of November 14, 2001, the principal amount of all of these notes
and accrued interest thereon have been paid in full and accordingly, the
related principal amounts of the notes outstanding at September 30, 2001 have
been classified as current assets.
On September 19, 2001, the Company entered into employment agreements
with each of its President and Chief Executive Officer, Executive Vice
President and Chief Operating Officer, Senior Vice President of Finance and
Chief Financial Officer, Senior Vice President of Legal and Senior Vice
President of Manufacturing Operations and Product Development (each, an
"executive"). Each employment agreement has a three-year term, effective as of
September 19, 2001. The term of employment for each of the President and Chief
Executive Officer and Executive Vice President and Chief Operating Officer will
be automatically extended for one additional day each day during the term of
employment unless either the Company or the executive otherwise gives notice.
The employment agreements provide for a stated base salary, minimum bonus and
benefits for each executive. The employment agreements also provide for the
grant of a total of 2,450,000 options to three of the executives at a per share
exercise price of $50.01.
(14) ACCOUNTING FOR DERIVATIVE INSTRUMENTS 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 as
amended and its operations relative thereto 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.
(15) SUBSEQUENT EVENTS
In October 2001, the Company entered into a sublease for a four story
building in downtown New York to serve as its future corporate headquarters and
research facility. The space, to be designed and improved by the Company in the
future, includes between 75,000 and 100,000 square feet of usable space,
depending on design, and includes possible additional
16
IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
expansion space. The sublease has a term of 22 years, followed by two five year
renewal option periods. In order to induce the sublandlord to enter into the
sublease, the Company made a loan to and accepted from the sublandlord a
$10,000,000 note receivable. The note is secured by a leasehold mortgage on the
prime lease as well as a collateral assignment of rents by the sublandlord. The
note is payable over 20 years and bears interest at 5 1/2% in years one through
five, 6 1/2% in years six through ten, 7 1/2% in years eleven through fifteen
and 8 1/2% in years sixteen through twenty. In addition, the Company paid the
owner of the building a consent fee in the amount of $500,000.
Future minimum lease payments associated with this sublease are as
follows:
Year Ending December 31:
2001............................................ $ 100,000
2002............................................ 600,000
2003............................................ 1,588,000
2004............................................ 2,084,000
2005............................................ 2,088,000
2006 and thereafter........................... 44,565,000
--------------
$ 51,025,000
==============
17
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
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues.
Revenues for the nine months ended September 30, 2001 and 2000 were
$30,906,000 and $1,260,000, respectively, an increase of $29,646,000. Revenues
for the nine months ended September 30, 2001 primarily included $27,760,000 in
milestone revenues from our development and license agreement with Merck KGaA
for ERBITUX. Pursuant to this agreement, we received a $2,000,000 cash milestone
payment in June 2001 which was recognized as revenue and a $5,000,000
equity-based milestone payment in August 2001, of which $1,760,000 was
recognized as revenue. The remaining $24,000,000 of 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, we
recognized $167,000 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 ERBITUX. Under this agreement, an additional $25,000,000 in
equity-based milestones may be received upon the achievement of additional
milestones. Revenues for the nine months ended September 30, 2001 also included
$1,428,000 in royalty revenue from our strategic corporate alliance with Abbott
Laboratories ("Abbott") in diagnostics and $1,000,000 in milestone revenues and
$122,000 in license fee revenues from our strategic corporate alliance with
Merck KGaA for our principal cancer vaccine product candidate, BEC2. Finally,
revenues for the nine months ended September 30, 2001 also included $387,000
from our ERBITUX development, promotion, distribution and supply agreement (the
"commercial agreement") with Bristol-Myers Squibb Company ("BMS") and its wholly
owned subsidiary, E.R. Squibb and Sons ("E.R. Squibb"). An additional
$800,000,000 may be received upon the achievement of additional milestones.
Revenues for the nine months ended September 30, 2000 primarily included
$250,000 in milestone revenue and $849,000 in royalty revenue from our strategic
corporate alliance with Abbott in diagnostics and $121,000 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
Total operating expenses for the nine months ended September 30, 2001
and 2000 were $101,037,000 and $46,796,000, respectively, an increase of
$54,241,000, or 116%. Operating expenses for the nine months ended September 30,
2001 included $16,050,000 in advisor fees associated with consummating each of
the acquisition agreement, stockholder agreement and commercial agreement (the
"BMS agreements") with BMS and its affiliates.
Operating Expenses: Research and Development.
Research and development expenses for the nine months ended September
30, 2001 and 2000 were $69,631,000 and $36,401,000, respectively, an increase of
$33,230,000 or 91%. Research and development expenses for the nine months ended
September 30, 2001 and 2000 as a percentage of total operating expenses,
excluding costs associated with consummating the BMS agreements, in the nine
months ended September 30, 2001 were 82% and 78%, respectively. Research and
development expenses include costs associated with our in-house and
collaborative research programs, product and process development expenses, costs
to manufacture our product candidates, particularly ERBITUX, prior to any
approval that we may obtain of a product candidate for commercial use or
obligations of our corporate partners to acquire product from us, quality
assurance and quality control costs, costs to conduct our clinical trials and
associated regulatory activities. Research and development expenses for the nine
months ended September 30, 2001 and 2000 have been reduced by $6,336,000 and
$4,164,000, respectively, for clinical trial and contract manufacturing costs
that are reimbursable by Merck KGaA. The increase in research and development
expenses for the nine months ended September 30, 2001 was primarily attributable
to (1) the costs associated with newly initiated and ongoing clinical trials of
ERBITUX, (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 ERBITUX and (4)
18
increased expenditures associated with discovery research. We expect research
and development costs to increase in future periods as we continue to
manufacture ERBITUX prior to any approval of the product that we may obtain for
commercial use or obligations of our corporate partners to acquire product from
us. Should such approval be obtained, the subsequent costs associated with
manufacturing ERBITUX for supply to E.R. Squibb for commercial use will be
included in inventory and expensed when sold. We expect research and development
costs associated with discovery research and product development also to
continue to increase in future periods.
Operating Expenses: Marketing, General and Administrative.
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing 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 nine months ended September 30, 2001 and 2000 were
$15,356,000 and $10,395,000, respectively, an increase of $4,961,000, or 48%.
The increase in marketing, general and administrative expenses primarily
reflected (1) costs associated with our marketing efforts (2) additional
administrative staffing required to support our commercialization efforts for
ERBITUX and (3) expenses associated with general corporate activities. We expect
marketing, general and administrative expenses to increase in future periods to
support our continued commercialization efforts for ERBITUX.
Interest Income, Interest Expense and Other (Income) Expense.
Interest income was $11,071,000 for the nine months ended September
30, 2001 compared with $15,354,000 for the nine months ended September 30, 2000,
a decrease of $4,283,000, or 28%. The decrease was primarily attributable to (1)
a decrease in interest rates associated with our portfolio of debt securities as
well as (2) a lower average portfolio balance during the nine months ended
September 30, 2001 when compared with the nine months ended September 30, 2000.
Interest expense was $10,042,000 and $8,617,000 for the nine months ended
September 30, 2001 and 2000, respectively, an increase of $1,425,000 or 17%. The
increase was primarily attributable to the convertible subordinated notes issued
in February 2001. Interest expense for the nine months ended September 30, 2001
and 2000 were offset by capitalizing interest costs of $1,398,000 and $491,000,
respectively, during the construction period of our product launch manufacturing
facility and second commercial manufacturing facility for which conceptual
design and preliminary engineering plans have been completed. 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"). We recorded losses on securities and investment for the nine months
ended September 30, 2001 in the amount of $2,668,000 as compared to gains of
$70,000 for the nine months ended September 30, 2000. The net losses on
securities and investments for the nine months ended September 30, 2001 included
$4,375,000 in write-downs of our investment in ValiGen N.V. and a $1,000,000
write-off of our convertible promissory note from A.C.T. Group, Inc. These
losses were offset by gains in our portfolio of debt securities of $2,707,000
during the nine months ended September 30, 2001.
Net Losses.
We had a net loss to common stockholders of $71,770,000 or $1.05 per
share for the nine months ended September 30, 2001 compared with $43,442,000 or
$0.70 per share for the nine months ended September 30, 2000. Included in the
net loss for the nine months ended September 30, 2001 was $16,050,000 in advisor
fees associated with consummating the BMS Agreements. Excluding these expenses,
the net loss to common stockholders for the nine months ended September 30, 2001
would have been $55,720,000 or $0.82 per share. Included in the loss for the
nine months ended September 30, 2000 was a non-cash charge of $2,596,000 related
to the cumulative effect of a change in accounting policy (see note 12 to the
accompanying consolidated financial statements). Excluding the effect of this
change in accounting policy, the net loss to common stockholders for the nine
months ended September 30, 2000 would have been $40,846,000 or $0.66 per share.
The increase in the net loss to common stockholders was due to the factors noted
above.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
Revenues.
Revenues for the three months ended September 30, 2001 and 2000 were
$2,911,000 and $812,000, respectively, an increase of $2,099,000. Revenue for
the three months ended September 30, 2001 primarily included $1,760,000 in
milestone
19
revenue associated with the achievement of an equity-based milestone related to
our development and license agreement with Merck KGaA for ERBITUX. In addition,
we recognized $56,000 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 ERBITUX. Under this agreement, an additional $25,000,000 in
equity-based milestones may be received upon the achievement of additional
milestones. Revenues for the three months ended September 30, 2001 also included
$667,000 in royalty revenue from our strategic corporate alliance with Abbott in
diagnostics and $41,000 in license fee revenue from our strategic corporate
alliance with Merck KGaA for BEC2. Finally, revenues for the three months ended
September 30, 2001 also included $387,000 from our commercial agreement with BMS
and E.R. Squibb for ERBITUX. Revenues for the three months ended September 30,
2000 included (1) $250,000 in milestone revenues and $522,000 in royalty
revenues from our strategic alliance with Abbott in diagnostics and (2) $39,000
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
Total operating expenses for the three months ended September 30, 2001
and 2000 were $45,495,000 and $16,044,000, respectively, an increase of
$29,451,000, or 184%. Operating expenses for the three months ended September
30, 2001 included $16,050,000 in advisor fees associated with consummating the
BMS agreements.
Operating Expenses: Research and Development.
Research and development expenses for the three months ended September
30, 2001 and 2000 were $24,040,000 and $12,557,000, respectively, an increase of
$11,483,000 or 91%. Research and development expenses for the three months ended
September 30, 2001 and 2000 as a percentage of total operating expenses,
excluding costs associated with consummating the BMS agreements in the three
months ended September 30, 2001, were 82% and 78% respectively. Research and
development expenses include costs associated with our in-house and
collaborative research programs, product and process development expenses, costs
to manufacture our product candidates, particularly ERBITUX, prior to any
approval that we may obtain of a product candidate for commercial use or
obligations of our corporate partners to acquire product from us, 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 September 30, 2001 and 2000 have been reduced by $2,624,000
and $2,650,000, respectively, for clinical trial and contract manufacturing
costs that are reimbursable by Merck KGaA. Research and development expenses for
the three months ended September 30, 2001 have also been reduced by $2,475,000
as a result of a reduction in prior billings associated with our commercial
manufacturing service agreement with Lonza. The increase in research and
development expenses for the three months ended September 30, 2001 was primarily
attributable to (1) the costs associated with newly initiated and ongoing
clinical trials of ERBITUX, (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
ERBITUX and (4) increased expenditures associated with discovery research. We
expect research and development costs to increase in future periods as we
continue to manufacture ERBITUX prior to any approval of the product that we may
obtain for commercial use or obligations of our corporate partners to acquire
product from us. Should such approval be obtained, the subsequent costs
associated with manufacturing ERBITUX for commercial supply to E.R. Squibb for
commercial use will be included in inventory and expensed when sold. We expect
research and development costs associated with discovery research and product
development also to continue to increase in future periods.
Operating Expenses: Marketing, General and Administrative.
Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related occupancy costs, additional
costs to develop internal marketing 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 September 30, 2001 and 2000 were
$5,405,000 and $3,487,000, respectively, an increase of $1,918,000, or 55%. The
increase in marketing, general and administrative expenses primarily reflected
(1) costs associated with our marketing efforts (2) additional administrative
staffing required to support our commercialization efforts for ERBITUX and (3)
expenses associated with general corporate activities. We expect marketing,
general and administrative expenses to increase in future periods to support our
continued commercialization efforts for ERBITUX.
Interest Income, Interest Expense and Other (Income) Expense.
Interest income was $3,244,000 for the three months ended September 30,
2001 compared with $6,002,000 for the three months ended September 30, 2000, a
decrease of $2,758,000, or 46%. The decrease was primarily attributable to (1) a
decrease in interest rates on our portfolio of debt securities as well as (2) a
lower average portfolio balance during the three months ended September 30, 2001
when compared with the three months ended September 30, 2000. Interest expense
was $3,532,000 and
20
$3,729,000 for the three months ended September 30, 2001 and 2000, respectively,
a decrease of $197,000 or 5%. The decrease in interest expense was attributable
to a greater amount of capitalized interest in the three months ended September
30, 2001 as compared with the three months ended September 30, 2000. Interest
expense for the three months ended September 30, 2001 and 2000 were offset by
capitalizing interest costs of $278,000 and $184,000, respectively, during the
construction period of our product launch manufacturing facility and a second
commercial manufacturing facility for which conceptual design and preliminary
engineering plans have been completed. Interest expense for both periods
included (1) interest on the convertible subordinated notes, (2) interest on the
outstanding 1990 IDA Bond with a principal amount of $2,200,000 and (3) interest
recorded on various capital lease obligations under a 1996 financing agreement
and a 1998 financing agreement with Finova. We recorded gains on securities and
investment for the three months ended September 30, 2001 and 2000 of $1,800,000
and $54,000, respectively, an increase of $1,746,000. The increase in gains on
securities and investment was attributable to selling securities in our
portfolio of debt securities during a period of declining interest rates.
Net Losses.
We had a net loss to common stockholders of $41,072,000 or $0.57 per
share for the three months ended September 30, 2001 compared with $13,617,000 or
$0.21 per share for the three months ended September 30, 2000. Included in the
net loss for the three months ended September 30, 2001 was $16,050,000 in
advisor fees associated with consummating the BMS agreements. Excluding these
expenses, the net loss to common stockholders for the nine months ended
September 30, 2001 would have been $25,022,000 or $0.35 per share. The increase
in the net loss and per share net loss to common stockholders was due to the
factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, our principal sources of liquidity consisted of
cash and cash equivalents and securities available for sale of approximately
$348,907,000. From inception through September 30, 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 $64,221,000 from license fees,
contract research and development fees and royalties from
collaborative partners. Additionally, we have approximately
$205,759,000 in deferred revenue related to up-front
payments received from our ERBITUX commercial agreement with
BMS and E.R. Squibb, our ERBITUX development and license
agreement with Merck KGaA and our BEC2 development and
commercialization agreement with Merck KGaA. These amounts
are being recognized as revenue over the expected lives of
the respective agreements (see Note 12 of the consolidated
financial statements)
- We have earned approximately $42,589,000 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.
Until September 19, 2006 or, if earlier, upon the occurrence of certain
specified events, we may not take any action that constitutes a prohibited
action under our stockholder agreement with BMS and BMS Biologics without the
consent of the directors sitting on our board and designated by BMS pursuant to
their right under the stockholder agreement. Such prohibited actions include
(i) issuing additional shares or securities convertible into shares in excess
of 21,473,002 shares of our common stock in the aggregate, subject to certain
exceptions; (ii) incurring additional indebtedness if the total of the
principal amount of such indebtedness incurred since September 19, 2001 and
then-outstanding, and the net proceeds from the issuance of any redeemable
preferred stock then-outstanding, would exceed the amount of indebtedness
outstanding as of September 19, 2001 by more than $500 million; (iii) acquiring
any business if the aggregate consideration for such acquisition, when taken
together with the aggregate consideration for all other acquisitions
consummated during the previous twelve months, is in excess of 25% of the
aggregate value of the Company at the time we enter into the binding agreement
relating to such acquisition; (iv) disposing of all or any substantial portion
of our non-cash assets; (v) issue capital stock with more than one vote per
share.
21
In September 2001, we entered into a commercial agreement with BMS and
E.R. Squibb relating to ERBITUX, pursuant to which, among other things, together
with E.R Squibb we are (a) co-developing and co-promoting ERBITUX in the United
States and Canada, and (b) co-developing ERBITUX (together with Merck KGaA) in
Japan. In exchange for these rights, we can receive up-front and milestone
payments totaling $1,000,000,000 in the aggregate, of which $200,000,000 was
received upon the signing of the agreement. The remaining $800,000,000 in
milestone payments comprise $300,000,000 payable upon acceptance by the FDA of
the initial regulatory filing for ERBITUX and $500,000,000 payable upon receipt
of marketing approval from the FDA. All such payments are non-refundable. E.R.
Squibb is also responsible for 100% of the distribution, sales and marketing
costs in North America, and we and E.R. Squibb will each be responsible for 50%
of the distribution, sales, marketing costs and other related costs and expenses
in Japan. The commercial agreement provides that E.R. Squibb shall pay us
distribution fees based on a percentage of annual sales of ERBITUX by E.R.
Squibb in North America. The base distribution fee rate is 39% of net sales in
North America. Pursuant to the commercial agreement with BMS and E.R. Squibb,
this rate will increase in the event that net sales exceed certain agreed
levels. The commercial agreement also provides that the distribution fees for
the sale of ERBITUX in Japan by E.R. Squibb or us shall be equal to 50% of
operating profit or loss with respect to such sales for any calendar month. In
the event of an operating profit, E.R. Squibb will pay us the amount of such
distribution fee, and in the event of an operating loss, we will credit E.R.
Squibb the amount of such distribution fee. The commercial agreement provides
that we will be responsible for the manufacture and supply of all requirements
of ERBITUX in bulk form for clinical and commercial use in the United States,
Canada and Japan and that E.R. Squibb will purchase all of its requirements of
ERBITUX in bulk form for commercial use from us. We will supply ERBITUX for
clinical use at our fully burdened manufacturing cost, and will supply ERBITUX
for commercial use at our fully burdened manufacturing cost plus a mark-up of
10% as defined in the commercial agreement. In addition to the up-front and
milestone payments, the distribution fees for the United States Canada and Japan
and the 10% mark-up on ERBITUX, E.R. Squibb is also responsible for 100% of the
development costs for ERBITUX registrational clinical studies and 50% of the
development costs for ERBITUX non-registrational clinical studies.
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 September 30, 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. This agreement was amended in April 2001 to
include additional services. Under the agreement, Lonza is responsible for
process development and scale-up to manufacture ERBITUX in bulk form under cGMP
conditions. These steps were taken to assure that the manufacturing process
would produce bulk material that conforms with our reference material and to
support, in part, our regulatory filing with the FDA. As of September 30, 2001,
we had incurred approximately $5,304,000 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 ERBITUX. This agreement was amended in June 2001 and again in
September 2001 to include additional services. As of September 30, 2001, we had
incurred approximately $7,800,000 for services provided under the commercial
manufacturing services agreement. Under these two agreements, Lonza is
manufacturing ERBITUX at the 5,000 liter scale under cGMP conditions and is
delivering it to us over a term ending no later than December 2003. The costs
associated with both of these agreements are included in research and
development expenses when incurred and will continue to be so classified until
such time as ERBITUX may be approved for sale or until we obtain obligations
from our corporate partners for supply of such product. In the event of such
approval or obligations from our corporate partners, the subsequent costs
associated with manufacturing ERBITUX for commercial sale will be included in
inventory and expensed when sold. In the event we terminate (i.e., the
cancellation of batches of bulk product) the commercial manufacturing services
agreement without cause, we will be required to pay 85% of the stated costs for
each of the first ten batches cancelled, 65% of the stated costs for each of the
next ten batches cancelled and 40% of the stated costs for each of the next six
batches cancelled. The batch cancellation provisions for the subsequent batches
contained in the amendment to the commercial manufacturing services agreement
require us to pay 100% of the stated costs of cancelled batches scheduled within
six months of the cancellation, 85% of the stated costs of cancelled batches
scheduled between six and twelve months following the cancellation and 65% of
the stated costs of cancelled batches scheduled between twelve and eighteen
months following the cancellation. These amounts are subject to mitigation
should Lonza use its manufacturing capacity caused by such termination for
another customer.
22
In October 2001, we entered into an agreement in principle with Lonza to
manufacture ERBITUX at the 2,000 liter scale for use in clinical trials by Merck
KGaA. We have incurred approximately $1,763,000 during the nine months ended
September 30, 2001 for services provided under this agreement. The expenditures
associated with this agreement are included in other current assets in the
consolidated balance sheet at September 30, 2001 because they are reimbursable
by Merck KGaA.
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, should we choose to do so. 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 supply 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. In 2001 we completed renovations of the facility to better suit
our needs at a cost of approximately $2,800,000.
In October 2001, we entered into a sublease for a four story building
in downtown New York to serve as our future corporate headquarters and research
facility. The space, to be designed and improved in the future, includes between
75,000 and 100,000 square feet of usable space, depending on design, and
includes possible additional expansion space. The sublease has a term of 22
years, followed by two five year renewal option periods. The future minimum
lease payments are approximately $51,025,000 throughout the term of the
sublease. In order to induce the sublandlord to enter into the sublease, we made
a loan to and accepted from the sublandlord a $10,000,000 note receivable. The
note is secured by a leasehold mortgage on the prime lease as well as a
collateral assignment of rents by the sublandlord. The note receivable is
payable by the sublandlord over 20 years and bears interest at 5 1/2% in years
one through five, 6 1/2% in years six through ten, 7 1/2% in years eleven
through fifteen and 8 1/2% in years sixteen through twenty. In addition, we paid
the owner of the building a consent fee in the amount of $500,000.
We have built a product launch manufacturing facility on our campus in
Somerville, New Jersey. It is expected that the necessary commissioning and
validation of the product launch facility will be completed by the end of 2001.
The facility is approximately 80,000 square feet, contains three 10,000 liter
fermentors and is being dedicated to the commercial production of ERBITUX. The
cost of the facility was approximately $53,000,000, excluding capitalized
interest of approximately $1,966,000. The cost for the facility has come from
our cash reserves, which were primarily obtained through the issuance of debt
and equity securities. The product launch facility was put in operation in July
2001 and we commenced depreciation at that time.
We have completed conceptual design and preliminary engineering plans
and begun detailed design plans for a second commercial manufacturing facility
to be built on our Somerville, New Jersey campus. The multi-product facility
will be approximately 250,000 square feet and contain up to 10 fermentors with a
total capacity of 110,000 liters. The cost of this facility, for two completely
fitted out suites and a third suite with utilities only, is expected to be
approximately $250,000,000, excluding capitalized interest. The actual amount
may change depending upon various factors. We have incurred approximately
$16,091,000 in conceptual design, engineering and capitalized interest costs
through September 30, 2001.
Total capital expenditures made during the nine months ended September
30, 2001 were $44,591,000 and primarily included (1) $1,757,000 related to the
purchase of equipment for and leasehold improvement costs associated with our
corporate office and research laboratories in our New York facility; (2)
$19,768,000 related to engineering, construction and capitalized interest costs
of the product launch manufacturing facility; (3) $16,091,000 related to the
conceptual design and preliminary engineering plans for the second commercial
manufacturing facility; (4) $1,559,000 related to improving and equipping our
pilot manufacturing facility; (5) $3,330,000 in computer hardware, software and
design and configuration costs related to the implementation of an enterprise
resource planning system and (6) $612,000 related to the purchase of land
adjacent to the existing pilot manufacturing facility.
We believe that our existing cash on hand and amounts to which we are
entitled 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, upon the achievement of research and development
milestones, to certain milestone payments. Such payments include $800,000,000 in
cash-based milestone payments under our ERBITUX commercial agreement with BMS
and E.R. Squibb and $25,000,000 in equity-based milestone payments under our
ERBITUX development and license agreement with Merck
23
KGaA. 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
At December 31, 2000, we had net operating loss carryforwards for
United States federal income tax purposes of approximately $308,923,000, which
expire at various dates from 2001 through 2020. At December 31, 2000 we had
research credit carryforwards of approximately $11,558,000, 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 the corporation experiences a
change in ownership of more than 50 percentage points within a three-year
period. Since 1986, we have experienced two such ownership changes. As a result,
we are only permitted to use in any one year approximately $5,159,000 of our
available net operating loss carryforwards that occurred prior to February 1996.
Similarly, we are limited in using our research credit carryforwards. We have
determined that our November 1999 public stock offering, our February 2000
private placement of convertible subordinated notes, our August 2001 issuance of
common stock to Merck KGaA associated with an equity milestone payment under the
ERBITUX development and license agreement and our September 2001 acquisition
agreement with BMS and BMS Biologics did not cause an additional ownership
change that would further limit the use of our net operating losses and research
credit carryforwards. Of our $308,923,000 in net operating loss carry forwards
at December 31, 2000, we have approximately $261,821,000 available to use in
2001, approximately $5,159,000 available to use in each year from 2002 through
2010 and approximately $672,000 available to use in 2011. Any of the
aforementioned net operating loss carryforwards which are not utilized are
available for utilization in future years, subject to the statutory expiration
dates of such net operating loss 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 our business, including without limitation, the risks and uncertainties
associated with completing pre-clinical and clinical trials of our compounds
that demonstrate such compounds' safety and effectiveness; obtaining additional
financing to support our operations; obtaining and maintaining regulatory
approval for such compounds and complying with other governmental regulations
applicable to the our 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 our products, either directly
or with collaborative partners; developing market demand for and acceptance of
such products; competing effectively with other pharmaceutical and
biotechnological products; obtaining adequate reimbursement from third-party
payors; 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 and Form 10-K.
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
24
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
September 30, 2001:
2006 AND
2001 2002 2003 2004 2005 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed Rate....... -- $10,245,000 $245,000 -- -- $ 44,720,000 $ 55,210,000 $ 59,144,000
Average Interest
Rate........... -- 2.74% 6.00% -- -- 6.17% 5.52% --
Variable Rate.... -- $13,985,000(1) -- $32,998,000(1) $27,208,000(1) $133,800,000(1) $207,991,000 $209,175,000
Average
Interest Rate.... -- 3.58% -- 4.14% 4.36% 4.30% 4.24% --
---- ----------- -------- ----------- ----------- ------------- ------------ ------------
-- $24,230,000 $245,000 $32,998,000 $27,208,000 $178,520,000 $263,201,000 $268,319,000
==== =========== ======== =========== =========== ============= ============ ============
- ------------------
(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 $294,900,000 at September 30, 2001.
25
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
(b) Reports on Form 8-K
On September 26, 2001, the Company filed a Current Report on
Form 8-K with the Securities and Exchange Commission under Item 5.
26
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: November 13, 2001 By /s/ SAMUEL D. WAKSAL
---------------------------------------------
Samuel D. Waksal
President and Chief Executive Officer
Date: November 13, 2001 By /s/ DANIEL S. LYNCH
---------------------------------------------
Daniel S. Lynch
Senior Vice President, Finance and
Chief Financial Officer
27