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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] 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 12, 1999
Common Stock, par value $.001 25,632,551 Shares
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IMCLONE SYSTEMS INCORPORATED
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999
(unaudited) and December 31, 1998 1
Unaudited Consolidated Statements of Operations - Three
and nine months ended September 30, 1999 and 1998 2
Unaudited Consolidated Statements of Cash Flows - Nine
months ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
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PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share data)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
(UNAUDITED)
Current assets:
Cash and cash equivalents . $1,211 $3,888
Securities available for sale 33,052 42,851
Prepaid expenses 239 470
Other current assets 1,528 1,196
------------- ------------
Total current assets 36,030 48,405
------------- ------------
Property and equipment:
Land 340 340
Building and building improvements 10,708 10,519
Leasehold improvements 4,878 4,846
Machinery and equipment 8,619 7,834
Furniture and fixtures 653 640
Construction in progress 3,724 115
------------- ------------
Total cost 28,922 24,294
Less accumulated depreciation and amortization (14,162) (12,877)
------------- ------------
Property and equipment, net 14,760 11,417
------------- ------------
Patent costs, net 897 860
Deferred financing costs, net 39 46
Other assets 1,868 1,524
------------- ------------
$53,594 $62,252
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,948 $1,109
Accrued expenses and other 2,695 4,847
Interest payable 106 45
Deferred revenue -- 75
Fees potentially refundable from corporate partner 14,000 4,000
Current portion of long-term liabilities 913 744
Preferred stock dividends payable 4,307 2,512
------------- ------------
Total current liabilities 23,969 13,332
------------- ------------
Long-term debt 2,200 2,200
Other long-term liabilities, less current portion 1,363 1,546
------------- ------------
Total liabilities 27,532 17,078
------------- ------------
Commitments and contingencies
Stockholders' equity :
Preferred stock, $1.00 par value; authorized 4,000,000 shares;
issued and outstanding Series A Convertible: 400,000 at
September 30, 1999 and December 31, 1998 (preference in
liquidation $44,307 and $42,512, respectively) 400 400
Common stock, $.001 par value; authorized 60,000,000 shares;
issued 25,671,324 and 24,567,312 at September 30, 1999 and
December 31, 1998, respectively; outstanding 25,620,507, and
24,516,495 at September 30, 1999 and December 31, 1998,
respectively 26 25
Additional paid-in capital 191,094 184,853
Accumulated deficit (165,211) (138,846)
Treasury stock, at cost; 50,817 shares at September 30, 1999
and December 31, 1998 (492) (492)
Note receivable - officer and stockholder (139) (142)
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale, net 384 (624)
------------- ------------
Total stockholders' equity 26,062 45,174
------------- ------------
$53,594 $62,252
============= ============
See accompanying notes to consolidated financial statements.
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IMCLONE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
Revenues:
Product development milestone revenues $ -- $ -- $ -- $1,000
Research and development funding from third
parties and other 138 819 1,021 2,434
-------- -------- -------- --------
Total revenues 138 819 1,021 3,434
-------- -------- -------- --------
Operating expenses:
Research and development 8,626 6,423 22,131 15,269
General and administrative 2,107 1,215 5,784 4,174
-------- -------- -------- --------
Total operating expenses 10,733 7,638 27,915 19,443
-------- -------- -------- --------
Operating loss (10,595) (6,819) (26,894) (16,009)
-------- -------- -------- --------
Other:
Interest income (589) (741) (1,757) (2,348)
Interest expense 129 120 375 320
Loss (gain) on securities available for sale 21 (32) 853 (34)
-------- -------- -------- --------
Net interest and other income (439) (653) (529) (2,062)
-------- -------- -------- --------
Net loss (10,156) (6,166) (26,365) (13,947)
Preferred dividends (including assumed incremental yield
attributable to beneficial conversion feature of $333 and
$317 for the three months ended September 30, 1999
and 1998, respectively and $1,005 and $952 for the
nine months ended September 30, 1999 and 1998,
respectively) 938 922 2,800 2,747
-------- -------- -------- ------
Net loss to common stockholders $(11,094) $(7,088) $(29,165) $(16,694)
======== ======== ======== ========
Basic and diluted net loss per common share $(0.44) $(0.29) $ (1.17) $ (0.69)
======== ======== ======== ========
Weighted average shares outstanding 25,398 24,328 24,947 24,277
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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IMCLONE SYSTEMS INCORPORATED
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
September 30,
1999 1998
Cash flows from operating activities:
Net loss $(26,365) $(13,947)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,374 1,341
Expense associated with issuance
of options and warrants 1,979 416
Loss (gain) on securities available for sale 853 (34)
Changes in:
Prepaid expenses 231 382
Other current assets (332) (320)
Other assets (130) (47)
Interest payable 61 38
Accounts payable 839 (429)
Accrued expenses and other (2,152) 1,023
Deferred revenue (75) 150
Fees potentially refundable from corporate partner 10,000 --
-------- --------
Net cash used in operating activities (13,717) (11,427)
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (4,096) (812)
Purchases of securities available for sale (19,378) (38,322)
Sales and maturities of securities available for sale 29,117 50,503
Additions to patents (118) (248)
-------- --------
Net cash provided by investing activities 5,525 11,121
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 5,936 404
Proceeds from issuance of common stock under the employee stock purchase plan 114 12
Proceeds from equipment and building improvement financings 94 593
Payments of other liabilities (640) (662)
Interest received on note receivable - officer and stockholder 11 --
-------- --------
Net cash provided by financing activities 5,515 347
-------- --------
Net (decrease) increase in cash and cash equivalents (2,677) 41
Cash and cash equivalents at beginning of period 3,888 2,558
-------- --------
Cash and cash equivalents at end of period $1,211 $2,599
======== ========
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IMCLONE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements of ImClone Systems Incorporated ("ImClone"
or the "Company") as of September 30, 1999 and for the three and nine months
ended September 30, 1999 and 1998 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, 1998, as filed with the Securities and Exchange
Commission.
Results for the interim periods are not necessarily indicative of results for
the full years.
(2) SEGMENT INFORMATION
The Company is a biopharmaceutical company engaged in the research and
development of novel cancer treatments. The Company is currently pursuing three
research and development programs that it believes show promise for treating
cancer: growth factor inhibitors, cancer vaccines and angiogenesis inhibitors. 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 managed and operated as one business. The entire business 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. In addition, the Company
does not directly 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 location and does not have separately
reportable segments as defined by SFAS No. 131.
(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
gains on foreign currency transactions of approximately $9,000 for the nine
months ended September 30, 1999 and losses on foreign currency transactions of
approximately $131,000 for the nine months ended September 30, 1998. For the
three months ended September 30, 1999 and September 30, 1998, the Company
recorded foreign currency transaction losses of approximately $132,000 and
$20,000, respectively.
(4) COMMITMENTS
The Company signed a definitive agreement in April 1999 with Boehringer
Ingelheim Pharmaceuticals KG ("BI Pharmaceuticals") for the further development,
production scale-up and manufacture of the Company's lead therapeutic product
candidate, C225, for use in human clinical trials. Services pursuant to this
agreement commenced in April 1998 pursuant to an agreement in principle. The
Company estimates that the total cost under the agreement, including the cost of
additional amounts of material the Company had the right to request, will be
DM12,100,000 or $6,636,000 as of September 30, 1999. As of September 30, 1999,
the Company has incurred approximately DM3,940,000, of which DM3,720,000 has
been paid, for services provided under this agreement.
(5) RELATED PARTY TRANSACTIONS
In January 1998, the Company accepted a promissory note totaling approximately
$131,000 from its President and CEO in connection with the exercise of a warrant
to purchase 87,305 shares of the Company's common stock, $.001 par value (the
"Common Stock"). The note is due no later than two years from issuance and is
full recourse. Interest was paid on the first anniversary date of the promissory
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note at an annual rate of 8.5% and is payable on the stated maturity or any
accelerated maturity at the annual rate of 8.5%. At September 30, 1999, the
total amount due the Company, including interest, was approximately $139,000 and
is classified in the stockholders' equity section of the balance sheet as a note
receivable from officer and stockholder.
(6) EARNINGS PER SHARE
Basic and diluted Earnings Per Share ("EPS") are computed based on the net loss
for the relevant period, adjusted for cumulative Series A Convertible Preferred
Stock (the "Series A Preferred Stock" or "Series A Preferred Shares") dividends
and the assumed incremental yield attributable to the beneficial conversion
feature in the preferred stock, divided by the weighted average number of shares
outstanding during the period. Potentially dilutive securities, including
convertible preferred stock, options and warrants, have not been included in the
diluted EPS computation because they are anti-dilutive.
(7) COMPREHENSIVE INCOME (LOSS)
The following table reconciles net loss to comprehensive loss:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
........................ ........................
1999 1998 1999 1998
..... ..... ..... ....
Net loss $(10,156,000) $(6,166,000) $(26,365,000) $(13,947 ,000)
Other comprehensive income:
Unrealized holding gain arising
during the period 86,000 (910,000) 155,000 (704,000)
Less: Reclassification adjustment for
realized gain (loss) included in
net loss (21,000) 32,000 (853,000) 34,000
------------ ----------- ------------ ------------
Total other comprehensive income 107,000 (942,000) 1,008,000 (738,000)
------------ ----------- ------------ ------------
Total comprehensive loss $(10,049,000) $(7,108,000) $(25,357,000) $(14,685,000)
============ =========== ============ ============
(8) LOSS ON SECURITIES AVAILABLE FOR SALE
In October 1997, the Company entered into a Collaborative Research and License
Agreement with CombiChem Inc. ("CombiChem"). Concurrent with this agreement, the
Company entered into a Stock Purchase Agreement pursuant to which the Company
purchased 312,500 shares of common stock of CombiChem, as adjusted, for a total
purchase price of $2,000,000. The investment has been classified as available
for sale and a long-term asset. The market value of the investment in CombiChem
has declined substantially from the date of original investment and the Company
has deemed this decline in market value to be other than temporary. Accordingly,
the cost basis in the investment in CombiChem has been adjusted and a loss on
securities available for sale of $828,000 was recorded in March 1999. These
securities have not been sold by the Company. In October 1999, CombiChem
announced that it is being acquired and holders of its shares will receive cash
consideration of approximately $6.75 per share, subject to completion of the
acquisition, which would represent a financial reporting gain with respect to
the CombiChem shares of approximately $937,000, after considering the
aforementioned write-down.
(9) COMMON STOCK
On May 24, 1999, the date of the annual shareholders meeting, the stockholders
approved the amendment of the Company's certificate of incorporation to increase
the total number of shares of Common Stock the Company is authorized to issue
from 45,000,000 shares to 60,000,000 shares.
In September 1999, the Company filed with the Securities and Exchange Commission
a Registration Statement on Form S-3 relating to the public offering and sale of
up to 2,875,000 shares of its common
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stock. There can be no assurance that the Company will consummate the sale of
any of these shares of common stock.
(10) STOCK OPTIONS AND WARRANTS
On May 24, 1999, the date of the annual shareholders meeting, the stockholders
approved an amendment to the Company's 1996 Incentive Stock Option Plan (the
"1996 ISO Plan") to increase the total number of shares of Common Stock that may
be issued pursuant to options that may be granted under the 1996 ISO Plan from
3,000,000 to 4,000,000, which number shall be reduced by the number of shares of
Common Stock that have been or may be issued pursuant to options granted under
the Company's 1996 Non-Qualified Stock Option Plan (the "1996 Non-Qualified
Plan").
The stockholders also approved amendments to the Company's 1996 Non-Qualified
Plan to (i) increase the total number of shares of Common Stock that may be
issued pursuant to options that may be granted under the 1996 Non-Qualified Plan
from 3,000,000 to 4,000,000, which number shall be reduced by the number of
shares of common stock that have been or may be issued pursuant to options
granted under the Company's 1996 ISO Plan, and (ii) increase the annual option
grant made to members of the Board of Directors and the Chairman who are not
full-time employees of the Company under the 1996 Non-Qualified Plan. The annual
option grant to non-employee members of the Board of Directors increased from
2,500 to 15,000 and the annual option grant to the Chairman increased from 2,500
to 30,000.
The stockholders approved the grant of an option to the Company's President and
Chief Executive Officer to purchase 1,000,000 shares of Common Stock at a per
share exercise price equal to $18.25, the last reported sale price of the Common
Stock on the date shareholder approval was obtained at the annual shareholders
meeting. The options will vest no later than six years from the grant date and
specified amounts are subject to earlier vesting if specified Company Common
Stock price thresholds are met.
The stockholders approved the grant of an option to the Company's Executive Vice
President and Chief Operating Officer to purchase 650,000 shares of Common Stock
at a per share exercise price equal to $18.25, the last reported sale price of
the Common Stock on the date shareholder approval was obtained at the annual
shareholders meeting. The options will vest no later than six years from the
grant date and specified amounts are subject to earlier vesting if specified
Company Common Stock price thresholds are met.
(11) RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform to the
current year's presentation.
(12) COLLABORATIVE AGREEMENTS
The Company has a development and license agreement with Merck KGaA with respect
to C225, its lead interventional therapeutic product for the treatment of
cancer. In exchange for certain marketing and development rights, the Company
can receive up to $60,000,000 in milestone payments ($30,000,000 of which are
equity based) assuming the achievement of certain milestones and a $30,000,000
secured line of credit or guaranty for the build-out of a manufacturing facility
for the commercial production of C225. This agreement may be terminated by Merck
KGaA in various instances, including (i) at its discretion on any date on which
a milestone is achieved (in which case no milestone payment will be made), (ii)
for a one-year period after first commercial sale of C225 in Merck KGaA's
territory, upon Merck KGaA's reasonable determination that the product is
economically unfeasible (in which case Merck KGaA is entitled to receive back
50% of the 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 C225 sales or C225 license fees in the United States and Canada), or (iii)
in the event the Company does not obtain certain collateral license agreements
in which case Merck KGaA also is entitled to a return of all cash amounts with
respect to milestone payments to date, plus liquidated damages of $500,000. In
April 1999, the parties agreed on the production concept for the manufacturing
facility and are currently working toward securing Merck KGaA's guaranty of the
Company's obligations under a $30,000,000 credit facility relating to the
construction of the manufacturing facility. In the event of termination of the
agreement, the
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Company will be required to use its best reasonable efforts to cause the
release of Merck KGaA as guarantor. As of September 30, 1999, the Company has
received $14,000,000 in milestone payments. And, as of October 27, 1999, Merck
KGaA has confirmed the Company has achieved milestones, with respect to which
the Company is entitled to receive an additional $6,000,000 in payments. These
payments have been recorded as fees potentially refundable from corporate
partner and will be recognized as revenue upon Merck's providing the credit
facility or guaranty and the Company's obtaining the defined collateral license
agreements.
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 which affected our financial position and operating
results during the periods included in the accompanying financial statements.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1999 and 1998
REVENUES.
Revenues for the nine months ended September 30, 1999 and 1998 were $1,021,000
and $3,434,000, respectively, a decrease of $2,413,000, or 70%. Revenues for the
nine months ended September 30, 1999 primarily consisted of (i) $225,000 in
research support from our partnership with American Home Products Corporation
("American Home") in infectious disease vaccines, (ii) $533,000 in research and
support payments from our research and license agreement with Merck KGaA for our
principal cancer vaccine product candidate, BEC2, and (iii) $258,000 in royalty
revenue from our strategic alliance with Abbott Laboratories ("Abbott") in
diagnostics. Revenues for the nine months ended September 30, 1998 consisted of
(i) $225,000 in research support from our partnership with American Home in
infectious disease vaccines, (ii) $1,000,000 in milestone revenue and $1,875,000
in research and support payments from our research and license agreement with
Merck for BEC2 (iii) $236,000 in royalty revenue from our strategic alliance
with Abbott in diagnostics and (iv) $98,000 from a Phase I Small Business
Innovation Research grant from the National Cancer Institute for a program in
cancer-related angiogenesis. The decrease in revenues for the nine months ended
September 30, 1999 was primarily attributable to (i) the decrease in research
and support revenue as a result of the completion of all research and support
payments due from our research and license agreement with Merck KGaA for BEC2
and (ii) a decrease in milestone revenue which can vary widely from period to
period depending upon the timing of the achievement of various research and
development milestones for products under development.
OPERATING; RESEARCH AND DEVELOPMENT EXPENSES.
Total operating expenses for the nine months ended September 30, 1999 and 1998
were $27,915,000 and $19,443,000, respectively, an increase of $8,472,000, or
44%. Research and development expenses for the nine months ended September 30,
1999 and 1998 were $22,131,000 and $15,269,000, respectively, an increase of
$6,862,000 or 45%. Such amounts for the nine months ended September 30, 1999 and
1998 represented 79% of total operating expenses in both years. The increase in
research and development expenses for the nine months ended September 30, 1999
was primarily attributable to (i) the costs associated with the initiation of a
pivotal Phase III clinical trial of C225 in treating head and neck cancer in
combination with radiation, (ii) the costs associated with the initiation of two
additional Phase II clinical trials of C225, one in refractory head and neck
cancer in combination with cisplatin and one in refractory colorectal cancer in
combination with irinotecan, (iii) expenditures in the functional areas of
product development, manufacturing, clinical and regulatory affairs associated
with C225, (iv) expenses recognized in connection with the issuance of options
granted to scientific consultants and collaborators and (v) expenditures
associated with additional staffing in the area of discovery research. We expect
research and development costs to increase in future periods as we continue to
expand our efforts in product development and clinical trials.
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GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with 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, 1999 and 1998 were $5,784,000 and $4,174,000, respectively,
an increase of $1,610,000, or 39%. The increase in general and administrative
expenses primarily reflected (i) additional support staffing for the expanding
research, development, clinical, manufacturing and marketing efforts of the
Company, particularly with respect to C225 and (ii) expenses associated with the
pursuit of strategic corporate alliances and other corporate development
expenses. We expect general and administrative expenses to increase in future
periods to support our planned increases in research, development, clinical and
manufacturing efforts.
INTEREST AND OTHER INCOME OR LOSS AND INTEREST EXPENSE.
Interest income was $1,757,000 for the nine months ended September 30, 1999
compared with $2,348,000 for the nine months ended September 30, 1998, a
decrease of $591,000, or 25%. The decrease was primarily attributable to the
decrease in our investment portfolio as a result of funding our operations.
Interest expense was $375,000 and $320,000 for the nine months ended September
30, 1999 and 1998, respectively, an increase of $55,000 or 17%. Interest expense
for both periods primarily included (i) interest on an outstanding Industrial
Development Revenue Bond issued in 1990 (the "1990 IDA Bond") with a principal
amount of $2,200,000 and (ii) interest recorded on various capital lease
obligations under a December 1996 Financing Agreement (the "1996 Financing
Agreement") and an April 1998 Financing Agreement (the "1998 Financing
Agreement") with Finova Technology Finance, Inc. ("Finova"). The increase was
primarily attributable to entering into additional capital leases. We recorded
losses on securities available for sale for the nine months ended September 30,
1999 in the amount of $853,000 as compared to gains of $34,000 for the nine
months ended September 30, 1998. The loss for the nine months ended September
30, 1999 is primarily attributable to the $828,000 write-down of our investment
in CombiChem Inc. ("CombiChem") as a result of an other than temporary decline.
See "Liquidity and Capital Resources". In October 1999, CombiChem announced that
it is being acquired and holders of its shares will receive cash consideration
of approximately $6.75 per share, subject to completion of the acquisition,
which would represent a financial reporting gain with respect to the CombiChem
shares of approximately $937,000, after considering the aforementioned
write-down. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
NET LOSSES.
We had net losses to common stockholders of $29,165,000 or $1.17 per share for
the nine months ended September 30, 1999 compared with $16,694,000 or $0.69 per
share for the nine months ended September 30, 1998. The increase in the net
losses and per share net loss to common stockholders was due primarily to the
factors noted above.
Three Months Ended September 30, 1999 and 1998
REVENUES.
Revenues for the three months ended September 30, 1999 and 1998 were $138,000
and $819,000, respectively, a decrease of $681,000, or 83%. Revenues for the
three months ended September 30, 1999 consisted of (i) $75,000 in research
support from our partnership with American Home in infectious disease vaccines,
and (ii) $63,000 in royalty revenue from our strategic alliance with Abbott in
diagnostics. Revenues for the three months ended September 30, 1998 consisted of
(i) $75,000 in research support from our partnership with American Home in
infectious disease vaccines, (ii) $625,000 in research and support payments from
our research and license agreement with Merck KGaA for BEC2 (iii) $119,000 in
royalty revenue from our strategic alliance with Abbott in diagnostics. The
decrease in revenues for the three months ended September 30, 1999 was primarily
attributable to the decrease in research and support revenue as a result of the
completion of all research and support payments due from our research and
license agreement with Merck for BEC2.
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OPERATING; RESEARCH AND DEVELOPMENT EXPENSES.
Total operating expenses for the three months ended September 30, 1999 and 1998
were $10,733,000 and $7,638,000, respectively, an increase of $3,095,000, or
41%. Research and development expenses for the three months ended September 30,
1999 and 1998 were $8,626,000 and $6,423,000, respectively, an increase of
$2,203,000 or 34%. Such amounts for the three months ended September 30, 1999
and 1998 represented 80% and 84%, respectively, of total operating expenses. The
increase in research and development expenses for the nine months ended
September 30, 1999 was primarily attributable to (i) the costs associated with
the initiation of a pivotal Phase III clinical trial of C225 in treating head
and neck cancer in combination with radiation, (ii) the costs associated with
the initiation of two additional Phase II clinical trials of C225, one in
refractory head and neck cancer in combination with cisplatin and one in
refractory colorectal cancer in combination with irinotecan, (iii) expenditures
in the functional areas of product development, manufacturing, clinical and
regulatory affairs associated with C225, (iv) expenses recognized in connection
with the issuance of options granted to scientific consultants and collaborators
and (v) expenditures associated with additional staffing in the area of
discovery research. We expect research and development costs to increase in
future periods as we continue to expand our efforts in product development and
clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES.
General and administrative expenses include administrative personnel costs,
costs incurred in connection with pursuing arrangements with 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, 1999 and 1998 were $2,107,000 and $1,215,000, respectively,
an increase of $892,000, or 73%. The increase in general and administrative
expenses primarily reflected (i) additional support staffing for the expanding
research, development, clinical, manufacturing and marketing efforts of the
Company, particularly with respect to C225 and (ii) expenses associated with the
pursuit of strategic corporate alliances and other corporate development
expenses. We expect general and administrative expenses to increase in future
periods to support our planned increases in research, development, clinical and
manufacturing efforts.
INTEREST AND OTHER INCOME AND INTEREST EXPENSE.
Interest income was $589,000 for the three months ended September 30, 1999
compared with $741,000 for the three months ended September 30, 1998, a decrease
of $152,000, or 21%. The decrease was primarily attributable to the decrease in
our investment portfolio as a result of funding our operations. Interest expense
was $129,000 and $120,000 for the three months ended September 30, 1999 and
1998, respectively, an increase of $9,000 or 8%. Interest expense for both
periods primarily included (i) interest on the outstanding 1990 IDA Bond with a
principal amount of $2,200,000 and (ii) interest recorded on various capital
lease obligations under the 1996 Financing Agreement and the 1998 Financing
Agreement with Finova.
NET LOSSES.
We had net losses to common stockholders of $11,094,000 or $0.44 per share for
the three months ended September 30, 1999 compared with $7,088,000 or $0.29 per
share for the three months ended September 30, 1998. The increase in the net
losses and per share net loss to common stockholders was due primarily to the
factors noted above.
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LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, our principal sources of liquidity consisted of cash and
cash equivalents and short-term securities available for sale of approximately
$34,263,000. Since inception, we have financed our operations through the
following means:
- - Public and private sales of equity securities in financing transactions
have raised approximately $163,799,000 in net proceeds.
- - We have earned approximately $33,876,000 from license fees, contract
research and development fees and royalties from collaborative partners,
including approximately $1,021,000 earned during the nine months ended
September 30, 1999. Additionally, we have received $14,000,000 in
potentially refundable fees from our C225 development and license agreement
with Merck KGaA. And, as of October 27, 1999, Merck KGaA has confirmed that
we have achieved milestones, with respect to which we are entitled to
receive an additional $6,000,000 in payments. The amounts from Merck KGaA
with respect to C225 have yet to be recognized as revenue. See Footnote 12,
"Collaborative Agreements", of the Notes to Consolidated Financial
Statements.
- - We have earned approximately $10,220,000 in interest income, including
approximately $1,757,000 earned during the nine months ended September
30,1999.
- - The sale of the Industrial Development Revenue Bonds ( the "IDA Bonds") in
each of 1985, 1986 and 1990 through the New York Industrial Development
Agency (the "NYIDA") raised an aggregate of $6,313,000, 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 currently outstanding.
The 1990 IDA Bond in the outstanding principal amount of $2,200,000 becomes due
in 2004. We will incur annual interest on the 1990 IDA Bond aggregating
approximately $250,000. In order to secure our obligations to the NYIDA under
the 1990 IDA Bond, we have granted the NYIDA a security interest in facility
equipment purchased with the bond proceeds.
We signed a definitive agreement in April 1999 with Boehringer Ingelheim
Pharmaceuticals KG ("BI Pharmaceuticals") for the further development,
production scale-up and manufacture of the Company's lead therapeutic product
candidate, C225, for use in human clinical trials. Services pursuant to this
agreement commenced in April 1998 pursuant to an agreement in principle. We
estimate that the total cost under the agreement, including the cost of
additional amounts of material we had the right to request, will be
DM12,100,000 or $6,636,000 as of September 30, 1999. As of September 30, 1999,
we had incurred approximately DM3,940,000, of which DM3,720,000 has been paid,
for services provided under this agreement. We do not currently hedge our
exposure to the foreign currency risk associated with this agreement. We may
pursue an agreement with another third party relating to the manufacture of C225
for both clinical trials and commercial sale. Any such agreement would likely
require us to expend substantial funds over the next several years for process
development and for supply of C225.
We have obligations under various capital leases for certain laboratory, office
and computer equipment and also certain building improvements primarily under
the 1996 Financing Agreement and the 1998 Financing Agreement with Finova. The
1996 Financing Agreement allowed us to finance the lease of equipment and make
certain building and leasehold improvements to existing facilities involving
amounts totaling approximately $2,500,000. Each lease has a fair market value
purchase option at the expiration of a 42-month term. Pursuant to the 1996
Financing Agreement, we issued to Finova a warrant expiring December 31, 1999 to
purchase 23,220 shares of our common stock at an exercise price of $9.69 per
share. We recorded a non-cash debt discount of approximately $125,000 in
connection with this financing, which discount is being amortized over the
42-month term of the first lease. The 1996 Financing Agreement with Finova
expired in December 1997 and we utilized only $1,745,000 of the full $2,500,000
under the agreement. In April 1998, we entered into the 1998 Financing Agreement
with Finova totaling approximately $2,000,000. The terms of the 1998 Financing
Agreement are substantially similar to the now expired 1996 Financing Agreement
except that each lease has a 48-month term. As of September 30, 1999, we had
entered into twelve individual leases under both the 1996 Financing Agreement
and the 1998 Financing Agreement aggregating a total cost of $3,695,000. The
1998 Financing Agreement expired in May 1999.
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We rent our New York City facility under a lease that was scheduled to expire in
March 1999. We renewed the entire lease for a term commencing as of January 1,
1999 through December 2004 and have begun to retrofit the facility to better
suit our needs at an expected cost of approximately $2,000,000.
Under our agreement with Merck KGaA for C225, we developed, in consultation with
Merck KGaA, a production concept for a new manufacturing facility for the
commercial production of C225. Merck KGaA is to provide us, subject to certain
conditions, with a guaranty under a $30,000,000 credit facility for the
build-out of this facility. We have determined to erect this facility adjacent
to our current manufacturing facility in New Jersey, which supplies C225 to
support our clinical trials. We plan to begin construction on this facility in
the first half of 2000 and estimate that the total cost will be approximately
$45,000,000. We are currently in the process of finalizing the terms of the loan
agreement and guaranty. We expect to fund the remaining cost of this facility
through a combination of cash on hand and equipment financing transactions.
Total capital expenditures made during the nine months ended September 30, 1999
were $4,628,000, of which $532,000 have been reimbursed in accordance with the
terms of the 1998 Financing Agreement with Finova. Of the total capital
expenditures made during the nine months ended September 30, 1999, $1,788,000
related to the purchase of equipment for and costs associated with the retrofit
of our corporate office and research laboratories in New York. The balance of
capital additions include $1,821,000 in engineering and other pre-construction
costs associated with the build-out of the commercial manufacturing facility to
be erected adjacent to our current manufacturing facility in New Jersey. The
remaining $1,019,000 related to improving and equipping our existing
manufacturing facility.
The holders of the 400,000 shares of Series A Preferred Stock are entitled to
receive cumulative dividends at an annual rate of $6.00 per share. Dividends
accrue as of the issuance date of the Series A Preferred Stock and are payable
on the outstanding Series A Preferred Stock in cash on December 31 of each year
beginning December 31, 1999 or at the time of conversion or redemption of the
Series A Preferred Stock on which the dividend is to be paid, whichever is
sooner. Accrued dividends were $4,307,000 at September 30, 1999.
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 relating to the public offering and sale of up to
2,875,000 shares of our common stock. There can be no assurance that we will
consummate the sale of any of these shares of common stock.
We believe that our existing cash on hand and amounts expected to be available
under our credit facilities, together with the net proceeds from the anticipated
offering of our common stock, should enable us to maintain our current and
planned operations through at least 2001. We are also entitled to reimbursement
for certain research and development expenditures and to certain milestone
payments, including $16,000,000 in cash-based milestone payments and $30,000,000
in equity-based milestone payments from our C225 development and license
agreement with Merck KGaA, which are to be paid subject to our attaining
research and development milestones, certain of which have recently been
attained, and certain other conditions. There can be no assurance that we will
achieve the unachieved milestones. Additionally, the termination of the
agreement due to our failure to obtain the necessary collateral license
agreements would require us to return all milestone payments made to date, plus
$500,000 in liquidated damages. Our future working capital and capital
requirements will depend upon numerous factors, including, but not limited to:
- - progress 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
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- - costs of establishing both clinical scale and commercial scale
manufacturing capacity in our facility and those of others
In order to fund our capital needs after 2001, we will require significant
levels of additional capital and we intend to raise the capital through
additional arrangements with corporate partners, equity or debt financings, or
from other sources including the proceeds of product sales, if any. There is no
assurance that we will be successful in consummating any such arrangements. If
adequate funds are not available, we may be required to significantly curtail
our planned operations.
At December 31, 1998, we had net operating loss carryforwards for United States
federal income tax purposes of approximately $130,954,000 which expire at
various dates from 2000 through 2018. At December 31, 1998 we had research
credit carryforwards of approximately $4,725,000 which expire at various dates
between years 2009 and 2018. 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 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 relate to periods before these ownership
changes. Similarly, we are limited in using our research credit carryforwards.
It has not been determined whether the pending public offering of our common
stock will result in additional ownership changes that would further limit the
use of our net operating losses and research credit carryforwards.
YEAR 2000
The "Year 2000 problem" involves mainly the inability of certain computer
programs and microprocessing devices to differentiate between the year 1900 and
the year 2000 because two-digit rather than four-digit fields were used to
identify the year. There are a variety of related "date" problems, including the
use by older programs and devices of algorithms that will fail to correctly
identify the year 2000 and certain other years in the twenty-first century as
leap years. A Year 2000 problem could cause a computer system or microprocessor
that is date sensitive to malfunction, resulting in system failures. Such
failures could cause disruptions of our operations, including, without
limitation, the systems in place at our Somerville, New Jersey clinical-scale
manufacturing facility, computers, communication devices and laboratory
instrumentation and systems which use date-based information in our research and
development and scientific testing or, possibly, in our pre-clinical or clinical
trials.
To deal with the Year 2000 problem we have developed a Year 2000 program that
has three main phases: (1) review of information technology and
non-information-technology systems for the purposes of assessing the potential
impact of Year 2000 on our business and identifying non-Year 2000 compliant
systems; (2) remediation and development of contingency plans; and (3) testing.
These phases are not necessarily sequential. We have a Year 2000 team to
coordinate and carry out the various phases and Reporting Responsible Persons in
each critical area, including computer hardware, software, other hardware,
laboratory equipment, collaborators and process/clinical development. While we
believe that our program is and will be adequate to address Year 2000 problems,
there can be no assurance that our operations will not be adversely affected.
While we have devoted significant resources to dealing with the Year 2000
problem, our efforts to date have not caused the deferral of any other
significant information technology projects.
We have reviewed the potential impact of the "Y2K" bug on our research and
development, product development, manufacturing, financial, communication and
administrative operations. We determined which systems are critical to our
business. We also determined which systems were non-Year 2000 compliant.
We are in the process of remediating through corrective programming
modifications or system replacement all mission critical systems that we
identified as non-compliant. We believe that this process is substantially
completed. In addition, for systems that we have identified as non-mission
critical, we also intend to either correct them through programming changes or
replace them with compliant software and any necessary hardware or, possibly,
simply discontinue using the system.
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We have incurred approximately $350,000 on our Year 2000 program through
September 30, 1999. This includes the purchase of third-party software and
required hardware to run such software as well as the cost of modifying
software. We estimate that any additional costs incurred to complete our
remediation plan will not be material.
In addition to the review of internal systems, we are making inquiries of our
critical suppliers, corporate partners, manufacturers, clinical study sites,
service suppliers, communications providers, lessors, utilities, and banks whose
system failures or non-compliant products could have an adverse impact on our
operations. While we are not currently aware of any material Year 2000 problems
involving such entities that are likely to adversely affect us, there can be no
assurance that there will not be such problems or that, if discovered, they will
be timely remediated.
We have developed contingency plans to deal with possible disruptions of
important operations such as discovery research, product development,
manufacturing and ongoing clinical trials. Such disruptions could affect the
development and ultimate marketing of potential products as well as put us at a
competitive disadvantage relative to companies that have corrected such
problems. These contingency plans may need to be refined as more information
becomes available.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS--SAFE HARBOR STATEMENT
Those statements contained herein that do not relate to historical
information are forward-looking statements. There can be no assurance that the
future results covered by such forward-looking statements will be achieved.
Actual results may differ materially due to the risks and uncertainties inherent
in the Company's business, including without limitation, the risks and
uncertainties associated with completing pre-clinical and clinical trials of the
Company's compounds that demonstrate such compounds' safety and effectiveness;
obtaining additional financing to support the Company's operations; obtaining
and maintaining regulatory approval for such compounds; complying with other
governmental regulations applicable to the Company's business; obtaining the raw
materials necessary in the development of such compounds; consummating
collaborative arrangements with corporate partners for product development;
achieving milestones under collaborative arrangements with corporate partners;
developing the capacity and ability to manufacture, as well as to market and
sell the Company's products, either directly or with collaborative partners;
developing market demand for and acceptance of such products; competing
effectively with other pharmaceutical and biotechnological products; obtaining
adequate reimbursement from third party payors; attracting and retaining key
personnel; obtaining patents to protect the Company's own products, licenses to
use certain technologies of third parties and operating without infringing the
intellectual property rights of others; successfully remedying Year 2000
problems by the Company and those entities associated with the Company; and
those other factors set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview and Risk Factors," in
the Company's most recent Registration Statement on Form S-3.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our holdings of financial instruments are comprised of a mix of any of U.S.
corporate debt, foreign corporate debt, U.S. government debt, foreign
government/agency guaranteed debt and commercial paper. All such instruments are
classified as securities available for sale. Generally, we do not invest in
portfolio equity securities or commodities or use financial derivatives for
trading purposes. Our debt security portfolio represents funds held temporarily
pending use in our business and operations. We manage these funds accordingly.
We seek reasonable assuredness of the safety of principal and market liquidity
by investing in investment grade fixed income securities while at the same time
seeking to achieve a favorable rate of return. Our market risk exposure consists
principally of exposure to changes in interest rates. Our holdings are also
exposed to the risks of changes in the credit quality of issuers. We typically
invest in the shorter-end of the maturity spectrum or if longer, in highly
liquid debt instruments with periodic interest rate adjustments. We also have
certain foreign exchange currency risk. See footnote 4.
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, 1999:
2004 AND
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
Fixed Rate - $2,844,000 - - - - $2,844,000 $2,843,000
Average
Interest Rate - 5.10% - - - - 5.10% -
Variable Rate - - - - - $30,214,000(1) $30,214,000 $30,209,000
Average
Interest Rate - - - - - 5.59% 5.59% -
------ ---------- ------ ------- ------ ---------- ----------- -----------
- $2,844,000 - - - $30,214,000(1) $33,058,000 $33,052,000
====== =========== ====== ======= ====== ========== =========== ===========
(1) These holdings consist of U.S. corporate and foreign corporate floating rate
notes. Interest on the securities are adjusted at fixed dates using prevailing
interest rates. These holdings are highly liquid and we consider the potential
for loss of principal to be minimal.
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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)
Exhibit No. Description
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On October 7, 1999, the Company filed with the Commission a
Current Report on Form 8-K, attaching a press release issued by
the Company.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMCLONE SYSTEMS INCORPORATED
(Registrant)
Date: November 15, 1999 By /s/ Samuel D. Waksal
-----------------------------------------
Samuel D. Waksal
President and Chief Executive Officer
Date: November 15, 1999 By /s/ Carl S. Goldfischer
-----------------------------------------
Carl S. Goldfischer
Vice President, Finance and Chief
Financial Officer
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