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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-16614
NEORX CORPORATION
(Exact name of Registrant as specified in its charter)
WASHINGTON 91-1261311
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
410 WEST HARRISON STREET, SEATTLE, WASHINGTON 98119-4007
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 281-7001
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.02 PAR VALUE
9 3/4% CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2014
$2.4375 CONVERTIBLE EXCHANGEABLE PREFERRED STOCK, SERIES 1
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 16, 1999 was approximately $34.0 million (based on
the closing price for shares of the Registrant's Common Stock as reported by
the Nasdaq National Market for the last trading date prior to that date).
Shares of Common Stock held by each officer, director and holder of 5% or
more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of February 16, 1999, approximately 21.0 million shares of the
Registrant's Common Stock, $.02 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's 1999 Notice of Annual Meeting and Proxy
Statement for the Registrant's Annual Meeting of Shareholders to be held on
May 14, 1999 are incorporated by reference in Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
The discussion within the following description of the Company's business and
elsewhere in the Form 10-K contains "forward-looking statements" within the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995, which are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. The words
"believe", "expect", "intend", "anticipate" and similar expressions are used
to identify forward-looking statements, but their absence does not mean a
statement is not forward-looking. Many factors could affect the Company's
actual results, including those factors described under " Risk Factors
Affecting Forward Looking Statements," and among others, these factors could
cause results to differ materially from those presently anticipated by the
Company. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report.
The Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date of this report or to reflect the
occurrences of unanticipated events.
PRODUCTS
NeoRx Corporation ("NeoRx" or the "Company") develops innovative therapeutic
biopharmaceuticals primarily for the treatment of cancer, cardiovascular, and
inflammatory diseases. As part of its cancer treatment program, NeoRx is
currently conducting a Phase I trial of its Skeletal Targeted Radiation
("STR") product combined with chemotherapy in patients with multiple myeloma.
NeoRx is also developing a proprietary PRETARGET-REGISTERED TRADEMARK-
platform for the delivery of therapeutic products directly to tumor sites.
The Company began Phase I trials this year using its PRETARGET-REGISTERED
TRADEMARK- technology for the treatment of lymphoma.
In collaboration with Cambridge University scientists, NeoRx is investigating
the role of Transforming Growth Factor Beta ("TGF(beta)") for the treatment
of certain inflammatory and cardiovascular diseases. The Company has
conducted a Phase I study to investigate the safety and impact on TGF(beta)
levels of a certain drug that is currently marketed by a pharmaceutical
company for other indications. In addition, the Company's collaborators
discovered a series of low molecular weight compounds ("Chemotides-TM-") that
block certain parts of the inflammatory process and that have shown efficacy
in several animal models of inflammation such as asthma and inflammatory skin
reactions.
CANCER AND ITS TREATMENT
Cancer is second only to cardiovascular disease as a cause of death in the
United States. The American Cancer Society estimates that approximately
1,229,000 new cases of cancer will be diagnosed in the United States in 1998,
of which 50% are expected to be tumors of the lung, colon, breast and
prostate. Cancer is a large group of diseases characterized by uncontrolled
cell proliferation. Cancer cells have the tendency to dislodge from the sites
where the tumors originate and metastasize, spreading to other parts of the
body, and invading and destroying the organs in which they are growing.
1
Current regimens for the treatment of cancer include surgery, external-beam
radiation, chemotherapy, hormone therapy for some tumors and, more recently,
certain biological agents such as interferons and antibodies. With some
exceptions, chemotherapy is the primary therapy for tumors that have spread
throughout the body. However, chemotherapy provides only modest benefits to
patients with the most frequently occurring malignancies, such as lung, colon
and breast cancers. Generally, relatively low efficacy and considerable
toxicity characterize existing cancer therapy for these high-incidence tumors.
Chemotherapy drugs are usually administered intravenously so that the drug
can circulate throughout the body to reach the metastases. As chemotherapy
drugs circulate, they kill cancer cells, but are also toxic to normal cells.
Consequently, cancer patients receiving chemotherapy often suffer severe,
sometimes life-threatening side effects, such as damage to bone marrow,
lungs, heart, kidneys and nerves. Therefore, the optimal drug dose for
killing cancer cells must often be reduced to avoid intolerable toxicities.
NeoRx believes that improved cancer therapies will arise from one of two
approaches: inhibiting a process that is both unique AND critical to the
tumor; or, targeting more generally toxic agents preferentially to tumors.
NeoRx focuses on the second approach.
Over the course of its history, the Company's scientists have developed
expertise and technologies that permit radiation, and other toxic molecules,
to be targeted preferentially to tumor cells. Current applications involve
the Company's PRETARGET-REGISTERED TRADEMARK- product development programs.
PRETARGET-REGISTERED TRADEMARK- NEORX'S PROPRIETARY DRUG DELIVERY PLATFORM
FOR CANCER THERAPIES. NeoRx's lymphoma cancer therapy study employs
proprietary monoclonal antibody-based technology for delivering radiation
therapy. Antibodies are proteins produced by certain white blood cells in the
body's immune system in response to antigens (foreign substances) such as
viruses, bacteria, toxins and specific types of cancer cells. An antibody
will recognize and bind specifically only to a single type of antigen. This
quality makes antibodies potentially useful as "targeting vehicles" for the
delivery of imaging and therapeutic products to disease sites.
Radiation is known to kill cancer cells that are exposed to sufficiently
large doses. In the conventional approach to radioimmunotherapy ("RIT"), the
radiation is linked to the antibody that is then administered to patients.
Because the antibody is a large molecule, the antibody and the linked
radiation circulate for a long time through the bloodstream before eventually
reaching the tumors. This prolonged circulation can cause "innocent
bystander" toxicity to normal organs such as the bone marrow.
NeoRx's PRETARGET-REGISTERED TRADEMARK- technology takes advantage of the
high binding affinity of two molecules: biotin and streptavidin. Since biotin
is a small molecule it travels rapidly through the bloodstream and penetrates
the tumor site much faster than a large molecule such as an antibody. The
problem is that biotin does not bind at the tumor site. If streptavidin could
be "targeted" to the surface of a tumor, then the biotin molecules would bind
to the streptavidin on the tumor's surface and thus deliver whatever
therapeutic molecule it was carrying.
With PRETARGET-REGISTERED TRADEMARK-, an antibody that will bind to antigen
markers on the surface of particular tumor cells is linked to streptavidin.
This antibody-streptavidin conjugate (the "conjugate") is then administered
to the patient and over a 24-48 hour period will accumulate on the surface of
the tumor cells. Since no radiation is attached to the conjugate, there is no
"innocent bystander" toxicity
2
during this period of circulation. Depending on the antibody, different
tumors will be targeted in different amounts. Because almost all antibodies
also bind to some normal tissues, the display of streptavidin on normal
tissues will also depend on the particular antibody.
Because conjugate continues to circulate, an injection of biotin linked to
radiation could first bind to the conjugate in the circulation before
reaching the tumor. To reduce the conjugate in the circulation, a "clearing
agent" is injected to substantially clear the conjugate from the bloodstream
to the liver where it is metabolized. The therapy (e.g., radiation) linked to
biotin, is then administered to the patient. The biotin-radiation molecule
rapidly passes through the bloodstream and attaches primarily to the
pre-localized antibody-streptavidin conjugate. The remainder that does not
bind to the streptavidin is rapidly eliminated through the kidneys, thereby
reducing the radiation dose to the bone marrow and other normal organs
resulting from circulating radioactivity. Thus the PRETARGET-REGISTERED
TRADEMARK- technology more efficiently locates the radiation on the tumor,
reduces "innocent bystander" toxicity, and has allowed higher radiation doses
to be safely administered than with conventional RIT.
LYMPHOMA: Lymphomas are cancers of the lymph cells in the body, and represent
a variety of different disease entities. In general, lymphomas may be divided
into Hodgkins Disease and Non-Hodgkins Lymphoma ("NHL"), with the latter
further divided into T-cell and B-cell NHL depending on their cell of origin
and can form solid tumor masses of the cancerous lymph cells. Most NHLs are
derived from B-cells, and thus referred to as B-cell Lymphomas. The incidence
of B-cell lymphomas is rising (50% in the last fifteen years) due in part to
the improved longevity of patients with AIDS and to the aging of the
population. There is common consensus that the low and intermediate-grade
lymphomas are generally responsive to chemotherapy and that these diseases
represent the majority of the lymphoma cases. However, while responsive to
chemotherapy, low-grade lymphomas are rarely cured and intermediate-grade
lymphomas that are not cured by intensive chemotherapy (~50%) are also rarely
cured. Therefore the need exists for additional and improved therapies.
Patients with recurrent low-grade lymphoma treated at the Fred Hutchinson
Cancer Research Center and the University of Washington using conventional
radioimmunotherapy (RIT) at doses requiring a bone marrow transplant
demonstrated a very high complete response rate (~80%) with long median
duration of response. The Company believes its PRETARGET-REGISTERED
TRADEMARK- technology might be able to deliver high tumor doses without
requiring a bone marrow transplant. If so, this would constitute a major
improvement in both the cost and treatment of this disease.
The Company began a project in the latter part of 1997 to create a product
for the treatment of lymphoma. The first study aimed to establish proof of
concept in the clinic by employing a known antibody and comparing results
with literature reports of the conventional approach. Company scientists
constructed a conjugate using an approved lymphoma antibody marketed by
another company, and, in 1998 began accruing patients for dosimetry.
Dosimetry, while not providing a therapeutic benefit, allows the estimation
of how much radiation is delivered to tumor and normal organs using weak
forms of radiation that can be counted by cameras but do not usually result
in tumor regressions or side effects (imaging radionuclides). The results
thus far have been encouraging, with most patients demonstrating improved
tumor:normal organ ratios compared to the conventional approach as reported
in the literature. Better tumor:normal organ ratios are believed to correlate
with the ability to deliver higher doses safely.
3
Because of these results, the Food and Drug Administration granted permission
to administer therapeutic radiation doses along with the imaging
radionuclides used in the dosimetry study. The clinical investigators are
still exploring dosing and scheduling studies, and the first dose used in
these studies was higher than the maximum tolerated dose currently being
tested in pivotal trials by another company. Again, the therapeutic data has
been encouraging, although the study to date has included only a small number
of patients.
APPLYING THE PRETARGET-REGISTERED TRADEMARK- TECHNOLOGY TO CARCINOMAS
Carcinomas (cancers of organs such as lung, colon, breast, prostate,
pancreas, etc.) comprise the vast majority of invasive cancers, although they
are less sensitive to radiation than lymphoma. The Company began its
application of PRETARGET-REGISTERED TRADEMARK- technology by using an
antibody directed at these tumors with the AVICIDIN-REGISTERED TRADEMARK-
product. AVICIDIN-REGISTERED TRADEMARK- completed the Phase I clinical trials
in 1997. Previous preclinical and clinical trials have demonstrated that,
compared to conventional RIT, the maximum tolerated dose ("MTD") for
AVICIDIN-REGISTERED TRADEMARK- is more than 5-fold what the Company believes
to be the MTD of conventional therapy using yttrium-90. It is generally held
that the more radiation to which the tumor is exposed, the more likely the
tumor is to regress and the longer that the tumor regression will last. In
the Phase I trials tumor regression was observed in some patients following a
single AVICIDIN-REGISTERED TRADEMARK- dose, including patients with advanced,
bulky tumors. The dose-limiting toxicity determined in the Phase I trials was
exhibited by diarrhea that the Company believes is caused by binding of some
of the antibody to the large intestine.
Phase II trials to study the efficacy of AVICIDIN-REGISTERED TRADEMARK- in
patients with cancers of the colon and prostate who had failed standard
therapy were conducted by the Company's partner, Janssen Pharmaceutica, a
wholly-owned division of Johnson & Johnson, in 1998. Despite using the dose
believed to be safe in the Phase I trials, the Company was informed by
Janssen that the Phase II trials showed unacceptable levels of toxicity,
primarily diarrhea but also other side effects. As a consequence, Janssen
decided to return the product to NeoRx during the last half of 1998. Janssen
has committed itself to providing NeoRx the full database from these studies,
but the Company has not yet received that information.
These AVICIDIN-REGISTERED TRADEMARK- trials were conducted with the murine
antibody. During these trials the product evoked an immune response. Because
human anti-mouse antibodies ("HAMA") are usually created when a murine
antibody is used, only one dose of AVICIDIN-REGISTERED TRADEMARK- was
administered to each patient in the Phase II trials. The Company believes
that a product that can be administered more than once to each patient is
more likely to achieve a greater rate of response as well as more significant
responses than a product that is given only once. During 1998, the Company
tested a "humanized" (90% human) antibody and found that although the immune
response to the humanized antibody was significantly less than the immune
response to the murine antibody, an immune response to streptavidin was
present. The Company is currently studying means of reducing the immune
response to streptavidin so that multiple doses might be administered and
individual doses might be lowered to enable a safer dosing regimen.
During 1998, NeoRx scientists developed a genetically engineered targeting
molecule ("fusion protein") with two functional binding capacities, for tumor
and for biotin. This version of the humanized antibody was developed to
substantially reduce the manufacturing cost. One such molecule based upon the
AVICIDIN-REGISTERED TRADEMARK- product is expected to be tested in the clinic
in 1999.
NeoRx has also tested the delivery of additional therapeutic products such as
other forms of radiation and immune response modifiers (e.g., tumor necrosis
factor). The PRETARGET-REGISTERED TRADEMARK-
4
platform may offer the first practical opportunity to deliver alpha emitters,
a form of radiation significantly more potent than yttrium-90, effectively
and safely to solid tumors. NeoRx has received two Small Business Innovative
Research ("SBIR") grants to study alpha emitters with the
PRETARGET-REGISTERED TRADEMARK- technology.
SKELETAL TARGETED RADIOTHERAPY (STR): ANOTHER TARGETED CANCER THERAPY PROJECT.
Multiple myeloma is a cancer involving the malignancy of plasma cells, which
are found in the bone marrow. Current treatments for this disease have had
limited success. STR uses a targeting principle, which is different from
PRETARGET-REGISTERED TRADEMARK-, to deliver a beta-emitting radionuclide,
holmium-166, to bone where it is designed to destroy the plasma cells in the
bone marrow, both tumor cells and normal cells. Prior to therapy the
patients' bone marrow cells are harvested, so they can be reinfused following
treatment. In 1998 NeoRx began a Phase I study of STR combined with standard
therapies in patients with multiple myeloma. To date, two dose levels have
been completed and another two dose levels are planned. Although it is too
early and the patient numbers are too small to predict success, initial data
has been encouraging. If this study shows that the therapy is promising, a
pivotal trial is expected to begin by 2000. NeoRx has an exclusive option
from a large chemical company that expires in 1999 to the STR product. The
companies are negotiating a final license at this time; however, there is no
assurance that a definitive license will be negotiated.
CARDIOVASCULAR DISEASE AND ITS TREATMENT
The American Heart Association estimates that approximately 60 million
Americans have one or more types of cardiovascular disease, and that the cost
of cardiovascular diseases and stroke in 1997 was approximately $250 billion.
Nearly one million people die of cardiovascular disease each year in the
United States, making it the leading cause of death.
Cardiovascular disease is divided into four main categories: high blood
pressure, coronary artery disease, stroke and valvular heart disease. Medical
procedures to treat coronary artery disease include percutaneous transluminal
coronary angioplasty and coronary artery bypass surgery. Heart
transplantation is reserved for patients with intractable heart failure or
arrhythmia, which is usually the result of coronary artery disease or
cardiomyopathy (muscle damage due to environmental or infectious agents).
NeoRx's cardiovascular product development program is focused on coronary
artery disease (atherosclerosis, and inflammation).
ATHEROSCLEROSIS AND INFLAMMATION: Atherosclerosis is a complex disease of
blood vessels commonly understood as clogging of arteries with cholesterol.
It is a leading cause of death from heart attack and stroke. Clogged arteries
do not deliver oxygen-carrying blood to organs as well as normal arteries and
are more likely to become completely restricted with blood clots that shut
off blood flow. The result is that the affected organ receives insufficient
oxygen and may die if flow is not restored rapidly, leading to conditions
such as heart attack and stroke. Surgery and/or angioplasty (as described
above) can improve blood flow, but prevention or reduction in the disease
progression would be preferred.
RAISING TGF(BETA) LEVELS: NEORX'S APPROACH TO TREATING ATHEROSCLEROSIS.
Scientists at University of Cambridge in the United Kingdom ("Cambridge"),
working with NeoRx, have discovered that patients with advanced coronary
artery disease have low levels of active TGF(beta), a protein that regulates
the growth of certain cell types such as those found in the lining of
arteries. They have
5
reported that segments of arteries prone to atherosclerosis are low in active
TGF(beta) and that the elevation of active TGF(beta) can prevent the
development of lesions in arteries of a mouse animal model that express the
human apo(a) gene associated with atherosclerosis lesions in humans. NeoRx is
the exclusive assignee of the rights of its Cambridge collaborators to this
technology.
A Phase I dosing study has been conducted to determine the safety and the
appropriate dose of a drug molecule that is believed to increase activated
TGF(beta) in patients with advanced coronary artery disease. This drug had
been provisionally licensed from a third party with each party retaining the
right to cease development after the study. The third party has not agreed to
go forward with the project. The Company does not control a drug molecule
suitable for TGF(beta) activation. The Company is seeking other partners who
have suitable drug molecules.
INFLAMMATORY DISEASES AND CHEMOKINES
Chemokines are low molecular weight secreted proteins that play a variety of
roles in intercellular signaling. Chemokine mediated activities include:
chemotaxis, release of stored granule components (histamine release from mast
cells), lymphoproliferation, NK (natural killer) cell activation and
immunomodulation of T cell development into TH1 and TH2 subtypes. They exert
their actions by binding to chemokine receptors on white cells. Chemokine
mediated activities are key to the pathophysiology of a wide range of
inflammatory and autoimmune diseases. Potential disease indications for this
technology include asthma, allergy, atherosclerosis, inflammatory bowel
disease, myocardial infarction, CNS trauma, rheumatoid arthritis, diabetes,
transplant rejection, and multiple sclerosis.
TGF(beta) research that began with investigations in atherosclerosis has
since led to observations that appear to be relevant to the treatment of
other inflammatory diseases such as rheumatoid arthritis and asthma. The
absence of inflammatory cells in the arteries of certain genetically
deficient mice were noted to be related to an aberration in a particular
chemokine (proteins that stimulate immune function by binding to receptors on
immune cells). From this observation, it was deduced that certain low
molecular weight molecules might inhibit immune stimulation, and both IN
VITRO and animal model data have confirmed that intuition.
NeoRx has launched a new program to develop the chemokine inhibitors
(Chemotides-TM- technology). One candidate molecule has demonstrated efficacy
in three different animal models: asthma, sublethal endotoxemia, and
inflammatory skin response. This molecule is being developed for a planned
proof of concept clinical trial in 1999.
6
STUDIES UNDERWAY The following table summarizes studies underway at NeoRx:
STUDY INDICATION Q1 1999 STATUS
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CANCER
PRETARGET-REGISTERED TRADEMARK- Lymphoma Relapsed B-cell Lymphoma Pilot Phase I trials
Skeletal Targeted Radiation MULTIPLE MYELOMA Phase I combination
therapy trials
PRETARGET-REGISTERED TRADEMARK- Technology Carcinomas Preclinical
ANTI-INFLAMMATORY
Chemotide NR58-3.14.3 Inflammatory Preclinical studies to
Diseases/Asthma support IND
ATHEROSCLEROSIS
TGF(Beta) upregulation Treatment of atherosclerosis Seeking corporate
partners
RELATIONSHIP WITH JANSSEN PHARMACEUTICA
In 1997, NeoRx granted Janssen Pharmaceutica NV ("Janssen"), a subsidiary of
Johnson & Johnson, Inc., an exclusive worldwide license for the development,
manufacture, and distribution of NeoRx's AVICIDIN-REGISTERED TRADEMARK-
cancer therapy product. Janssen terminated this agreement in the second half
of 1998, returning all rights to NeoRx.
RELATIONSHIP WITH SCHWARZ PHARMA
In 1997, the Company granted Schwarz Pharma AG ("Schwarz Pharma") an
exclusive license to develop, market and distribute NeoRx's
BIOSTENT-REGISTERED TRADEMARK- restenosis treatment product in North America
and Europe. In November 1998, Schwarz Pharma informed NeoRx that it was
ceasing the development of the product and intending to terminate the
agreement. NeoRx believes that, under the terms of the agreement and the
factual information provided by Schwarz Pharma, Schwarz Pharma has no right
to terminate the agreement and the development of the product. The Company
expects to settle this dispute, but will pursue its legal rights if required.
7
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to protect its proprietary technology aggressively.
It has filed applications for U.S. and foreign patents issued in its
portfolio, covering numerous aspects of its technology. The Company
currently has in excess of 100 issued and allowed U.S. patents.
NeoRx has been awarded 15 U.S. patents related to its PRETARGET-REGISTERED
TRADEMARK- technology, and has additional U.S. and foreign applications
pending. The Company also is the exclusive licensee of Stanford University
patents issued in the U.S., Europe and Japan related to the underlying
technology used in NeoRx's PRETARGET-REGISTERED TRADEMARK- products.
The Company has received a notice of allowance for a U.S. patent covering its
BIOSTENT-REGISTERED TRADEMARK- product, and has additional pending U.S. and
foreign applications related to the product. In addition, NeoRx holds seven
issued U.S. patents, with additional U.S. and foreign applications pending,
relating to the use of TGF(beta) elevating agents to treat cardiovascular
indications. NeoRx is also the exclusive assignee of the rights of its
Cambridge collaborators to this technology and to the Chemotides-TM- program.
There can be no assurance that any of the pending or future applications of
the Company or its collaborators will result in issued patents. Moreover,
there can be no assurance that the patents owned by or licensed to the
Company will provide substantial protection or commercial benefit. In
addition to patent protection, the Company relies upon trade secrets,
unpatented proprietary know-how and continuing technological innovation to
develop and maintain its competitive position. There can be no assurance that
others will not acquire or independently develop the same or similar
technology, or that the Company's issued patents or those it has licensed
will not be circumvented, invalidated or rendered obsolete by new technology.
Moreover, there can be no assurance that others will not gain access to the
Company's proprietary technology, or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented proprietary
technology.
The rapid rate of development and the intense research efforts throughout the
world in biotechnology, the significant lag time between the filing of a
patent application and its review by appropriate authorities and the lack of
significant legal precedent involving biotechnology inventions make it
difficult to predict accurately the breadth or degree of protection that
patents will afford the Company's or its licensees' biotechnology products or
their underlying technology. It is also difficult to predict whether valid
patents will be granted based on biotechnology patent applications or, if
such patents are granted, to predict the nature and scope of the claims of
such patents or the extent to which they may be enforceable.
Under U.S. law, although a patent has a statutory presumption of validity,
the issuance of a patent is not conclusive as to validity or as to the
enforceable scope of its claims. Accordingly, there can be no assurance that
the patents owned or licensed by the Company will not be infringed or
designed around by others or that others will not obtain patents that the
Company would need to license or design around.
8
It is the Company's policy to respect the valid patent rights of others.
NeoRx has obtained patent licenses from various parties covering technologies
relating to its products. The Company expects to enter into additional
license agreements in the future with third parties for technologies that may
be useful or necessary for the development and or manufacture of the
Company's products. The Company anticipates that such licenses, if any, will
be available on commercially reasonable terms. However, there can be no
assurance that such licenses, if required, will be available on acceptable
terms, if at all. If such licenses are not available, there can be no
assurance that the Company will be able to design around necessary technology
patented by others in a cost-effective manner, if at all, or that such design
will not infringe the rights held by others to the patented technology.
COMPETITION
NeoRx faces significant competition from emerging companies and established
biotechnology, pharmaceutical and chemical companies. Many emerging companies
have corporate partnership arrangements with large, established companies to
support research, development and commercialization efforts of products that
may be competitive with those being developed by the Company. In addition, a
number of established pharmaceutical companies are developing proprietary
technologies or have enhanced their capabilities by entering into
arrangements with, or acquiring, companies with proprietary monoclonal
antibody-based technology or other technologies applicable to cancer therapy,
the prevention of restenosis or the treatment of atherosclerosis and
inflammatory diseases. Many of the Company's existing or potential
competitors have or have access to substantially greater financial, research
and development, marketing and production resources than those of the Company.
The Company's cancer therapy products under development are designed for the
treatment of metastatic cancer or where there is a very high statistical risk
that the cancer has spread. The Company anticipates that the principal
competition in this type of cancer treatment will come from existing
chemotherapy, hormone therapy and biological therapies that are designed to
treat the same cancer stage.
Many pharmaceutical, emerging pharmaceutical and biotechnology companies are
testing a large array of alternative treatments for heart disease and
inflammatory diseases. If any of these proves to be more effective, safer or
less expensive than the Company's products under development, the Company's
competitive position could be materially adversely affected.
Other companies may develop and introduce products and processes competitive
with or superior to those of the Company. Further, the development by others
of new cancer treatment, anti-restenosis, atherosclerosis or inflammatory
disease treatment products or prevention products could render the Company's
technology and products under development less competitive, uneconomical or
obsolete.
Timing of market introduction and health care reform, both uncertainties,
will affect the competitive position of the Company's products. The Company
believes that competition among products approved for sale will be based,
among other things, on product safety, efficacy, reliability, availability,
third party reimbursement, price, and patent protection.
9
GOVERNMENT REGULATION AND PRODUCT TESTING
The manufacture and marketing of the Company's proposed products and its
research and development activities are subject to extensive regulation for
safety, efficacy and quality by numerous government authorities in the United
States and other countries. In the United States, drugs and biologics are
subject to rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic
Act of 1976, as amended, and the regulations promulgated thereunder, and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of the Company's products. Product
development and approval within this regulatory framework take a number of years
to accomplish and involve the expenditure of substantial resources.
The steps required before a pharmaceutical product may be marketed in the United
States include (i) preclinical laboratory tests, IN VIVO preclinical studies and
formulation studies, (ii) the submission to the FDA of an Investigational New
Drug Application ("IND"), which must become effective before clinical trials can
commence, (iii) adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug, (iv) the submission of a Biologic License
Application ("BLA") or New Drug Application ("NDA") to the FDA, and (v) FDA
approval of the BLA or NDA prior to any commercial sale or shipment of the drug.
In addition to obtaining FDA approval for each product, each domestic
drug-manufacturing establishment must be registered with, and inspected by, the
FDA. Domestic manufacturing establishments are subject to biennial inspections
by the FDA and must comply with current Good Manufacturing Practice ("cGMP")
regulations enforced by the FDA through its facilities inspection program for
biologics, drugs and devices. To supply products for use in the United States,
foreign manufacturing establishments must comply with cGMP and are subject to
periodic inspection by the FDA or by corresponding regulatory agencies in such
countries under reciprocal agreements with the FDA.
Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as animal studies, to assess the potential safety and
efficacy of the product. Laboratories that comply with the FDA regulations
regarding Good Laboratory Practice must conduct preclinical safety tests. The
results of the preclinical studies are submitted to the FDA as part of an IND
and are reviewed by the FDA prior to commencement of clinical trials. Unless the
FDA provides comments to an IND, the IND will become effective 30 days following
its receipt by the FDA. There can be no assurance that submission of an IND will
result in the FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational new drug to
healthy volunteers or to patients under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with the FDA's
Protection of Human Subjects regulations and Good Clinical Practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board
("IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.
Clinical trials are typically conducted in three sequential Phases, but the
Phases may overlap. In Phase I, the drug is tested for safety (adverse effects),
dosage tolerance, metabolism, distribution,
10
excretion and pharmacodynamics (clinical pharmacology). Phase II involves
studies in a limited patient population to (i) determine the efficacy of the
drug for specific, targeted indications, (ii) determine dosage tolerance and
optimal dosage, and (iii) identify possible adverse effects and safety risks.
When a compound is found to have potential efficacy and to have an acceptable
safety profile in Phase II clinical trials, Phase III clinical trials are
undertaken to further evaluate clinical efficacy and to further test for
safety within an expanded patient population at geographically dispersed
clinical study sites. With respect to any of the Company's products subject
to such trials, there can be no assurance that Phase I, Phase II or Phase III
clinical trials will be completed successfully within any specific time
period, if at all. Furthermore, the Company or the FDA may suspend clinical
trials at any time if it is determined that the subjects or patients are
being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and clinical
trials are submitted to the FDA in the form of a BLA or NDA for approval of the
marketing and commercial shipment of the drug. The testing and approval
processes are likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may deny a BLA or NDA if applicable regulatory criteria are not satisfied,
may require additional testing or information, or may require postmarketing
testing and surveillance to monitor the safety of the Company's products if it
does not view the BLA or NDA as containing adequate evidence of the safety and
efficacy of the drug.
Notwithstanding the submission of such data, the FDA may ultimately decide that
the application does not satisfy its regulatory criteria for approval. Moreover,
if regulatory approval of a drug is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Finally, product
approvals may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur following initial marketing.
Among the conditions for BLA or NDA approval is the requirement that the
prospective manufacturers' quality control and manufacturing procedures conform
to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the areas of
production and quality control to ensure full technical compliance.
EMPLOYEES
As of February 19, 1999, the Company had 57 full-time employees and 5 part-time
employees, 15 of who hold Ph.D. degrees and 3 of who hold M.D. degrees. Of this
number, 47 employees were engaged in research, development and manufacturing
activities and 15 were employed in general administration.
The Company considers its relations with its employees to be good. None of the
Company's employees is covered by a collective bargaining agreement.
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
NEED FOR ADDITIONAL FINANCING
The Company has been unprofitable since inception and expects to incur
additional operating losses over the next several years. Based on the Company's
current operating plan, the Company believes that its working capital will be
sufficient to satisfy its capital requirements through at least the second
quarter of 2000. This belief is based on certain assumptions and there can be no
assurance that
11
such assumptions will prove to be correct. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Substantial additional capital will be required for the
Company's operations. The Company intends to seek additional financing, which
may take the form of the public or private financings, including equity
financings, which would be dilutive to existing shareholders, and through
other arrangements, including relationships with corporate partners for the
development of certain of the Company's products. There can be no assurance
that the Company will be able to obtain such additional capital or enter into
relationships with corporate partners on a timely basis, on favorable terms,
or at all. If adequate funds are not available, the Company may be required
to delay, reduce or eliminate expenditures for certain of its programs or
products or to enter into relationships with corporate partners to develop or
commercialize products or technologies that the Company would otherwise seek
to develop or commercialize itself.
RISKS ASSOCIATED WITH RELATIONSHIPS WITH CORPORATE PARTNERS
The Company has, in the past, entered into relationships with corporate partners
for the development, marketing, manufacture and distribution of products under
development and intends to enter into additional relationships with corporate
partners for the development of certain of the Company's products. These
relationships may also include the performance by these corporate partners of
marketing, manufacture or distribution obligations for these products, among
other things. These relationships involve certain risks. These relationships
depend on the achievement of research and clinical objectives by the Company and
these corporate partners, as well as the financial, competitive, marketing and
strategic considerations of these corporate partners, which are beyond the
Company's control. These considerations may include the relative advantages of
alternative products being marketed or developed by others, including relevant
patent and proprietary positions. As such, these relationships may be terminated
prior to the successful development of any of the Company's products that are
the subject of these relationships. In addition, there can be no assurance that
the interest and motivations of the Company's corporate partners are, or will
remain, consistent with those of the Company, that such corporate partners will
successfully perform their development, marketing, manufacturing or distribution
obligations or that such current or future relationships with corporate partners
will continue. The Company has received payments under these relationships from
these corporate partners, which the Company has used to fund its operations.
There can be no assurance that the Company will be able to attract and
successfully negotiate additional relationships with corporate partners in the
future, that these relationships will be acceptable or advantageous to the
Company or that any of the current or future relationships will be successful.
The absence, suspension or termination of current or future relationships with
corporate partners could have a material adverse effect on the development of
the Company's products and could result in the loss of material revenues to the
Company, either of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
NO ASSURANCE THAT PRODUCTS WILL BE SUCCESSFULLY DEVELOPED
The Company's realization of its long-term potential will be dependent upon the
successful development and commercialization of products currently under
development. There can be no assurance that these products will be developed
successfully or receive regulatory approval. Furthermore, there can be no
assurance that these products, if developed and approved, can be successfully
manufactured in quantities necessary for commercialization or that such products
will receive market acceptance.
12
UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING
Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. Results of initial preclinical and clinical testing of products under
development by the Company are not necessarily indicative of results that will
be obtained from subsequent or more extensive preclinical and clinical testing.
Furthermore, there can be no assurance that clinical trials of products under
development will be completed or will demonstrate the safety and efficacy of
such products at all, or to the extent necessary to obtain regulatory approvals.
Companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after achieving promising results in earlier
trials. The failure to adequately demonstrate the safety and efficacy of a
therapeutic product under development could delay or prevent regulatory approval
of such products.
The rate of completion of clinical trials depends on, among other factors, the
enrollment of patients. Patient accrual is a function of many factors, including
the size of the patient population, the proximity of patients to clinical sites,
the eligibility criteria for the study, and the existence of competitive
clinical trials. Delays in planned patient enrollment in the Company's current
clinical trials or future clinical trials may result in increased costs, program
delays or both.
GOVERNMENTAL REGULATIONS: NO ASSURANCE OF PRODUCT APPROVAL
The manufacture and marketing of the Company's proposed products and its
research and development activities are subject to regulation for safety,
efficacy and quality by numerous government authorities in the United States and
other countries. Clinical trials, manufacturing, and marketing are subject to
the rigorous testing and approval processes of the FDA and equivalent foreign
regulatory authorities. Clinical trials and regulatory approval can take a
number of years to accomplish and require the expenditure of substantial
resources. There can be no assurance that clinical trials will be started or
completed successfully within any specified time period. Delays in approval can
occur for a number of reasons, including the Company's failure to obtain
necessary supplies of monoclonal antibodies or other materials or to obtain a
sufficient number of available patients to support the claims necessary for
regulatory approval. There can be no assurance that requisite FDA approvals will
be obtained on a timely basis, if at all, or that any approvals granted will
cover all the clinical indications for which the Company may seek approval.
Delays or failure to obtain regulatory approval would adversely affect or
prevent the marketing of products developed by the Company and its ability to
receive royalty or other product revenues. The manufacture and marketing of
drugs are subject to continuing FDA review and later discovery of previously
unknown problems with a product; manufacturer or facility may result in
restrictions, including withdrawal of the product from the market. Marketing the
Company's products abroad will require similar regulatory approvals and is
subject to similar risks. In addition, federal and state agencies and
congressional committees have expressed interest in further regulation of
biotechnology. The Company is unable to estimate the extent and impact of
regulation in the biotechnology field resulting from any future federal, state
or local legislation or administrative action.
For clinical investigation and marketing outside the United States, the Company
or its collaborative partners also are subject to foreign regulatory
requirements governing human clinical trials and marketing approval for drugs.
The requirements governing the conduct of
13
clinical trials, product licensing, pricing and reimbursement vary widely for
European countries both within and outside the European Community.
DEPENDENCE ON SUPPLIERS
The Company depends on the timely delivery from suppliers of certain
materials and services. In connection with its research, preclinical studies
and clinical trials, the Company has periodically experienced interruption in
the supply of monoclonal antibodies. Interruptions in these and other
supplies could occur in the future. The Company, or its partners, will need
to develop sources for commercial quantities of Yttrium-90 and Holmium-166,
the radionuclides used in its proposed cancer therapeutic products, for the
antibody, streptavidin and clearing agent used in its PRETARGET-REGISTERED
TRADEMARK- products and for a drug molecule suitable for TGF(beta)
activation. There is no assurance that the Company or its partners will be
able to develop such sources.
DEPENDENCE ON OTHERS FOR COMMERCIAL MANUFACTURING AND MARKETING
There can be no assurance that the Company will be able to negotiate additional
collaborative arrangements in the future. The Company has no manufacturing
facilities for commercial production of its products under development. The
Company also has no experience in sales, marketing or distribution. In most
cases, the Company's strategy for commercialization of its potential products
requires entering into various arrangements with corporate collaborators,
licensors, licensees and others to manufacture, distribute and market such
products; the Company will depend on the successful performance of these third
parties. Although the Company believes that parties to its existing and any
future arrangements will have an economic incentive to perform their contractual
responsibilities successfully, these activities will not be within the Company's
control. There can be no assurance that such parties will perform their
obligations, that the Company will derive any revenues from such arrangements,
or that the Company's reliance on others for manufacturing products will not
result in unforeseen problems with product supply.
TECHNOLOGICAL CHANGE AND COMPETITION
The competition for development of cancer therapies and cardiovascular products
is intense. There are numerous competitors developing products to treat each of
the diseases for which the Company is seeking to develop products. Some
competitors have adopted product development strategies targeting cancer cells
with monoclonal antibodies. Many emerging companies have corporate partnership
arrangements with large, established companies to support research, development
and commercialization efforts of products that may be competitive with those
being developed by the Company. In addition, a number of established
pharmaceutical companies are developing proprietary technologies or have
enhanced their capabilities by entering into arrangements with, or acquiring,
companies with proprietary monoclonal antibody-based technology or other
technologies applicable to the treatment of cancer and cardiovascular diseases.
Several major pharmaceutical companies market HMG CoA-reductase inhibitor drugs
that reduce the risk of atherosclerosis and heart attack. Many of the Company's
existing or potential competitors have or have access to substantially greater
financial, research and development, marketing and production resources than
those of the Company and may be better equipped than NeoRx to develop,
manufacture and market competing products. The Company's competitors may have,
or may develop and introduce, new products that would render the Company's
technology and products under development less competitive, uneconomical or
obsolete.
14
TECHNOLOGICAL UNCERTAINTIES REGARDING HUMAN IMMUNE RESPONSE TO FOREIGN PROTEINS
The Company plans to use monoclonal antibodies coupled to streptavidin (a
protein of bacterial origin) in its PRETARTET-REGISTERED TRADEMARK- cancer
therapy products. These molecules appear as foreign proteins to the human
immune system that develops its own antibody in response. The Company plans
to use humanized antibodies, where needed, to minimize the "human anti-mouse
antibody" (HAMA) response which otherwise might restrict the number of doses
that can be safely or effectively administered, thus limiting the product's
efficacy. The "human anti-streptavidin antibody" (HASA) response may also
limit the number of doses. The Company believes that modifying streptavidin
may reduce HASA. Although the Company may utilize humanized antibodies and is
modifying streptavidin, there can be no assurance that either would reduce
the extent to which HASA and HAMA may limit the effectiveness of the
Company's cancer therapy products.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The patent position of biotechnology firms is generally highly uncertain and
involves complex legal and factual questions. Currently, no consistent policy
has emerged regarding the breadth of claims allowed in biotechnology patents.
Products and processes important to NeoRx are subject to this uncertainty.
Accordingly, there can be no assurance that the Company's patent applications
will result in additional patents being issued or that, if issued, patents will
afford protection against competitors with similar technology. There can also be
no assurance that any patents issued to the Company will not be infringed by or
designed around by others or that others will not obtain patents that the
Company would need to license or design around. Moreover, the technology
applicable to the Company's products is developing rapidly. Research institutes,
universities and biotechnology companies, including the Company's competitors,
have filed applications for, or have been issued, numerous patents and may
obtain additional patents and proprietary rights relating to products or
processes competitive with or relating to those of the Company. The scope and
validity of such patents, the extent to which the Company may be required to
obtain licenses thereunder or under other proprietary rights and the cost and
availability of licenses, are unknown. To the extent licenses are required,
there can be no assurance that they will be available on commercially reasonable
terms, if at all. The Company also relies on unpatented proprietary technology.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques, that others
will not otherwise gain access to the Company's proprietary technology or
disclose such technology, or that the Company can meaningfully protect its
rights in such unpatented proprietary technology.
RISK OF PRODUCT LIABILITY
The testing, manufacturing, marketing and sale of human healthcare products
under development by the Company entail an inherent risk that product
liability claims will be asserted against the Company. Although the Company
is insured against such risks up to a $10 million annual aggregate limit in
connection with clinical trials and commercial sales of its products under
development, there can be no assurance that the Company's present product
liability insurance is adequate. A product liability claim in excess of the
Company's insurance coverage could have a material adverse effect on the
Company and may prevent the Company from obtaining product liability
insurance in the future on affordable terms. In addition, there can be no
assurance that
15
product liability coverage will continue to be available in sufficient
amounts or at an acceptable cost.
UNCERTAINTY OF PHARMACEUTICAL PRICING, HEALTHCARE REFORM AND REIMBURSEMENT
The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of government and third-party payors to
contain or reduce the costs of healthcare through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to governmental control. In the United States, there have been, and
the Company expects that there will continue to be, a number of federal and
state proposals to implement similar governmental control. It is uncertain what
legislative proposals will be adopted or what actions federal, state or private
payors for healthcare goods and services may take in response to any healthcare
reform proposals or legislation. Even in the absence of statutory change, market
forces are changing the healthcare sector. The Company cannot predict the effect
healthcare reforms may have on its business, and there can be no assurance that
any such reforms will not have a material adverse effect on the Company.
Further, to the extent that such proposals or reforms have a material adverse
effect on the business, financial condition and profitability of other
pharmaceutical companies that are prospective collaborators for certain of the
Company's potential products, the Company's ability to commercialize its
products under development may be adversely affected. In addition, both in the
United States and elsewhere, sales of prescription pharmaceuticals depend in
part on the availability of reimbursement to the consumer from third-party
payors, such as governmental and private insurance plans. Third-party payors are
increasingly challenging the prices charged for medical products and services.
If the Company succeeds in bringing one or more products to market, there can be
no assurance that these products will be considered cost-effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive basis.
RELIANCE ON KEY PERSONNEL
The Company's success will depend in part on the efforts of certain key
scientists and management personnel. Because of the specialized nature of the
Company's business, the Company's ability to maintain its competitive position
will depend in part on its ability to attract and retain qualified personnel.
Competition for such personnel is intense. There can be no assurance that the
Company will be able to hire sufficient qualified personnel on a timely basis or
retain such personnel. The loss of key management or scientific personnel could
have a material adverse effect on the Company's business. The Company does not
maintain key person insurance on any of its scientists or management personnel.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS; HAZARDOUS MATERIALS
The Company is subject to federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
effluent discharge, handling and disposal of certain materials and wastes in
connection with its research and development activities and its manufacturing of
clinical trial materials. Although the Company believes that it has complied
with these laws and regulations in all material respects, there can be no
assurance that it will not be required to incur significant costs to comply with
environmental and health and safety regulations in the future.
16
The Company's research and development and clinical manufacturing processes
involve the controlled use of small amounts of hazardous and radioactive
materials. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any resulting damages, and any such liability
could exceed the Company's resources.
ITEM 2. PROPERTIES
The Company occupies approximately 36,000 square feet of office, laboratory and
manufacturing space at 410 West Harrison Street, Seattle, Washington, under a
lease that expires May 31, 2001. The lease is renewable through May 31, 2006.
NeoRx believes its facilities are in good condition and are adequate for all
present uses. A portion of its facilities is used for pilot manufacturing to
produce certain of its products under development for clinical trials. The
Company believes that the production capacity of its pilot facility is adequate
to satisfy the Company's Phase I clinical trial requirements, and it passed an
FDA inspection for these purposes in 1993 and a Washington State Board of
Pharmacy inspection in 1996.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol NERX. The following table sets forth, for the periods indicated, the high
and low sales price for Common Stock as reported by Nasdaq. These quotations
reflect inter-dealer prices without retail mark-up, markdown or commission, and
may not necessarily represent actual transactions.
HIGH LOW
----- -----
1998
First Quarter.............................. $6.06 $5.06
Second Quarter............................. 9.00 4.63
Third Quarter.............................. 4.94 1.91
Fourth Quarter............................. 2.00 1.13
1997
First Quarter.............................. $6.31 $4.06
Second Quarter............................. 5.63 3.19
Third Quarter.............................. 7.56 3.56
Fourth Quarter............................. 8.50 4.44
There were approximately 969 shareholders of record as of February 19, 1999.
This figure does not include the number of shareholders whose shares are held on
record by a broker or clearing agency, but includes such a brokerage house or
clearing agency as one holder of record.
The Company has not paid any cash dividends on the Common Stock since its
inception and does not intend to pay cash dividends on the Common Stock in the
foreseeable future.
18
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
STATEMENT OF OPERATIONS DATA:
Revenue............................ $ 9,087 $10,352 $ 4,784 $ 307 $ 1,568
Operating expenses................. 15,378 14,647 14,763 13,343 12,605
Loss from operations............... (6,291) (4,295) (9,979) (13,036) (11,037)
Net loss........................... (4,449) (2,550) (9,001) (12,271) (11,144)
Net loss per common share --
basic and diluted................ $ (.24) $ (0.31) $ (0.68) $ (0.98) $ (1.02)
Weighted average common
shares outstanding --
basic and diluted................ 20,907 18,065 15,604 13,142 11,616
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 1,910 $ 1,949 $ 2,945 $ 7,182 $ 2,428
Short term investments............. 28,242 31,760 15,322 8,937 14,723
Working capital.................... 28,807 33,775 17,523 15,245 15,992
Total assets....................... 32,441 36,321 20,510 18,518 20,035
Long-term debt..................... 1,195 1,199 1,242 1,283 1,212
Shareholders' equity............... $29,044 $33,368 $17,079 $14,892 $15,841
- ---------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following discussion of results of operations, liquidity and capital
resources includes certain forward-looking statements. The words "believe",
"expect", "intend", "anticipate" and similar expressions are used to identify
forward-looking statements, but their absence does not mean a statement is not
forward-looking. Certain risk factors have been identified under "Risk Factors
Affecting Forward-Looking Statements," which, among other factors, could cause
results to differ materially from those presently anticipated by the Company.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997
The Company's revenues for 1998 totaled $9.1 million, and consisted
primarily of a milestone payment of $7.0 million from Janssen reflecting
Janssen's decision to begin Phase II trials of AVICIDIN-REGISTERED
TRADEMARK- and license fees of $1.4 million in cash and $0.7 million in stock
and warrants from Nycomed Imaging AS, Theseus LTD, and Angiotech
Pharmaceuticals, Inc. for the license of parts of NeoRx's non-strategic
technology. Revenue for 1997 totaled $10.4 million and consisted almost
entirely of payments received from the Company's agreements with Janssen and
Schwarz Pharma. The Company does not have any significant revenue sources
that will continue into 1999.
19
The Company's total operating expenses for 1998 increased 5% to $15.4
million from $14.6 million in 1997. In 1998, research and development
expenses decreased 6% from $11.0 million in 1997 to $10.3 million. The
decrease in research and development expenses was primarily due to decreased
costs for clinical trials for AVICIDIN-REGISTERED TRADEMARK- cancer therapy
product and a license payment in 1997 for technology relating to the
PRETARGET-REGISTERED TRADEMARK- project. Research and development expenses
are shown net of reimbursements for payments made to third parties received
under collaborative agreements. During 1998 the Company received $2.2 million
in reimbursements. In 1997, reimbursements from collaborative agreements
totaled $3.4 million. The decrease in reimbursements from collaborative
agreements was caused by the transfer of the AVICIDIN-REGISTERED
TRADEMARK- product development activity to Janssen, as well as the ultimate
termination of the Janssen agreement in the fourth quarter of 1998. General
and administrative expenses increased 19% to $4.4 million in 1998. The
increase in general and administrative expenses is principally due to higher
costs for outside consulting, financing advisory services, recruiting and
personnel costs added to support research and product development activities.
During the fourth quarter of 1998, the Company restructured its operations to
conserve cash by reducing its workforce by 25%. A restructuring charge of
$0.7 million was incurred relating to the severance benefits; $0.2 million of
the severance benefits were paid in 1998, $0.5 million of the severance
benefits accrued in 1998 will be paid in 1999.
Interest income for 1998 was $2.0 million compared to $1.9 million in 1997.
The Company's 1998 net loss increased 74% to $4.4 million compared to a net loss
of $2.6 million in 1997. The increase in the net loss was primarily due to lower
revenues, higher general and administrative expenses and the restructuring
expense.
Preferred dividends were $0.5 million in 1998 compared to $3.1 million in
1997. Preferred dividends in 1998 are primarily related to payment of dividends
on Series 1 preferred stock. In 1997 dividend payments also included a non-cash
dividend of $2.1 million recorded upon the sale of NeoRx Series 3 Preferred
Stock with discounted conversion features and dividend payments for Series 2 and
4 Preferred Stock.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH DECEMBER 31, 1996
The Company's revenues for 1997 totaled $10.4 million and resulted almost
entirely from payments received from its licensing agreements with Janssen
and Schwarz Pharma. Revenues in 1996 consisted primarily of license fees of
$4.5 million from DuPont Merck for exclusive North American rights to market
NeoRx's VERLUMA-REGISTERED TRADEMARK- lung cancer imaging products.
The Company's total operating expenses for 1997 decreased slightly to $14.6
million from $14.8 million in 1996. Research and development expenses increased
3% from $10.7 million in 1996 to $11.0 million in 1997. The increase in research
and development expenses in 1997 is attributed to expenditures relating to
antibody humanization, clinical trial activities and license fees. Research and
development expenses are shown net of reimbursements received under
collaborative agreements for payments made to third parties received under
collaborative agreements. During 1997 the Company received $3.4 million in
reimbursements from corporate partners and government research grants under such
collaborative agreements. General and administrative expenses decreased 10% to
$3.7 million in 1997 from $4.1 million in 1996. The decrease in general and
administrative expenses is principally due to reduced costs for compensation, as
well as reduced costs for legal and professional services for the negotiation of
collaborative agreements.
Interest income for 1997 increased 68% to $1.9 million compared to $1.1
million in 1996. The increase in 1997 was primarily due to higher average cash
balances resulting from sales of Common and Preferred Stock. The Company's 1997
net loss decreased 72% to $2.6 million compared to a net loss of $9.0 million in
1996. The decrease in the net loss was primarily due to revenues received from
its licensing agreements with Janssen and Schwarz Pharma.
20
Preferred dividends were $3.1 million in 1997 compared to $1.7 million in
1996. Preferred dividends in 1997 include a non-cash dividend of $2.1 million
recorded upon the sale of NeoRx Series 3 Preferred Stock with discounted
conversion features and dividend payments for Series 2 and 4 Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled $30.2 million,
$33.7 million and $18.3 million at December 31, 1998, 1997, and 1996
respectively. Cash used in operating activities for 1998 totaled $3.5 million.
Revenue derived mainly from the licensing agreements together with investment
and interest income were used to fund a portion of operating expenses.
Cash provided by investing activities for 1998 totaled $3.4 million. The
Company invests excess cash in short-term investments that will be used to fund
future operating costs. During 1998 the Company also invested $0.9 million in
equipment, furniture and leasehold improvements, primarily to support its
research activities. As of December 31, 1998, the Company was committed to
spending approximately $1.2 million pursuant to operating and capital lease
obligations.
The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements through at least the second quarter of 2000. The Company's actual
capital requirements will depend on numerous factors, including results of
research and development activities, clinical trials, the levels of resources
that the Company devotes to establishing and expanding marketing and
manufacturing capabilities, competitive and technological developments and the
timing of revenues and expense reimbursements resulting from relationships with
parties or collaborative agreements. The Company intends to seek additional
funding through public or private equity financing, arrangements with corporate
partners or other sources. There can be no assurance that the Company will be
able to obtain such additional capital or enter into relationships with
corporate partners on a timely basis, on favorable terms, or at all. If adequate
funds are not available, the Company may be required to delay, reduce or
eliminate expenditures for certain of its programs or products or enter into
relationships with corporate partners to develop or commercialize products or
technologies that the Company would otherwise seek to develop or commercialize
itself.
IMPACT OF THE YEAR 2000
The Year 2000 problem is pervasive and complex, as virtually every
computer operation will be affected in some way by the rollover of the
two-digit year value to 00. The issue is whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize date sensitive information could
generate erroneous data or cause a system to fail.
READINESS
The Company has undertaken an initial review of its information technology
computer systems and believes that the Year 2000 problem does not pose
significant operational problems to its information technology systems. The
majority of the Company's software and computer equipment has been purchased
within the last five years from third-party vendors who have already provided
upgrades intended to bring their products into Year 2000 compliance. The Company
plans to survey its research and development equipment and significant
suppliers, including Clinical Research Organizations, to determine any
additional needed Year 2000 solutions.
21
COSTS
At this time, the Company cannot determine the full cost of correcting any
potential year 2000 problems. Based upon the Company's initial review of its
computer systems, the Company estimates that the cost to replace older,
non-compliant computers and software is immaterial. The full estimated cost of
correcting the Year 2000 problem will be known in mid-year 1999 after the
Company completes its survey of its research and development equipment and
significant suppliers.
RISKS
The Company anticipates that its largest Year 2000 risks are in activities
involving research and development equipment and significant suppliers,
including Clinical Research Organizations. If Year 2000 problems exist in these
areas, it could take significantly longer for the Company to bring a product to
market, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
CONTINGENCY
After the Company completes its survey of Year 2000 issues, it will
establish a contingency plan to address any "high-risk" issues that could delay
its efforts to bring products to market.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 establishes a new model
for accounting for derivatives and hedging activities and supercedes and amends
existing accounting standards and is effective for fiscal years beginning after
June 15, 1999. SFAS 133 requires that all derivatives be recognized in the
balance sheet at their fair market value, and the corresponding derivative gains
or loses be either reported in the statement of operations or as a component of
other comprehensive income depending on the type of hedge relationship that
exists with respect to such derivative. NeoRx Corporation does not expect the
adoption of SFAS 133 to have a material impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes and changes in the
market values of its investments.
INTEREST RATE RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's debt securities included in its investment portfolio.
The Company does not have any derivative financial instruments. The Company
invests in debt instruments of the U.S. Government and its agencies and
high-quality corporate issuers. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates.
At December 31, 1998, the Company owns government debt instruments in the amount
of $4.0 million and corporate debt securities in the amount of $23.5 million.
The Company's exposure to losses as a result of interest rate changes is managed
through investing in securities with maturities of one year or less.
22
INVESTMENT RISK
The Company has received equity instruments under licensing agreements. These
investments are included in investment securities and are accounted for at fair
value with unrealized gains and losses reported as a component of comprehensive
income and classified as accumulated other comprehensive income - unrealized
gain (loss) on investment securities in shareholders' equity. Such investments
are subject to significant fluctuations in fair market value due to the
volatility of the stock market. At December 31, 1998, the Company owned such
corporate equity securities in the amount of $700,000.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
NUMBER
------
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS..................................... 25 - 26
BALANCE SHEETS -- DECEMBER 31, 1998 AND 1997.................................. 27
STATEMENTS OF OPERATIONS -- FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996.......................................... 28
STATEMENTS OF SHAREHOLDERS' EQUITY -- FOR THE YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996.................................... 29
STATEMENTS OF CASH FLOWS - FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996.......................................... 30
NOTES TO FINANCIAL STATEMENTS................................................. 31 - 40
ALL OTHER FINANCIAL SCHEDULES ARE OMITTED SINCE THE REQUIRED INFORMATION IS
NOT APPLICABLE OR HAS BEEN PRESENTED IN THE FINANCIAL STATEMENTS AND THE NOTES
THERETO.
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
NeoRx Corporation
We have audited the accompanying balance sheets of NeoRx Corporation as of
December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NeoRx Corporation as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
KPMG LLP
Seattle, Washington
February 5, 1999
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of NeoRx Corporation:
We have audited the accompanying statement of operations, cash flows and
shareholders' equity of NeoRx Corporation, a Washington corporation, for the
year ended December 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of NeoRx
Corporation for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
February 25, 1997
26
NEORX CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------------
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 1,910 $ 1,949
Investment securities........................................................... 28,242 31,760
Prepaid expenses and other current assets....................................... 857 1,820
--------- ---------
Total current assets................................................... 31,009 35,529
--------- ---------
FACILITIES AND EQUIPMENT, AT COST:
Leasehold improvements.......................................................... 3,283 3,300
Equipment and furniture......................................................... 4,886 4,023
--------- ---------
8,169 7,323
Less: accumulated depreciation and amortization................................. (7,049) (6,642)
--------- ---------
Facilities and equipment, net.............................................. 1,120 681
--------- ---------
OTHER ASSETS, NET............................................................... 312 111
--------- ---------
TOTAL ASSETS $ 32,441 $ 36,321
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 756 $ 800
Accrued liabilities............................................................. 1,192 911
Deferred revenue................................................................ 250 --
Current portion of capital leases............................................... 4 43
--------- ---------
Total current liabilities.............................................. 2,202 1,754
--------- ---------
LONG-TERM LIABILITIES:
Convertible subordinated debentures............................................. 1,195 1,195
Capital leases, less current portion............................................ -- 4
--------- ---------
TOTAL LIABILITIES...................................................... 3,397 2,953
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.02 par value, 3,000,000 shares authorized:
Convertible exchangeable preferred stock, Series 1, 208,240 shares issued
and outstanding at December 31, 1998 and 1997 (entitled in liquidation
to $5,248 at December 31, 1998 and 1997).................................... 4 4
Convertible preferred stock, Series 2, 0 and 5,167 shares issued and
outstanding at December 31, 1998 and 1997, respectively..................... -- --
Convertible preferred stock, Series 3, 0 and 1,000 shares issued and
outstanding at December 31, 1998 and 1997, respectively..................... -- --
Common stock, $.02 par value, 60,000,000 shares authorized,
21,006,964 and 20,707,251 shares issued and outstanding, at
December 31, 1998 and 1997, respectively.................................... 420 414
Additional paid-in capital...................................................... 163,189 162,612
Accumulated deficit............................................................. (134,637) (129,662)
Accumulated other comprehensive income - unrealized gain on investment
securities.................................................................... 68 --
--------- ---------
Total shareholders' equity............................................. 29,044 33,368
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 32,441 $ 36,321
--------- ---------
--------- ---------
See accompanying notes to the financial statements.
27
NEORX CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- --------
Revenue........................................... $ 9,087 $ 10,352 $ 4,784
-------- -------- --------
OPERATING EXPENSES:
Research and development.......................... 10,325 10,961 10,682
General and administrative........................ 4,394 3,686 4,081
Restructuring expense............................. 659 -- --
-------- -------- --------
Total operating expenses................ 15,378 14,647 14,763
-------- -------- --------
Loss from operations.............................. (6,291) (4,295) (9,979)
OTHER INCOME (EXPENSE):
Interest income................................ 1,972 1,881 1,120
Interest expense............................... (130) (136) (142)
-------- -------- --------
Net loss.......................................... $ (4,449) $ (2,550) $ (9,001)
-------- -------- --------
-------- -------- --------
Preferred stock dividends......................... (526) (3,069) (1,684)
-------- -------- --------
Net loss applicable to common shares.............. $ (4,975) $ (5,619) $(10,685)
-------- -------- --------
-------- -------- --------
Net loss per common share --
basic and diluted............................... $ (.24) $ (.31) $ (.68)
-------- -------- --------
-------- -------- --------
Weighted average common shares
outstanding -- basic and diluted................ 20,907 18,065 15,604
-------- -------- --------
-------- -------- --------
See accompanying notes to the financial statements.
28
NEORX CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Preferred Stock Common Stock
--------------- -------------- Accumulated Total
Number Number Additional Other Share-
of Par of Par Paid-In Deferred Accumulated Comprehensive holders'
Shares Value Shares Value Capital Compensation Deficit Income Equity
------ ----- ------ ----- ---------- ------------ ----------- ------------- --------
BALANCE, DECEMBER 31, 1995 208 $ 4 14,359 $287 $128,098 $(139) $(113,358) $14,892
Sale of common stock........... -- -- 803 16 5,751 -- -- 5,767
Sale of preferred stock........ 47 1 -- -- 4,417 -- -- 4,418
Exercise of stock options...... -- -- 281 6 719 -- -- 725
Issuance of common stock in
payment of expenses........... -- -- 116 2 691 -- -- 693
Exchange of preferred stock
for common stock.............. (40) (1) 860 17 (16) -- -- --
Amortization of deferred
compensation.................. -- -- -- -- -- 139 -- 139
Net and total comprehensive
loss.......................... -- -- -- -- -- -- (9,001) (9,001)
Preferred stock dividends...... -- -- 32 1 1,129 -- (1,684) -- (554)
---- --- ------ ---- -------- ---- --------- --- -------
BALANCE, DECEMBER 31, 1996..... 215 4 16,451 329 140,789 -- (124,043) -- 17,079
Sale of common stock........... -- -- 699 14 2,633 -- -- 2,647
Sale of preferred stock........ 121 2 -- -- 16,396 -- -- 16,398
Exercise of stock options...... -- -- 114 2 376 -- -- 378
Issuance of common stock in
payment of expenses........... -- -- 22 1 100 -- -- 101
Exchange of preferred stock
for common stock.............. (122) (2) 3,366 67 (65) -- -- --
Net and total comprehensive
loss.......................... -- -- -- -- -- -- (2,550) (2,550)
Preferred stock dividends...... -- -- 55 1 2,383 -- (3,069) -- (685)
---- --- ------ ---- -------- ---- --------- --- -------
BALANCE, DECEMBER 31, 1997..... 214 4 20,707 414 162,612 -- (129,662) -- 33,368
Exercise of stock options and
warrants...................... -- -- 141 3 479 -- -- -- 482
Exchange of preferred stock
for common stock.............. (6) -- 138 3 (3) -- -- -- --
Comprehensive loss:
Net loss..................... -- -- -- -- -- -- (4,449) -- (4,449)
Unrealized gain on
investment securities....... -- -- -- -- -- -- -- 68 68
-------
Total comprehensive loss....... -- -- -- -- -- -- -- -- (4,381)
-------
Preferred stock dividends...... -- -- 21 -- 101 -- (526) -- (425)
---- --- ------ ---- -------- ---- --------- --- -------
BALANCE, DECEMBER 31, 1998..... 208 $ 4 21,007 $420 $163,189 $ -- $(134,637) $68 $29,044
---- --- ------ ---- -------- ---- --------- --- -------
---- --- ------ ---- -------- ---- --------- --- -------
See accompanying notes to the financial statements.
29
NEORX CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $ (4,449) $ (2,550) $ (9,001)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization...................... 427 348 381
Stock and warrants received as license fees ....... (690) -- --
Common stock for services.......................... -- 101 290
Compensation expense on stock awards
and options....................................... -- -- 167
(Increase) decrease in prepaid expenses and
other current assets.............................. 762 (375) 57
Decrease in accounts payable ...................... (44) (435) (276)
Increase (decrease) in accrued liabilities......... 281 (38) 708
Increase (decrease) in deferred revenue............ 250 -- (250)
-------- -------- --------
Net cash used in operating activities.............. (3,463) (2,949) (7,924)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities
of investment securities......................... 70,820 59,987 36,989
Purchases of investment securities................. (66,544) (76,425) (43,374)
Facilities and equipment purchases................. (866) (343) (250)
-------- -------- --------
Net cash provided by (used in) investing
activities........................................ 3,410 (16,781) (6,635)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligation............. (43) (44) (48)
Proceeds from stock options and warrants
exercised......................................... 482 378 693
Preferred stock dividends.......................... (425) (645) (508)
Proceeds from sale of common stock and warrants.... -- 2,647 5,767
Proceeds from sale of preferred stock.............. -- 16,398 4,418
-------- -------- --------
Net cash provided by financing activities.......... 14 18,734 10,322
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS............ (39) (996) (4,237)
CASH AND CASH EQUIVALENTS:
Beginning of year.................................. 1,949 2,945 7,182
-------- -------- --------
End of year........................................ $ 1,910 $ 1,949 $ 2,945
-------- -------- --------
-------- -------- --------
See the accompanying notes to the financial statements.
30
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
NeoRx Corporation (the "Company") develops biopharmaceutical products
primarily for the treatment of cancer, cardiovascular and inflammatory diseases.
The Company operates in a highly regulated and competitive environment. The
development and manufacturing of pharmaceutical products requires approval from,
and is subject to, ongoing oversight by the Food and Drug Administration (FDA)
in the United States and by comparable agencies in other countries. Obtaining
approval for a new therapeutic product is never certain and may take several
years and involve expenditure of substantial resources. Competition in
researching, developing and marketing pharmaceutical products is intense. Any of
the technologies covering the Company's existing products or products under
development could become obsolete or diminished in value by discoveries and
developments of other organizations.
The Company's development activities involve inherent risks. These risks
include, among others, dependence on key personnel, availability of raw
materials, determination of the patentability of the Company's products and
processes and approval by the FDA before the Company's products may be sold
domestically. Successful future operations depend upon the Company's ability to
develop, obtain regulatory approval for, and commercialize its products. The
Company will require a substantial amount of additional funds to complete the
development of most of its products and to fund additional operating losses,
which the Company expects to incur during the next several years.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. All highly liquid investments with a remaining
maturity of three months or less when purchased, are considered to be cash
equivalents.
ESTIMATES AND UNCERTAINTIES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES. Revenues from collaborative
agreements are recognized as earned as the Company performs research activities
under the terms of each agreement. Billings in excess of amounts earned are
classified as deferred revenue. License fees earned are recognized as revenue
unless subject to a contingency, which results in a deferral of revenue until
the contingency is satisfied. Research and development costs are expensed as
incurred. It is the Company's practice to offset third party collaborative
reimbursements received as a reduction of research and development expenses.
Third party reimbursements for 1998 and 1997 were $2,186,616 and $3,448,286
respectively. In 1996 third party reimbursements were insignificant.
INCOME TAXES. The Company computes income taxes using the asset and
liability method, under which deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and for operating loss and tax credit
carryforwards. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount, if any, which is more likely than not
expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has financial instruments
consisting of cash, cash equivalents, short-term investments, note from officer,
accounts payable and convertible subordinated debentures. All of the Company's
financial instruments, based on current market indicators or quotes from
brokers, approximate their carrying amount.
31
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES. The Company considers all investment securities as
available-for-sale. All securities are carried at fair value. Unrealized gains
and losses on investment securities are reported as a component of comprehensive
income and classified as accumulated other comprehensive income - unrealized
gain on investment securities in shareholders' equity.
SEGMENT REPORTING. The Company operates in one business segment. Revenues
almost entirely consist of fees received under license agreements. Expenses
incurred to date are reported according to their expense category. No further
segment segregation is considered meaningful at this time.
COMPREHENSIVE LOSS. On January 1, 1998, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," (SFAS 130) which establishes standards for the reporting and disclosure
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of financial statements. The Company's comprehensive loss
for the year ended December 31, 1998 consisted of net loss and unrealized gain
on investment securities. Comprehensive loss for the years ended December 31,
1997 and 1996 consisted of net loss. Prior year financial statements have been
reclassified to conform to the requirements of SFAS 130.
FACILITIES AND EQUIPMENT. Facilities and equipment, including equipment
under capital leases, are stated at cost. Depreciation is provided using the
straight-line method over an estimated useful life of five years for equipment
and furniture and three years for computer equipment and software. Leasehold
improvements and equipment under capital leases are amortized using the
straight-line method over the shorter of the assets' estimated useful lives or
the terms of the leases.
NET LOSS PER COMMON SHARE. Basic loss per share is based on the weighted
average number of common shares outstanding during the period. Diluted loss per
share is based on the potential dilution that would occur on exercise or
conversion of securities into common stock using the treasury stock method. The
numerator and denominator of the basic and diluted loss per share calculations
for the years ended December 31, 1998, 1997 and 1996 were the same, because
including the effect of potential common shares would have been antidilutive.
Outstanding options to purchase 3,334,916, 3,148,474 and 2,808,839 shares of
Common Stock at December 31, 1998, 1997 and 1996, respectively and outstanding
warrants to purchase 408,727 and 1,033,727 shares of Common Stock at December
31, 1997 and 1996, respectively, were excluded from the calculation.
In addition, 283,712, 423,553 and 434,891 aggregate shares issuable upon
conversion of the Company's Convertible Subordinated Debentures and its
Preferred Stock are not included in the calculation of diluted loss per share,
as applicable, for the years ended December 31, 1998, 1997 and 1996 because the
effect of including such shares would have been antidilutive.
STOCK ISSUED TO EMPLOYEES. The Company accounts for its stock option plans
for employees in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Compensation expense related to employee stock options is
recorded if, on the date of grant, the fair value of the underlying stock
exceeds the exercise price. The Company applies the disclosure-only requirements
of SFAS No. 123, "Accounting for Stock-Based Compensation", which allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma net income and pro forma
earnings per share disclosures as if the fair-value based method of accounting
in SFAS No. 123 had been applied to employee stock option grants made in 1995
and future years.
RECLASSIFICATIONS. Certain reclassifications were made to the 1997 and
1996 financial statements to make them comparable with the 1998 presentation.
32
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENT SECURITIES
Investment securities consisted of the following (in thousands):
DECEMBER 31,
--------------------
1998 1997
------- -------
Federal government and agency securities.... $ 4,016 $ 4,997
Corporate debt securities................... 23,492 26,763
Corporate equity securities................. 734 --
------- -------
$28,242 $31,760
------- -------
------- -------
Unrealized gains and losses at December 31, 1998 are as follows (in thousands):
FAIR
MARKET UNREALIZED UNREALIZED
BASIS VALUE GAINS LOSSES
------- ------- ---------- ----------
Federal government and agency securities... $ 4,022 $ 4,016 $-- $ 6
Corporate debt securities.................. 23,461 23,492 33 2
Corporate equity securities................ 691 734 43 --
------- ------- --- ---
$28,174 $28,242 $76 $ 8
------- ------- --- ---
------- ------- --- ---
Net Unrealized Gains $68
---
---
The fair value of the securities approximated amortized cost at December
31, 1997.
Corporate equity securities consist of common stock which is restricted and
can be sold no earlier than December 1999.
All debt securities mature within one year of the date of issuance.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31,
---------------
1998 1997
------ ----
Compensation.................... $ 601 $743
Severance....................... 504 --
Other........................... 87 168
------ ----
$1,192 $911
------ ----
------ ----
NOTE 5. LEASES
The Company leases certain equipment under capital leases, which expire on
various dates through 1999. The total cost of equipment under capital leases
included in facilities and equipment was $293,966 at December 31, 1998 and 1997,
and accumulated amortization applicable to such leases was $293,966 and
$243,284, respectively.
33
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The lease for the Company's principal location expires in 2001 and contains
one five-year renewal option. Total rent expense under operating leases was
$554,736, $535,812, and $515,412 for 1998, 1997 and 1996, respectively.
Minimum lease payments and the present value of capital lease obligations
as of December 31, 1998, are as follows (in thousands):
OPERATING CAPITAL
YEAR LEASES LEASES
- ---- --------- -------
1999....................................................... $ 514 $ 4
2000....................................................... 440 --
2001....................................................... 195 --
------ ---
Total minimum lease payments............................. $1,149 4
------
------
Less: amount representing interest......................... --
---
Present value of capital lease obligations - current..... $ 4
---
---
NOTE 6. CONVERTIBLE SUBORDINATED DEBENTURES
The Company has $1,195,000 in principal of Convertible Subordinated
Debentures (the "Debentures") outstanding, that will be retired in June 2000.
The Debentures are convertible at the option of the holder into the Company's
Common Stock at a conversion price of $25.80 per share (par), subject to
adjustment under certain conditions. Interest at 9 3/4% is payable semi-annually
on June 1 and December 1. The Debentures are redeemable, in whole or in part, at
any time, at the option of the Company at 100.975% of par, reducing to par in
1999, together with accrued interest. The Debentures are subordinated in right
of payment to any outstanding senior indebtedness of the Company, as defined in
the indenture.
NOTE 7. SHAREHOLDERS' EQUITY
COMMON STOCK TRANSACTIONS. During 1998, the Company issued 138,422 shares
of Common Stock in exchange for 5,167 shares of Series 2 Convertible Preferred
Stock ("Series 2 Preferred Stock") and 1,000 shares of Series 3 Convertible
Preferred Stock ("Series 3 Preferred Stock"). Dividends of $101,240 were also
paid on the Series 2 Preferred Stock by issuing 21,038 shares of Common Stock.
As of December 31, 1998, no Series 2 Preferred Stock or Series 3 Preferred Stock
remains outstanding.
During 1997, the Company issued 720,862 shares of Common Stock and received
net proceeds and services valued at $2,748,542. Also during 1997, the Company
issued 3,366,690 shares of Common Stock in exchange for 1,500 shares of Series 2
Convertible Preferred Stock ("Series 2 Preferred Stock"), 119,000 shares of
Series 3 Convertible Preferred Stock ("Series 3 Preferred Stock") and 1,000
shares of Series 4 Convertible Preferred Stock. ("Series 4 Preferred Stock").
Dividends of $266,448 were also paid on the Series 2 Preferred Shares by issuing
54,769 shares of Common Stock.
During 1996, the Company issued 919,632 shares of Common Stock and received
net proceeds and services valued at $6,459,701. Also during 1996, the Company
issued 859,861 shares of Common Stock in exchange for 40,000 shares of Series 2
Preferred Stock. Dividends of $173,783 were paid on the shares of Series 2
Preferred Stock by issuing 32,252 shares of Common Stock.
PREFERRED STOCK TRANSACTIONS. Holders of Series 1 Convertible Preferred
Stock ("Series 1 Preferred Stock") are entitled to receive an annual cash
dividend of $2.4375 per share if declared by the Board of Directors (the
"Board"), payable semi-annually on June 1 and December 1. Dividends are
cumulative. Each share of Series 1 Preferred Stock is convertible into
approximately 1.14 shares of Common Stock,
34
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
subject to adjustment in certain events. The Series 1 Preferred Stock is
redeemable at the option of the Company at $25.24 per share, decreasing to
$25.00 per share by 1999. Holders of Series 1 Preferred Stock have no voting
rights, except in limited circumstances.
During 1996, the Company issued 46,667 shares of Series 2 Convertible
Preferred Stock and received net proceeds of $4,418,037. During 1998, 5,167
shares of Series 2 Preferred Stock were converted into 115,747 shares of Common
Stock. As of December 31, 1998, no Series 2 Preferred Stock remains outstanding.
During 1997, 1,500 shares of Series 2 Preferred Stock were converted to 32,934
shares of Common Stock. During 1996, 40,000 shares of Series 2 Preferred Stock
were converted into 859,861 shares of Common Stock.
During 1997, the Company sold 120,000 shares of Series 3 Preferred Stock in
private transactions and received net proceeds of $11,441,012. During 1998,
1,000 shares of Series 3 Preferred Stock were converted into 22,675 shares of
Common Stock. As of December 31, 1998, no Series 3 Preferred Stock remains
outstanding. During 1997, 119,000 shares of Series 3 Preferred Stock were
converted into 2,500,423 shares of Common Stock.
In connection with a 1997 agreement with Janssen Pharmaceutica NV
("Janssen"), a subsidiary of Johnson & Johnson, Inc, Johnson & Johnson
Development Corporation ("JJDC"), also a subsidiary of Johnson & Johnson,
purchased 1,000 shares of Series 4 Preferred Stock, $.02 par value per share, at
a stated value of $5,000 per share with a dividend rate of 7% per annum. In
September 1997, the Series 4 Preferred Stock automatically converted into
833,333 shares of Common Stock, in accordance with the JJDC agreement, when the
Common Stock attained an average closing price of $6.00 per share. As of
December 31, 1997, none of the Series 4 Preferred Stock remained outstanding.
SHAREHOLDERS' RIGHTS PLAN. The Company has adopted a Shareholders' Rights
Plan intended to protect the rights of shareholders by deterring coercive or
unfair takeover tactics. The Board declared a dividend to holders of the
Company's Common Stock, payable on April 19, 1996, to shareholders of record on
that date, of one preferred share purchase right (the "Right") for each
outstanding share of the Common Stock. The Right is exercisable 10 days
following the offer to purchase or the acquisition of a beneficial ownership of
20% of the outstanding Common Stock by a person or group of affiliated persons.
Each Right entitles the registered holder, other than the acquiring person or
group, to purchase from the Company one-hundredth of one share of Series A
Junior Participating Preferred Stock ("Series A Preferred Stock") at a price of
$40, subject to adjustment. The Rights expire in 2006. The Series A Preferred
Stock will be entitled to a minimum preferential quarterly dividend of $1 per
share and has liquidation provisions. Each share of Series A Preferred Stock has
100 votes, and will vote with the Common Stock. Prior to the acquisition by a
person or group of 20% of the outstanding Common Stock, the Board may redeem
each Right at a price of $.001.
In lieu of exercising the Right by purchasing one one-hundredth of one
share of Series A Preferred Stock, the holder of the Right, other than the
acquiring person or group, may purchase for $40, that number of the Company's
Common Stock having a market value of twice that price.
The Board may, without further action by the shareholders of the Company,
issue preferred stock in one or more series and fix the rights and preferences
thereof, including dividend rights, dividend rates, conversion rates, voting
rights, terms of redemption, redemption price or prices, liquidation preferences
and the number of shares constituting any series or the designations of such
series.
STOCK OPTIONS. The Company has two stock option plans with options
available for grant: the 1994 Stock Option Plan (the "1994 Plan") and the
1991 Stock Option Plan for Non-Employee Directors (the "Directors Plan").
35
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The 1994 Plan, as amended, authorizes the Board or an Option Committee
appointed by the Board to grant options to purchase a maximum of 4,000,000
shares of Common Stock. The 1994 Plan allows for the issuance of incentive stock
options and nonqualified stock options to employees, officers, Directors,
agents, consultants, advisors and independent contractors of the Company,
subject to certain restrictions. All option grants expire ten years from the
date of grant. In general, two-thirds of the option grants become exercisable in
increments at a rate of 25% per year over a four-year period from the grant
date, and the remaining one-third becomes exercisable over a period of one to
six years from the grant date at the discretion of the Option Committee. As of
December 31, 1998, there were 919,105 shares of Common Stock available for grant
under the 1994 Plan.
On December 14, 1998, the Company canceled and reissued 1,904,927 employee
stock options at a price of $1.60 per share, which was greater than the fair
market value of $1.25 per share of the Common Stock on the reissue date. Except
for the exercise price, the options had terms identical to the cancelled
options. Employees agreed to a one-year moratorium on exercise of these options
to qualify for the exchange. During this "black-out period" any employee
resigning from the Company will not be able to exercise these options. The
exercise price of the cancelled options ranged from $2.94 - $12.25.
In 1996, the Company canceled and reissued at an exercise price range of
$5.13 - $5.25 per share, the fair market value of the Common Stock on the date
of reissue, all options held by non-executive employees with exercise prices
greater than $5.25 per share. Except for the exercise price, the terms of the
reissued options were identical to the cancelled options.
The Directors Plan authorizes the grant of stock options to non-employee
Directors to purchase a maximum of 250,000 shares of Common Stock. Under the
terms of the amended plan, each eligible Director receives annually, concurrent
with the annual election of Directors, an option to purchase 10,000 shares of
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. The options become exercisable in two equal annual
installments beginning with the first annual meeting of shareholders after the
date of grant. In addition, each newly appointed non-employee Director receives
a one-time initial option to purchase 20,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. Options expire on the earlier of ten years from the date of grant or five
years after the Director's termination of service as a Director. As of December
31, 1998, there were 37,500 shares of Common Stock available for grant under the
Directors Plan.
Information relating to activity under the Company's stock option plans is
as follows (in thousands, except per share data):
1998 1997 1996
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at beginning of year ..... 3,148 $5.14 2,809 $5.11 2,911 $4.85
Granted............................... 2,589 1.97 600 5.09 994 6.19
Exercised............................. (127) 3.25 (114) 3.32 (281) 2.62
Cancelled............................. (2,275) 5.06 (147) 5.87 (815) 6.35
------ ----- ----- ----- ----- -----
Outstanding at end of year............ 3,335 $2.81 3,148 $5.14 2,809 $5.11
------ ----- ----- ----- ----- -----
------ ----- ----- ----- ----- -----
Exercisable at end of year............ 887 $5.31 1,679 $5.54 1,267 $6.03
------ ----- ----- ----- ----- -----
------ ----- ----- ----- ----- -----
36
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Information relating to stock options outstanding and exercisable at
December 31, 1998 is as follows (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OF SHARES LIFE IN YEARS EXERCISE PRICE OF SHARES EXERCISE PRICE
- ------------------------ --------- ------------- -------------- --------- --------------
$1.25 - $1.50......... 438 8.48 $1.35 73 $1.46
$1.60......... 1,905 6.88 1.60 -- --
$2.94 - $21.75......... 992 6.06 5.78 814 5.65
----- ---- ----- --- -----
3,335 6.84 $2.81 887 $5.31
----- ---- ----- --- -----
----- ---- ----- --- -----
The fair value of each stock option granted is valued on the date of grant
using the Black-Scholes option-pricing model. During 1998, the weighted average
grant-date fair value of stock options granted with an exercise price equal to
the fair market value of the common stock was $2.01 per share using assumptions
of expected volatility of 105%, expected option lives of four to six years and a
risk-free rate of interest of 4.7%. The weighted average grant-date fair value
of repriced stock options was $.89 per share using assumptions of expected
volatility of 105%, expected option lives of four to five years and a risk-free
rate of interest of 4.7%. The weighted average grant-date fair value of stock
options granted during 1997 was $3.73 per share using the assumptions of
expected volatility of 66%, expected option lives of five to ten years and
risk-free rates of interest of 5.7 - 6.8%. During 1996, the weighted average
grant-date fair value of stock options granted was $3.66 per share using the
assumptions of expected volatility of 70%, expected option lives of five to ten
years and risk-free rates of interest of 6.5 - 6.7%. The Company assumed a
dividend yield of zero for all years. During 1997 and 1996 the exercise price of
the options was equal to the fair market value of the common stock at the date
of grant.
Had compensation cost for these stock option plans been determined in
accordance with SFAS 123, the Company's "Net Loss" and "Net Loss Per Common
Share" would have increased to the following pro forma amounts for 1998, 1997
and 1996 (in thousands, except per share data):
1998 1997 1996
---- ---- ----
NET LOSS......................... AS REPORTED................ $(4,449) $(2,550) $(9,001)
PRO FORMA.................. (5,819) (3,777) (9,503)
NET LOSS PER COMMON SHARE, AS REPORTED................ $ (.24) $ (.31) $ (.68)
BASIC AND DILUTED............ PRO FORMA.................. (.30) (.39) (.72)
Because the SFAS 123 method of accounting has not been applied to stock
options granted before January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
RESTRICTED STOCK. The Company also has a Restricted Stock Plan (the "Restricted
Stock Plan") under which restricted stock may be granted or sold to selected
employees, officers, agents, consultants, advisors and independent contractors
of the Company. Under the Restricted Stock Plan, adopted in 1991, 250,000 shares
are authorized for grant, of which 194,000 remain available for grant at
December 31, 1998.
37
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
WARRANTS. In connection with financing transactions in 1995, the Company
issued 1,634,907 three-year warrants to purchase 408,727 shares of Common Stock,
exercisable at a price of $5.31 per share. During 1998, 52,812 warrants were
exercised for 13,203 shares of Common Stock, the Company received net proceeds
of $70,141. The remaining warrants expired in 1998.
In 1992, the Company issued Common Stock purchase warrants to Boehringer
Ingelheim to acquire 625,000 shares of Common Stock at a per share exercise
price ranging from $15.84 to $21.12. The warrants expired in 1997.
NOTE 8. REVENUES
The Company entered into an agreement in August 1997 with Janssen for the
worldwide development, manufacture and distribution of NeoRx's
AVICIDIN-REGISTERED TRADEMARK- cancer therapy product. The Company received a
$5,000,000 license fee in 1997, which was recorded as revenue in 1997, and
rights to potential future milestone payments and royalties on product sales.
In January 1998, the Company received a $7,000,000 milestone payment from
Janssen, reflecting Janssen's decision to begin Phase II trials of
AVICIDIN-REGISTERED TRADEMARK- cancer therapy as part of the agreement entered
into with Janssen in 1997. This agreement was terminated by Janssen on
December 29, 1998.
Also in 1997, the Company received a $4,000,000 license fee from Schwarz
Pharma for marketing rights to NeoRx's BIOSTENT-REGISTERED TRADEMARK- product
in North America and Europe and $4,000,000 for 699,000 unregistered shares of
NeoRx Common Stock representing a 50% premium over the fair value of the
stock. The $4,000,000 license fee and the excess amount received over the fair
market value of the Common Stock ($1,333,334) were recorded as revenue. In
1997, the Company granted Schwarz Pharma AG ("Schwarz Pharma") an exclusive
license to develop, market and distribute NeoRx's BIOSTENT-REGISTERED
TRADEMARK- restenosis treatment product in North America and Europe. In
November 1998, Schwarz Pharma informed NeoRx that it was ceasing the
development of the product and intending to terminate the agreement. NeoRx
believes that, under the terms of the agreement and the factual information
provided by Schwarz Pharma, Schwarz Pharma has no right to terminate the
agreement and the development of the product. The Company expects to settle
this dispute, but will pursue its legal rights if required.
In 1996, the Company recorded as revenue a $4,500,000 milestone payment
from DuPont Merck upon FDA approval to market VERLUMA-REGISTERED TRADEMARK- in
the United States. In May 1998 DuPont gave one year's notice of termination of
its license agreement with the Company for the Verluma-REGISTERED TRADEMARK-
lung cancer-imaging product. Royalties collected for VERLUMA-REGISTERED
TRADEMARK- in 1998 and 1997 were insignificant.
NOTE 9. CASH FLOW
Interest paid by the Company was $129,881, $134,955, and $142,613 for 1998,
1997 and 1996, respectively.
38
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. FEDERAL INCOME TAXES
Temporary differences and carryforwards giving rise to deferred tax assets
were as follows (in thousands):
DECEMBER 31,
---------------------
1998 1997
-------- --------
Net operating loss carryforwards ....................... $ 21,048 $ 19,900
Research and experimentation credit carryforwards....... 2,239 1,600
Depreciation and amortization........................... 649 630
Other .................................................. 584 340
-------- --------
Deferred tax assets .................................. 24,520 22,470
Deferred tax asset valuation allowance ................. (24,520) (22,470)
-------- --------
Net deferred taxes ................................... $ -- $ --
-------- --------
-------- --------
The Company has established a valuation allowance equal to the amount of
deferred tax assets because the Company has not had taxable income since its
inception and significant uncertainty exists regarding the ultimate realization
of the deferred tax asset. Accordingly, no tax benefits have been recorded in
the accompanying statements of operations. The valuation allowance increased by
$2,050,000, $1,570,000 and $2,400,000 in 1998, 1997 and 1996, respectively.
The Company has net operating loss carryforwards of approximately
$61,800,000 which expire beginning in 1999 through 2012. Research and
experimentation credits expire from 2006 to 2019.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company's Chairman of the Board of Directors, has a consulting
agreement with the Company that provides that he shall be retained as a general
advisor and consultant to the Company's management on all matters pertaining to
the Company's business. In exchange for such services, he is compensated $30,000
for each calendar quarter of services, plus reasonable travel and other
expenses. In addition, under the agreement, in 1993 the Company granted him
options to purchase, at a 15% discount, a total of up to 125,000 shares of
Common Stock over four years. In 1996, the Board accelerated vesting of his
remaining 40,000 unvested shares for his assistance in the Company's 1996
financing. On February 21, 1997, the Board granted him, under the Restated 1994
Stock Option Plan, options to purchase 60,000 of the Company's Common Stock for
his services as Chairman of the Board of Directors. The options were granted at
the then current market price of the Common Stock, and vest and are exercisable
in two equal installments beginning one year after the date of grant.
Dr. Fred Craves, Chairman of NeoRx, is chairman of Bay City Capital, Ltd.,
("BCC") a merchant bank focused on the life sciences industry. Mr. Jack Bowman,
a NeoRx director, is on the business advisory board of BCC. In January 1999,
NeoRx Corporation and BCC entered into an agreement whereby BCC will act as the
Company's advisor for the purpose of identifying opportunities to enter into
strategic alliances. The Company paid a retainer fee of $50,000 in cash. The
agreement also includes a percentage of consideration, depending on the ultimate
amount of consideration raised, ranging from 1-5%.
The Company has a demand note receivable from an officer with a balance
of $91,981 and $111,938 at December 31, 1998 and 1997, respectively.
39
NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. RESTRUCTURING EXPENSE
In December 1998, the Company restructured its operations and reduced its
workforce in all departments by 20 employees. The employees were no longer with
the Company at December 31, 1998 and will not be providing future services to
the Company. The Company incurred a severance charge of $659,000 as a result of
the restructuring. The accrued severance payable at December 31, 1998 was
$504,000 which will be paid in 1999.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In April 1997, the Board of Directors, at the recommendation of the Audit
Committee, terminated the engagement of Arthur Andersen LLP as the Company's
certifying accountants.
The report of Arthur Andersen LLP on the Company's financial statements for
1996 did not contain any adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's 1996 fiscal years and subsequent interim periods
preceding the date of termination of the engagement of Arthur Andersen LLP, the
Company was not in disagreement with Arthur Andersen LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Arthur Andersen LLP, would have caused Arthur Andersen LLP to make reference to
the subject matter of the disagreement in connection with its report.
The required letter from Arthur Andersen LLP with respect to the above
statements made by the Company is filed as an exhibit hereto.
Also in April 1997, the Board of Directors, at the recommendation of the
Audit Committee, engaged KPMG LLP as the Company's certifying accountants. The
Company had not consulted with KPMG LLP during its previous two most recent
fiscal years or during any subsequent interim period prior to its engagement
regarding the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit option that might be rendered
on the Company's financial statements.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) DIRECTORS. The information required by this item is incorporated herein
by reference to the section captioned "Election of Directors" in the Company's
Proxy Statement for the Annual Meeting of Shareholders to be held on May 14,
1999, filed with the Securities and Exchange Commission (the "Commission")
pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act").
(b) EXECUTIVE OFFICERS. Information with respect to the Company's
executive officers is set forth below.
NAME AGE POSITION WITH THE COMPANY
Paul G. Abrams, M.D., J.D. 51 Chief Executive Officer and Director
Richard L. Anderson 59 President and Chief Operating Officer
Becky J. Bottino 50 Vice President, Operations
Robert W. Schroff, Ph.D., M.B.A. 44 Vice President and General Manager,
Cardiovascular Products
BUSINESS EXPERIENCE
DR. PAUL G. ABRAMS is a co-founder of the Company, has been a Director
since January 1985 and has been Chief Executive Officer since May 1990. Dr.
Abrams holds M.D., J.D. and B.A. degrees from Yale University. He is a
board-certified internist and medical oncologist and is an Affiliate
Associate Professor in the Department of Radiology at the University of
Washington.
RICHARD L. ANDERSON was promoted to President and COO in December 1998. He
held the position of Senior Vice President, Finance and Operations and Chief
Financial Officer from September 1997 to December 1998. He was Senior Vice
President and Chief Financial Officer from January 1996 to August 1997. From
November 1994 to January 1997, Mr. Anderson was Vice President and Controller at
Mosaix Inc., a provider of computer telephony integration products and services.
From September 1993 to October 1994, Mr. Anderson was Vice President of Finance,
Chief Financial Officer and Secretary of Merix Corporation (formerly a division
of Tektronix), a manufacturer of printed circuit boards. Mr. Anderson holds an
M.S. degree in Management from Johns Hopkins University, a M.S. degree in Solid
State Physics from the University of Maryland, a B.S. in Physics from Bucknell
University and is a Certified Public Accountant.
BECKY J. BOTTINO has been Vice President of Operations since September
1997. She was the Company's Director of Manufacturing and Product Development
from October 1996 through September 1997, Director of Product Development from
1992 to 1994 and Manager of Product Development from 1989 to 1992. Ms. Bottino
joined NeoRx in 1985 as a Research Technologist. She holds a M.S. degree in
Chemistry from the University of Washington and a B.S. degree from the
University of Utah.
DR. ROBERT W. SCHROFF has been Vice President and General Manager,
Cardiovascular Products since January 1993. He was the Company's Director,
Business Development and Analytical Labs from September 1991 to December 1992.
Dr. Schroff holds a Ph.D. degree in Immunology from the Bowman Gray School of
Medicine of Wake Forest University. He performed postdoctoral studies at the
University of California at Los Angeles. Dr. Schroff also holds an M.B.A.
degree from the University of Washington.
(c) COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. The information
required by this item is incorporated herein by reference to the section
captioned "Compliance With Section 16(a) of the Securities Exchange Act of 1934"
in the Company's Proxy Statement for the Annual Meeting of
42
Shareholders to be held on May 14, 1999, filed with the Commission pursuant to
Section 14(a) of the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference
to the sections captioned "Executive Compensation" in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 14, 1999,
filed with the Commission pursuant to Section 14(a) of the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
to the section captioned "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 14, 1999, filed with the Commission pursuant to
Section 14(a) of the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is detailed in the Notes to Financial
Statements contained herein in the section captioned "Related Party
Transactions".
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS -- SEE INDEX TO FINANCIAL STATEMENTS.
(a) (2) FINANCIAL STATEMENT SCHEDULES -- NOT APPLICABLE.
(a) (3) EXHIBITS -- SEE EXHIBIT INDEX FILED HEREWITH.
(b) REPORTS ON FORM 8-K -- NOT APPLICABLE.
(c) EXHIBITS -- SEE EXHIBIT INDEX FILED HEREWITH.
44
SIGNATURES
Pursuant to the requirements of Section 13 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.
NEORX CORPORATION
(Registrant)
/s/ RICHARD L. ANDERSON
----------------------------------------
Richard L. Anderson
President and Chief Operating Officer,
Secretary (Principal Financial and
Accounting Officer)
Date: March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ PAUL G. ABRAMS Chief Executive Officer and March 24, 1999
- ------------------------------ Director (Principal Executive
Paul G. Abrams Officer)
/s/ RICHARD L. ANDERSON President, Chief Operating March 24, 1999
- ------------------------------ Officer, Secretary
Richard L. Anderson
/s/ FRED B. CRAVES Chairman of the Board of March 24, 1999
- ------------------------------ Directors
Fred B. Craves
/s/JACK L. BOWMAN Director March 24, 1999
- ------------------------------
Jack L. Bowman
/s/ E. ROLLAND DICKSON Director March 24, 1999
- ------------------------------
E. Rolland Dickson
/s/ ALAN A.STEIGROD Director March 24, 1999
- ------------------------------
Alan A. Steigrod
EXHIBIT INDEX
INCORPORATION
EXHIBIT DESCRIPTION BY REFERENCE TO
- ------- ----------- ---------------
3.1(a) Restated Articles of Incorporation, dated April 29, 1996 *
3.1(b) Articles of Amendment, dated March 31, 1997, to Restated
Articles of Incorporation **
3.1(c) Articles of Amendment, dated August 8, 1997, to Restated
Articles of Incorporation XXXXX
3.2 Bylaws, as amended, of the registrant XXXXX
4.1 Form of Indenture, dated as of June 1, 1989, between NeoRx
Corporation and First Interstate Bank of Washington, N.A., as
Trustee ***
4.2 Specimen Warrant Certificate +++
4.3 Form of Purchase Agreements dated as of April 18, 1995 between
NeoRx Corporation and the Purchasers +++
4.4 Form of Purchase Agreements dated as of January 30, 1996 between
NeoRx Corporation and the Purchasers ++++
4.5 Rights Agreement, dated April 10, 1996, between NeoRx Corporation
and First Interstate Bank of Washington, N.A. ++++++
10.1 Restated 1994 Stock Option Plan (@) &
10.2 Lease Agreement for 410 West Harrison facility, dated February 15,
1996, between NeoRx Corporation and Diamond Parking, Inc #
10.3 1991 Stock Option Plan for Non-Employee Directors, as amended (@) ++
10.4 1991 Restricted Stock Option Plan (@) ******
10.5 Stock and Warrant Purchase Agreement, dated as of September 11, 1992,
between NeoRx Corporation and Boehringer Ingelheim International GmbH ****
10.6 Amendment to Stock and Warrant Purchase Agreement, dated as of
September 17, 1992, between NeoRx Corporation and Boehringer
Ingelheim International GmbH +
10.7 Second Amendment to Stock and Warrant Purchase Agreement, dated as
of September 29, 1993, between NeoRx Corporation and Boehringer
Ingelheim International GmbH +
10.8 Development and License Agreement, dated as of September 11, 1992,
between NeoRx Corporation and Boehringer Ingelheim International GmbH ****
10.9 First Amendment to Development and License Agreement, dated
September 22, 1994, between NeoRx Corporation and Boehringer
Ingelheim International GmbH ++
10.10 Second Amendment to Development and License Agreement, dated
October 31, 1994, between NeoRx Corporation and Boehringer
Ingelheim International GmbH ++
10.11 Technology License Agreement, dated as of September 11, 1992, between
NeoRx Corporation and Boehringer Ingelheim International GmbH ****
10.12 License Agreement, dated as of September 18, 1992, between NeoRx
Corporation and Sterling Winthrop Inc ****
10.13 Agreement, dated as of December 15, 1995 +++++
10.14 License Option Agreement, dated June 1, 1991, between NeoRx
Corporation and the UAB Research Foundation +
10.15 Research Agreement (With Option to License), dated February 8, 1993,
between NeoRx Corporation and Southern Research Institute +
10.16 Consulting Agreement, effective March 15, 1993, between NeoRx
Corporation and Oxford Molecular Inc +
10.17 Agreement, dated as of August 1, 1993, between NeoRx Corporation and
Avalon Medical Partners +
10.18 Registration Rights Agreement, dated September 1993, between NeoRx
Corporation and Avalon Medical Partners +
10.19 Consulting Agreement, dated as of July 7, 1993, between NeoRx
Corporation and Dr. Fred Craves (@) +
10.20 Amendment to consulting agreement, dated May 9,1995 between NeoRx
Corporation and Dr. Fred Craves (@) +++++
10.21 Engagement letter, dated as of June 22, 1993, between NeoRx
Corporation and the Placement Agents *****
10.22 Purchase Agreements, dated May 19, 1993, between NeoRx Corporation
and the Purchasers or representatives thereof *****
i
INCORPORATION
EXHIBIT DESCRIPTION BY REFERENCE TO
- ------- ----------- ---------------
10.23 Stock Purchase Agreement, dated as of October 5, 1994, between NeoRx
Corporation and The DuPont Merck Pharmaceutical Company ++
10.24 License Agreement, dated as of October 5, 1994, between NeoRx
Corporation and The DuPont Merck Pharmaceutical Company ++
10.25 Supply Agreement, dated November 10, 1994, between Cordis Corporation
and NeoRx Corporation ++
10.26 License Agreement, effective as of October 12, 1994, between Indiana
University Foundation and NeoRx Corporation, as amended ++
10.27 Agreement, dated as of June 1, 1987, between NeoRx Corporation and
the Board of Trustees of the Leland Stanford Junior University, as
amended ++
10.28 Amendment No. 3, dated November 15, 1995, to Contract between NeoRx
Corporation and the Board of Trustees of the Leland Stanford Junior
University +++++
10.29 Form of Registration Rights Agreement, dated January 30, 1996, by and
among NeoRx Corporation and Grace Brothers, Ltd., Genesee Fund, Ltd.
and SBSF Biotechnology Partners ++++
10.30 Indemnification Agreement (@) #
10.31 Change of Control Agreement (@) ##
10.32 Form of Key Executive Severance Agreement (@) ##
10.33 Development, Distribution and Supply Agreement between NeoRx
Corporation and Schwarz Pharma AG, dated March 31, 1997 X
10.34 Stock Purchase Agreement, dated May 24, 1997, between Schwarz
Pharma AG and NeoRx Corporation XXX
10.35 Preferred Stock Purchase Agreement, dated August 8, 1997, between
Johnson & Johnson Development Corporation and NeoRx Corporation XXXX
10.36 Agreement, entered into as of July 1, 1997, between Janssen
Pharmaceutica, N.V. and NeoRx Corporation XXXX
10.37 Officer Change in Control Agreement XXXXX
10.38 Key Executive Severance Agreement XXXXX
16.1 Letter Regarding Change in Certifying Accountants XX
23.1 Consent of KPMG LLP XXXXX
23.2 Consent of Arthur Andersen LLP XXXXX
27.1 Financial Data Schedules XXXXX
- -----------------
* Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 1996 and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form
S-3 (Registration No. 333-25161), filed April 14, 1997 and
incorporated herein by reference.
*** Filed as an exhibit to the Company's Registration Statement on Form
S-1 (Registration No. 33-28545) effective May 31, 1989 and
incorporated herein by reference.
**** Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1992 and incorporated herein by
reference.
***** Filed as an exhibit to the Company's Registration Statement on Form
S-3 (Registration No. 33-64992) effective August 25, 1993 and
incorporated herein by reference.
****** Filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended September 30, 1991 and incorporated herein by
reference.
+ Filed as an exhibit to the Company's Registration Statement on Form
S-2 (Registration No. 33-71164) effective December 13, 1993 and
incorporated herein by reference.
++ Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 1994 and incorporated herein by reference.
+++ Filed as an exhibit to the Company's Registration Statement on Form
S-3 (Registration No. 33-60029) effective August 8, 1995 and
incorporated herein by reference.
++++ Filed as an exhibit to the Company's Registration Statement on Form
S-3 (Registration No. 333-00785) effective February 7, 1996 and
incorporated herein by reference.
+++++ Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 1995 and incorporated herein by reference.
++++++ Filed as an exhibit to the Company's Registration Statement on Form
8-A, dated April 15, 1996 and incorporated herein by reference.
& Filed as an exhibit to the Company's Registration Statement on Form
S-8, filed July 31, 1997 and incorporated herein by reference.
# Filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended
ii
March 31, 1996 and incorporated herein by reference.
## Filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1996 and incorporated herein by reference.
X Filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1997 and incorporated herein by reference.
XX Filed as an exhibit to the Company's Form 8-K dated April 11, 1997
and incorporated herein by reference.
XXX Filed as an exhibit to the Company's Form 8-K dated June 11, 1997 and
incorporated herein by reference.
XXXX Filed as an exhibit to the Company's Form 8-K dated October 7, 1997
and incorporated herein by reference.
XXXXX Filed as an exhibit to the Company's Form 10-K for the fiscal year
ended December 31, 1998
@ Management contract or compensatory plan.
iii