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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-22147
ILEX ONCOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2699185
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11550 I.H. 10 WEST, SUITE 100
SAN ANTONIO, TEXAS 78230
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 949-8200
--------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EXCHANGE ON WHICH REGISTERED:
-------------------- -------------------------------------
COMMON STOCK, NATIONAL ASSOCIATION OF SECURITIES
$.01 PAR VALUE DEALERS AUTOMATED QUOTATION SYSTEM
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 .
----- -----
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. X .
-----
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
MARCH 6, 2000 IS 21,793,682.
THE AGGREGATE MARKET VALUE OF THE STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 6, 2000 WAS APPROXIMATELY $832 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE REGISTRANT'S
2000 ANNUAL MEETING OF STOCKHOLDERS, TO BE FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION NOT LATER THAN APRIL 30, 2000 ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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This Annual Report on Form 10-K contains certain "forward-looking"
statements as such term is defined in the Private Securities Litigation Reform
Act of 1995 and information relating to the Company and its subsidiaries that
are based on the beliefs of the Company's management as well as assumptions made
by and information currently available to the Company's management. When used in
this report, the words "anticipate," "believe," "estimate," "expect" and
"intend" and words or phrases of similar import, as they relate to the Company
or its subsidiaries or Company management, are intended to identify
forward-looking statements. Such statements reflect the current risks,
uncertainties and assumptions related to certain factors including, without
limitations, competitive factors, general economic conditions, relationships
with pharmaceutical and biotechnology companies, the ability to develop safe and
efficacious drugs, variability of royalty, license and other revenue, failure to
satisfy performance obligations, ability to enter into future collaboration
agreements, failure to achieve positive results in clinical trials, failure to
complete current or secure new contracts with contract research services
clients, uncertainty regarding the Company's patents and proprietary rights
(including the risk that the Company may be forced to engage in costly
litigation to protect such patent rights and the material adverse consequences
to the Company if there were unfavorable outcome of any such litigation),
governmental regulation and supervision, technological change, changes in
industry practices, one-time events and other factors described herein or in the
Company's Registration Statement on Form S-3 (Registration File No. 333-32000)
filed March 8, 2000, and the Company's annual, quarterly and other reports filed
with the Securities and Exchange Commission. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking
statements.
PART I.
ITEM 1. BUSINESS
SUMMARY
ILEX Oncology, Inc. (the "Company" or "ILEX") develops pharmaceuticals
for treating and preventing cancer and provides contract research services to
other companies developing anticancer drugs. We have a portfolio of seven
anticancer products in clinical development and several preclinical stage
products. We built this portfolio by in-licensing and acquiring product
candidates developed by others and do not conduct discovery research ourselves.
We recently completed a pivotal clinical trial in chronic lymphocytic leukemia
("CLL") for our most advanced product candidate, CAMPATH(R). We are developing
CAMPATH(R) in partnership with LeukoSite, Inc., which was acquired by Millennium
Pharmaceuticals, Inc. ("Millennium") in 1999. The results of this trial enabled
the partnership to submit a Biologics License Application ("BLA") with the U.S.
Food and Drug Administration, or FDA, in December 1999. The FDA has granted
CAMPATH(R) fast-track status, requiring agency review of the BLA to be completed
within six months of filing. We expect to file for marketing approval in the
European Union in the second quarter of 2000. In August 1999, the partnership
licensed worldwide marketing rights (except for Japan and East Asia) for
CAMPATH(R) to Schering AG.
We operate through two subsidiaries: ILEX Products, Inc., through which
we develop our own portfolio of anticancer compounds, and ILEX Oncology
Services, Inc., or ILEX Services, which is our full service contract research
organization ("CRO"). ILEX Services manages the preclinical research and
clinical trials for our own product candidates, as well as oncology products
being developed by other companies. In addition to building our expertise in
cancer drug development, our CRO business generates revenue, reduces our cost to
perform our own research and development, and gives us access to product
in-licensing opportunities.
ILEX was formed by The Cancer Therapy and Research Foundation of South
Texas ("CTRC") in December 1993 for the purpose of conducting certain advanced
drug development programs and pursuing commercial opportunities which were not
within the scope of CTRC's tax-exempt purpose. The Company's common stock began
trading publicly on February 20, 1997.
The Company was incorporated in Delaware in December 1993. The
Company's principal offices are located at 11550 IH-10 West, Suite 100, San
Antonio, Texas 78230.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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RECENT EQUITY FINANCINGS
o In March 2000, the Company entered into definitive agreements to sell 3.0
million newly issued shares of its common stock at $45.00 per share to
selected institutional and other accredited investors. Gross proceeds to
the Company are expected to be approximately $135 million. Net proceeds to
the Company are expected to be approximately $127 million. The transaction
is expected to close during the first quarter of 2000.
o In November 1999, the Company completed an underwritten public offering of
its common stock pursuant to which 4.2 million newly issued shares at
$14.00 per share were sold by the Company. The number of shares sold by the
Company includes the underwriters' exercise of their overallotment option.
Proceeds, net of offering costs, to the Company from this offering were
approximately $54.5 million.
o In July 1999, the Company completed a private placement of approximately
2.4 million shares of its common stock at $8.37 per share. Proceeds, net of
offering costs, to the Company from this private placement were
approximately $20.0 million.
ILEX intends to use the proceeds from these transactions to accelerate
its clinical trials and preclinical research, with a particular focus on its
late-stage clinical product candidates and preclinical angiogenesis inhibitors,
as well as potential acquisitions of complementary technologies, products,
companies and general corporate purposes.
OTHER SIGNIFICANT EVENTS IN 1999
o Through its acquisition of Convergence Pharmaceuticals, Inc. in July 1999,
a privately held research-based pharmaceutical company in Boston, ILEX
added a portfolio of potential angiogenesis and DNA repair inhibitors. ILEX
continues the preclinical development of these compounds in preparation for
filing Investigational New Drug applications and initiating clinical trials
with these agents.
o The Company, in collaboration with the National Cancer Institute ("NCI")
and the University of Wisconsin, is continuing enrollment into a pivotal
Phase III trial of eflornithine (DFMO) to determine its efficacy in
preventing the recurrence of superficial bladder cancer.
o Through its joint development agreement with Symphar SA of Geneva,
Switzerland, ILEX is conducting two Phase I trials of APOMINE(TM)
(SR-45023A) and preparing the development plan for Phase II trials. APOMINE
is an orally active compound that appears to selectively target cancer
cells and induces their death through apoptosis.
o ILEX is conducting four Phase II trials of ILX-295501, a diarysulfonylurea,
in non-small cell lung cancer, renal cancer, melanoma, and ovarian cancer.
ILX-295501, licensed by ILEX from Eli Lilly, has demonstrated anti-tumor
activity in a broad spectrum of human tumors.
o ILEX has initiated a pivotal Phase II trial of OXYPRIM(TM) (oxypurinol) in
patients with symptomatic hyperuricemia who are intolerant to allopurinol.
OXYPRIM has been designated as an orphan drug for this indication.
o The Company has initiated patient accrual to two Phase I trials of
ILX23-7553, a Vitamin D3 analog. A third Phase I trial will be initiated
in the first half of 2000. Each trial is evaluating a different dosing of
this compound to identify the optimal administration schedule.
ILEX PRODUCTS
We have seven drugs (CAMPATH(R), eflornithine, OXYPRIM(TM), ILX-295501,
APOMINE(TM), Aminopterin, ILX23-7553) in clinical development and several
product candidates in late preclinical research. All of our product rights were
either acquired or in-licensed. We follow a disciplined approach to product
acquisition and development:
o we only in-license product candidates that have shown strong preclinical or
human efficacy results;
o we only develop drugs that are patent protected, have patents pending or
can qualify for orphan drug designation from the FDA;
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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o we do not perform discovery research;
o we advance compounds into Phase II trials only if we see promising efficacy
results in Phase I trials; and
o we seek partners when considered appropriate to share the cost and risk of
developing and commercializing our products.
In addition to traditional chemotherapy drugs that kill cancer cells, we are
developing chemoprevention agents, which are intended to be well-tolerated oral
therapies aimed at preventing the occurrence, progression or recurrence of
cancer. We believe the market potential for chemoprevention agents is increasing
as more genetic and other diagnostic tests become available to identify people
at risk of developing cancer. As long-term therapies, chemoprevention agents
have the potential to address new markets substantially larger than most acute
care cancer products. Although long-term studies are usually needed to prove
that a drug can prevent cancer, our strategy is to seek approval based upon
effectively treating a pre-cancerous condition or preventing the recurrence of
cancer, thereby shortening the approval process.
ILEX SERVICES
We believe ILEX Services is the only full service provider of CRO services
focused predominantly on oncology. We offer a full range of specialized
preclinical research and clinical trial services, including chemistry and
toxicology services, small-scale manufacturing, design of clinical protocols,
organization and monitoring of clinical trials and preparation of regulatory
submissions. Based on our expertise, we aim to reduce the time normally required
to develop oncology products and increase the probability of obtaining
regulatory approval. In addition, ILEX Services provides CRO services on a
contract basis to ILEX Products and has been the source of three of the products
we now have in clinical development.
Our CRO revenues grew to $13.5 million in 1999, from $9.7 million in 1998, and
$5.9 million in 1997. Our CRO client list includes approximately 40
biotechnology and pharmaceutical companies, currently conducting approximately
150 preclinical studies and clinical trials with us. We signed $25 million of
new CRO business contracts during 1999, and ended the year with a backlog
totaling $20.5 million.
We work closely with prestigious cancer research institutions and groups that
give us access to top oncology clinical expertise. Our Board of Directors
includes Dr. Daniel Von Hoff, president of the American Association for Cancer
Research, and Dr. Joseph Bailes, president of the American Society of Clinical
Oncology. In addition, we have a strong relationship with CTRC Research
Foundation (CTRC Research), our largest stockholder. CTRC Research has one of
the largest oncology Phase I trial organizations in the United States (U.S.). We
also have strong historical ties with US Oncology, Inc., the largest oncology
physician practice management organization in the U.S., whose physicians see
approximately 13% of the new cancer patients in the U.S. annually. Our strong
relationships with these groups give us access to a significant number of
patients for enrollment into clinical trials. We believe that our oncology focus
combined with these relationships make us an attractive option for companies
selecting a CRO to develop a cancer drug.
OUR MARKET
Cancer encompasses a large number of discrete diseases that afflict many
different parts of the human body. The diversity of cancer diseases and their
overall prevalence create a large need for new and improved treatments. Cancer
is the second leading cause of death in the U.S. It is estimated that one in
three Americans will be diagnosed with cancer. The worldwide oncology drug
market was estimated at $16 billion in 1998, representing 15% growth from 1997.
This market is not saturated, with novel treatments often enjoying premium
pricing and rapid market acceptance.
Fundamentals of the oncology market that are particularly advantageous for us
include:
o accelerated approval procedures adopted by the FDA to shorten the
development process and review time for cancer drugs;
o in-licensing opportunities created by a trend among large pharmaceutical
companies to concentrate on products with larger market potential than most
anticancer drugs;
o favorable pricing and reimbursement for oncology drugs, with some novel
agents commanding $6,000 to $15,000 per course of therapy; and
o a highly concentrated population of oncologists and hematologists which
allows a small sales force to be effective.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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OVERVIEW OF CANCER
Cancer is characterized by uncontrolled cell division resulting in the
growth of a mass of cells commonly known as a tumor. Cancer cells, if not
eradicated, can spread ("metastasize") throughout the body. Cancerous tumors can
arise in almost any tissue or organ within the human body. Cancer is believed to
occur as a result of a number of factors, including genetic predisposition,
environmental agents and irradiation. These factors may result in genetic
changes affecting the ability of cells to regulate normally their growth and
division.
There are approximately 475 investigational agents in clinical
development for treating patients with cancer, more than at any time in history.
Many of these agents are being developed for treatment of advanced disease. Due
to the life-threatening nature of cancer, the FDA has adopted procedures for
accelerating the approval of oncology agents, thereby reducing the amount of
time required to bring such agents to market. Under these procedures, an
oncology drug can be approved if it is shown to shrink tumors in Phase II
studies and if the developing company commits to performing and completing Phase
III trials after marketing approval.
TREATMENT OF CANCER. The three most prevalent methods of treating
patients with cancer are surgery, radiation therapy and chemotherapy. A cancer
patient often receives a combination of two or all three of these treatment
methods. Surgery and radiation therapy are particularly effective in patients in
whom the disease has not yet spread to other tissues or organs. Chemotherapy is
the principal treatment for tumors that have metastasized. The purpose of
chemotherapy is to interfere with the molecular and cellular processes that
control the development, growth and survival of malignant tumor cells.
Chemotherapy involves the administration of drugs designed to kill cancer cells
("cytotoxic drugs") or the administration of hormone analogs to either reduce
the production of, or block the action of, certain hormones, such as estrogens
and androgens, which affect the growth of tumors. In many cases, chemotherapy
consists of the administration of several different drugs in combination.
Because chemotherapeutic agents generally attack rapidly dividing cells
indiscriminately, damaging normal as well as cancerous cells, use of such agents
often has adverse effects.
Although several types of tumors can now be treated effectively with
drugs, survival rates for the most common tumors have only begun to improve
slightly. In recent years, however, there have been significant advances in
molecular biology, immunology and other related fields of biotechnology which
have led to a better understanding of the processes that regulate the
proliferation and metastasis of malignant cells and by which malfunctioning
genes can result in the formation of tumors.
PREVENTION OF CANCER. There are a number of conditions which can
currently be diagnosed and which predispose an individual to developing cancer.
For example, high-grade cervical dysplasia, if left unattended, often progresses
to invasive cervical cancer. Recurrent colon polyps can lead to colon cancer;
actinic keratosis, a type of sun-induced skin lesion, can progress to skin
cancers; and individuals who have had a local tumor removed are at high risk for
having a second tumor. In the near future, physicians will increasingly be able
to use relatively simple genetic-based tests to identify individuals at risk for
developing cancer. The Company believes there is a significant need for
non-toxic, oral drugs which can be prescribed for chronic use to prevent the
onset of cancer in these situations. To date, no drug for the prevention of
cancer (i.e. chemoprevention drug) has been approved by the FDA, and there can
be no assurance that the Company will be able to develop successfully a safe and
effective chemoprevention drug or that such drug will be commercially viable or
will achieve market acceptance.
STRATEGY
Our objective is to be a leading oncology biopharmaceutical company. We
intend to market or co-market our own products in the future. Our strategy
consists of the following elements:
Focus on the Expanding Cancer Market
The worldwide oncology drug market was estimated at $16 billion in
1998, representing 15% growth from 1997. Despite the enormous effort undertaken
by the pharmaceutical industry to develop oncology products, cancer remains the
second leading cause of death in the U.S. and remains a largely unmet medical
need. In the U.S., each year over 1.2 million new cancer cases are diagnosed and
565,000 patients die of cancer. Given the life-threatening nature of cancer, the
FDA has adopted fast-track procedures, requiring agency review to be completed
within six months, to accelerate approval of oncology agents. These factors
combine to create a major opportunity for cancer drug development and for
providing oncology CRO services.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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Use Our Expertise to Identify and In-License Compounds
We use the expertise of our management and scientific team and
Scientific Advisory Board, along with the relationships we have developed
through our CRO business, to identify and in-license anticancer products. We
focus on in-licensing compounds that have previously shown anti-tumor activity
in preclinical or early clinical studies. We do not conduct extensive
early-stage drug discovery. We believe that many of the approximately 475 cancer
drugs in clinical development worldwide may become available for in-licensing or
equity participation by ILEX or other market participants because:
o industry consolidation has caused pharmaceutical and biotechnology
companies to prioritize research and development programs, resulting in
numerous licensing opportunities;
o an anticancer compound's market potential can be underestimated if
evaluated based on its initial indication; and
o large pharmaceutical companies sometimes consider the market potential of
certain of these compounds to be too small.
Reduce Risk by Developing a Broad Portfolio of Products
We are developing multiple products simultaneously, which reduces our
exposure to the impact of any single product failure and increases our
flexibility to eliminate programs we deem less promising. We believe our
portfolio approach increases the likelihood that we will successfully develop
pharmaceutical products.
Form Strategic Collaborations to Support Development and Commercialization of
Our Product Candidates
We often deem it advantageous to partner with pharmaceutical and
biotechnology companies to obtain funding and marketing support for our
development activities. These collaborations generally:
o enable us to develop a greater number of products than otherwise would be
possible;
o lower the substantial financial investment that is required of us to
develop our oncology drugs; and
o provide us with domestic and international marketing and sales expertise
for our partnered products once approved.
Offer a Full Range of Oncology CRO Services
We believe we are the largest full service provider of CRO services
focused predominantly on oncology. The range of specialized preclinical research
and clinical trial services we offer includes chemistry and toxicology services,
small-scale manufacturing, design of clinical protocols, organization and
monitoring of clinical trials and preparation of regulatory submissions. We
believe that our oncology expertise accelerates the drug development process for
our clients, increases the probability of obtaining regulatory approval and
makes us an attractive option for a company seeking a CRO to develop a cancer
drug.
Use Our CRO Business to Generate In-licensing Opportunities and Lower Our Own
Development Costs
We believe our CRO business is highly complementary to our ILEX
Products business. In addition to building our cancer drug development expertise
and generating revenue, our CRO business enhances our ability to:
o monitor oncology drug development trends;
o improve our overall drug development and regulatory filing capabilities;
o identify novel compounds to in-license or acquire (CAMPATH(R),
APOMINE(TM)and ILX-295501 are examples of compounds in-licensed as a result
of our CRO); and
o spread overhead and development costs that would otherwise have to be
supported entirely out of our internal research and development budget.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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ILEX PRODUCTS IN DEVELOPMENT
ILEX is developing compounds for treating patients with cancer and
premalignant conditions. ILEX has incurred research and development costs of
approximately $16.0 million, $16.1 million, and $6.7 million for 1999, 1998 and
1997, respectively. In addition to research and development costs incurred, a
$3.8, $4.5 and $4.3 million loss was recognized as equity in losses of research
and development partnerships for 1999, 1998 and 1997, respectively. In
connection with the acquisition of Convergence in 1999, the Company acquired
certain intangible assets and $11.1 million was expensed for the purchase of
in-process research and development.
The following table summarizes the drugs under development by the
Company and is qualified in its entirety by the more detailed information
following the table and elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
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MARKETING
PRODUCT INDICATION(S) DEVELOPMENT STATUS RIGHTS
<S> <C> <C> <C>
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CAMPATH(R)(1) Chronic lymphocytic Filed BLA with FDA in Schering AG
leukemia December 1999, and accepted
in February 2000;
Preparing to file MAA with
EMEA in Europe in 2000
Non-Hodgkin's Lymphoma Phase II
Organ Transplant Rejection Phase II
Multiple Sclerosis Phase II
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Eflornithine(2) (DFMO) Superficial bladder cancer Pivotal Phase III - ILEX
continuing patient accrual
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OXYPRIM(TM)(oxypurinol) Symptomatic Hyperuricemia in Pivotal Phase II trial ILEX
patients who are intolerant initiated
to allopurinol
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ILX-295501(3) Non-small cell lung cancer, Phase II ILEX\Eli Lilly
renal cancer, melanoma,
ovarian cancer
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Aminopterin Refractory Endometrial Cancer Phase II ILEX
Acute Leukemia Phase II
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APOMINE(TM)(4) Solid tumors Two Phase I trials in ILEX\Symphar
(SR-45023A) process. Planning underway
for Phase II and
registration trials.
- ------------------------------ ------------------------------- ------------------------------ ------------------
ILX23-7553 Solid tumors Two Phase I trials have been ILEX
initiated and a third will
begin in the first half of
2000
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Angiogenesis Inhibitors Solid tumors Pre-clinical ILEX
(NM-3, Restin(TM), Canstatin(TM),
Tumstatin(TM), Arresten(TM),
Apomigren(TM), THP-Dox)
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</TABLE>
(1) We have formed a joint venture with Millennium Pharmaceuticals, Inc. to
develop CAMPATH(R). The joint venture has granted worldwide marketing
rights, except for Japan and East Asia to Schering AG, and retained
co-promotion rights in the U.S.
(2) The National Cancer Institute is co-sponsoring certain eflornithine
clinical trials.
(3) We in-licensed this compound from Eli Lilly and Company. Eli Lilly can
repurchase our rights to ILX-295501 after Phase II trials, with ILEX
retaining a royalty interest.
(4) APOMINE(TM) is being developed in collaboration with Symphar SA.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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ILEX'S PRODUCT PORTFOLIO
CAMPATH(R)
Our most advanced product candidate, CAMPATH(R), is a humanized
monoclonal antibody in development for treating patients with chronic
lymphocytic leukemia (CLL) who are resistant to currently available drug
therapies. CLL is the most common form of leukemia, with approximately 120,000
patients in the U.S. and Europe suffering from the disease. Based on pilot human
studies, CAMPATH(R) may also have utility in treating patients with
non-Hodgkin's lymphoma, multiple sclerosis and organ transplants. We are
developing CAMPATH(R) in a 50/50 joint venture with Millennium, known as L&I
Partners, L.P. (L&I). In August 1999, the partnership granted worldwide
marketing rights (excluding Japan and East Asia) for CAMPATH(R) to Schering AG
under an agreement that provides the partnership with up to $30 million of
up-front and milestone payments and approximately 67% of net profits from sales.
The BLA for CAMPATH(R) was submitted to the FDA on December 23, 1999.
We expect to file for marketing approval in the European Union in the second
quarter of 2000.
Eflornithine
Our second most advanced product candidate is eflornithine, a
chemoprevention agent. In April 1999 we initiated a pivotal Phase III trial of
eflornithine for preventing the recurrence of superficial bladder cancer. This
double-blind, placebo-controlled, 450-patient trial is being co-sponsored by the
National Cancer Institute ("NCI"). More than 140,000 patients in the U.S. have
recurrent superficial bladder cancer. With the NCI, we are also investigating
eflornithine for use in various pre-malignant conditions. The compound is in a
Phase III trial to prevent the recurrence of non-melanoma skin cancer, a Phase
IIb trial in recurrent colon polyps, and Phase II trials in Barrett's esophagus.
These conditions are precursors to skin, colon and esophageal cancer,
respectively.
Other Clinical Candidates
Our other clinical stage products include:
o ILX-295501 --licensed from Eli Lilly and initiated Phase II trials in four
cancers: ovarian, kidney, non-small cell lung and melanoma. Eli Lilly has
the right to repurchase our rights following Phase II trials, with ILEX
retaining a royalty interest;
o APOMINE(TM) (SR-45023A) -- two Phase I trials for solid tumors are currently
underway; it is being developed in collaboration with Symphar SA, a Swiss
biotechnology company; and
o ILX23-7553 --two Phase I trials in solid tumors are currently underway; a
third Phase I trial is expected to initiate patient accrual in the first
half of 2000. These studies are testing different doses to determine the
optimal administration schedule.
o Aminopterin -- an anti-folate in the same family as methotrexate, a widely
used anticancer drug. This family of cancer drugs kills cells by interfering
with their ability to synthesize DNA. We are developing aminopterin in Phase II
trials for metastatic endometrial cancer resistant to methotrexate and other
drugs. In addition, a Phase II trial in acute lymphocytic leukemia is ongoing
under a physician investigational new drug study. Based on the results of these
trials, we will determine whether to proceed with additional trials. Aminopterin
qualifies for orphan drug status, and a method-of-use patent application has
been filed in the U.S.
o OXYPRIM(TM) (oxypurinol) --treatment of patients with symptomatic
hyperuricemia who are intolerant to allopurinol. As the only commercially
available xanthine oxidase inhibitor, allopurinol is typically the treatment of
choice for these patients. However, approximately 3% to 5% of patients receiving
allopurinol develop an intolerance to it. OXYPRIM(TM) is the active metabolite
of allopurinol. We are developing OXYPRIM(TM) as an alternative to allopurinol
for these patients. OXYPRIM(TM) has been available on a compassionate basis
since the late 1960s.
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ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
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PRECLINICAL ANTI-ANGIOGENESIS CANDIDATES
In July 1999, we acquired Convergence Pharmaceuticals, Inc. and its
portfolio of angiogenesis inhibitor product candidates. Angiogenesis inhibitors
help block the formation of new blood vessels that tumors require to grow larger
or to recover from chemotherapy or radiation. Our angiogenesis inhibitor
pipeline includes: NM-3, an oral, small molecule inhibitor of angiogenesis, and
five protein collagen fragments (Arresten(TM), Apomigren(TM), Canstatin(TM),
Restin(TM) and Tumstatin(TM)).
We are also in preclinical development with THP-Dox, a peptide
conjugated with doxorubicin that binds to a receptor on tumor blood vessels.
Doxorubicin is a widely used generic chemotherapy agent. We intend to develop
THP-Dox as a potential anti-angiogenic treatment for prostate, breast and lung
cancers. We expect to bring at least two of these product candidates into human
trials in 2000.
STRATEGIC ALLIANCES - ILEX PRODUCTS
ILEX intends to develop and commercialize its own products by
eventually forming its own sales, marketing, and distribution capabilities.
However, in some instances the company will form corporate partnerships with
larger pharmaceutical companies. In a typical partnership arrangement, a
corporate partner may bear the substantial cost of clinical development,
scale-up production, FDA approval and marketing.
MILLENNIUM PHARMACEUTICALS, INC.
In May 1997, ILEX formed a partnership with LeukoSite, which has since
been acquired by Millennium, to develop the monoclonal antibody, CAMPATH(R).
Pursuant to the formation of the partnership, LeukoSite sublicensed the rights
to manufacture and market CAMPATH(R) to the joint venture in exchange for
licensing fees, milestone payments and royalties. ILEX and Millennium own the
partnership equally.
SCHERING AG
In August 1999, L&I and Schering AG entered into a distribution and
development agreement that grants Schering AG exclusive worldwide marketing and
distribution rights to CAMPATH(R), except Japan and East Asia, where ILEX and
Millennium have retained rights.
ELI LILLY AND COMPANY
In January 1999, ILEX entered into a development agreement with Eli
Lilly to develop ILX-295501. Under this agreement, Eli Lilly retains an option
to buy rights to this compound back after the completion of the Phase II
clinical trials, with ILEX retaining a royalty interest.
SYMPHAR
In 1998, ILEX entered into a development agreement with Symphar S.A., a
Swiss company, for the development of APOMINE(TM)(SR-45023A). ILEX and Symphar
S.A. share rights to this compound under this agreement.
IN-LICENSING AGREEMENTS
As a part of its business strategy, the Company actively seeks to
expand its product portfolio. Historically, these acquisitions have been in the
form of exclusive licensing arrangements with a number of universities,
pharmaceutical companies, and individual inventors.
The Company's in-license agreements (the "Licenses") generally require
the Company to undertake and pursue with diligence and best efforts the
development of the compounds and technologies licensed and to report on a
regular basis on the Company's development, progress and plans. Each of the
Licenses requires payments of royalties on sales of products covered by the
License and, in several instances, minimum annual royalties. Under most of the
Licenses, the licensor has the first right to sue for infringement of, and
defend invalidity charges against, the licensed patents. All of the Licenses
provide that the licensor or sublicensor may terminate all or a portion of the
license or sublicense in the event of the Company's default in its obligations,
including the obligations to diligently pursue and apply best efforts to the
development of the licensed compound or technology, and, in some instances, in
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the event of the Company's insolvency or bankruptcy. In addition, certain
Licenses will automatically terminate if the Company does not achieve certain
development milestones by specified dates or, in lieu thereof, make payments
extending such dates. A termination of any of the Licenses could have a material
adverse effect upon the Company. The Company believes it has complied in all
material respects with the terms of all of its Licenses to date. The Company
intends to continue its licensing program and to engage in compound acquisitions
with a primary focus on clinical stage oncology compounds. There can be no
assurance that any such licenses or acquisitions will be on terms similar to the
Licenses or favorable to the Company.
The Company's agreements with its strategic corporate partners
typically provide that in the event the Company is required to pay a royalty to
a third party in order to market a product in any country because of a
third-party patent in such country, a portion of any such payments may be
credited by the Company against royalties payable to the partner. In addition,
if a product containing the compound subject to the agreement is introduced into
any country in which patent rights do not exist, and sales of such competing
product exceed certain specified percentages of unit sales of the Company's
products, then the royalty rates are subject to reduction. Subject to certain
exceptions, the obligation to pay royalties with respect to net sales in a
specific country typically ceases from eight to 15 years from the date of first
commercial sale of the product in such country.
ORPHAN DRUG STATUS
Pursuant to the Orphan Drug Act of 1983 (the "Orphan Drug Act"), the
FDA may designate a drug intended to treat a "rare disease or condition" as an
"orphan drug." A "rare disease or condition" is one which affects less than
200,000 people in the United States, or which affects more than 200,000 people
but for which the cost of development and distribution of the drug will not be
recovered from sales of the drug in the United States. Upon approval of a New
Drug Application ("NDA") for an orphan drug, such drug may be eligible for
exclusive marketing rights in the United States for designated and approved
indications for seven years. Orphan drugs may also be eligible for federal
income tax credits for certain clinical trial expenses. CAMPATH(R) and
OXYPRIM(TM) (oxypurinol) have been granted orphan drug status.
The Company may receive marketing exclusivity for an orphan drug only
if it is the sponsor of the first NDA approved for the drug for an indication
for which the drug was designated as an orphan drug prior to the approval of
such NDA. Therefore, unlike patent protection, orphan drug status does not
prevent other manufacturers from attempting to develop the drug for the
designated indication or from obtaining NDA approval prior to approval of the
Company's NDA. If another sponsor's NDA for the same drug and the same
indication is approved first, that sponsor is entitled to exclusive marketing
rights if that sponsor has received orphan drug designation for the drug. In
that case, the FDA would be prohibited from approving the Company's application
to market the product for the relevant indication for a period of seven years.
If another sponsor's NDA for the same drug and the same indication is approved
first, but that drug has not been designated as an orphan drug, the FDA would
still be permitted to approve the Company's NDA without the exclusivity provided
by orphan drug status.
The Company believes that some of its products may qualify for
designation as orphan drugs. There can be no assurance, however, that such other
products will receive orphan drug status. Moreover, possible amendment of the
Orphan Drug Act by the United States Congress and possible reinterpretation by
the FDA are frequently discussed. Legislation to limit exclusivity in some
respects was passed by Congress, but vetoed by the President in 1990. FDA
regulations reflecting certain other limitations and procedures went into effect
in January 1993. Therefore, there is no assurance as to the precise scope of
protection that may be afforded by orphan drug status in the future, or that the
current level of exclusivity and tax credits will remain in effect.
ILEX SERVICES
We believe ILEX Services is currently the only full service provider of
CRO services focused predominantly on oncology. We offer a full range of
specialized preclinical research and clinical trial services, including
chemistry and toxicology services, small-scale manufacturing, design of clinical
protocols, organization and monitoring of clinical trials and preparation of
regulatory submissions. We believe that our oncology expertise accelerates the
drug development process for our clients, increases the probability of obtaining
regulatory approval and makes us an attractive option for a company seeking a
CRO to develop a cancer drug. In addition, ILEX Services provides CRO services
on a contract basis to ILEX Products and has been the source of three of the
products we now have in clinical development.
We work closely with prestigious cancer research institutions and
groups that give us access to top oncology clinical expertise. Our Board of
Directors includes Dr. Daniel Von Hoff, president of the American
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Association for Cancer Research, and Dr. Joseph Bailes, president of the
American Society of Clinical Oncology. In addition, we have a strong
relationship with CTRC Research, our largest stockholder. CTRC Research has one
of the largest oncology Phase I trial organizations in the United States. We
also have strong historical ties with US Oncology, Inc., the largest oncology
physician practice management organization in the United States, whose
physicians see approximately 13% of the new cancer patients in the United States
annually. Our relationships with these groups give us access to a significant
number of patients for enrollment into clinical trials. We believe that our
oncology focus combined with these relationships make us an attractive option
for companies selecting a CRO to develop a cancer drug. In addition, these
relationships put us in a strong position to identify and license novel
anticancer drugs for development.
There are approximately 475 cancer drugs currently in clinical
development worldwide. This number is higher than at any time in history.
Companies developing oncology drugs face unique challenges related to conducting
cancer trials, therefore increasing the need for CROs with oncology expertise.
Because patients are increasingly being treated by physicians in community
practice rather than at teaching institutions, the traditional clinical trial
sites often cannot provide sufficient numbers of patients. With the FDA
approving new oncology drugs more rapidly and the large number of oncology drugs
currently in development, it is critical that clinical trial designs take into
account competing clinical trials and changing treatment practices.
Our CRO revenue grew to $13.5 million in 1999, from $9.7 million in
1998, and $5.9 million in 1997. Our client list includes approximately 40
biotechnology and pharmaceutical companies, currently conducting approximately
150 preclinical studies and clinical trials with us. ILEX has in the past
derived, and may in the future derive, a significant portion of its CRO revenue
from a relatively limited number of major projects or clients. Concentrations of
business in the CRO industry are not uncommon, and the Company is likely to
experience such concentration in future years. The Company intends to continue
to expand its contract research business by focusing its marketing efforts on
longer term, multi-phase drug development programs. For the years ended December
31, 1999, 1998, and 1997, our top five CRO customers accounted for 60%, 85%, and
83%, respectively, of our CRO revenue. The loss of business from a significant
client could materially harm our business and financial condition.
In June 1999, ILEX Services acquired certain assets and liabilities of
the former PFK offices located in the United Kingdom through its wholly owned
subsidiary, ILEX Services Limited. The acquisition provides ILEX Services with
two locations from which European clinical trials will be managed and supported:
Edinburgh, Scotland and Guildford, England. Additionally, in March 2000, ILEX
acquired the operations of British Biotech's Annapolis, Maryland office. The
Annapolis facility provides contracted drug development services necessary to
complete ongoing clinical development in North America.
Preclinical Services
Chemistry and Manufacturing. Oncology drugs are complex, toxic
molecules that can be difficult to synthesize and require special handling
procedures. We manufacture bulk drug products for preclinical studies and
clinical trials at our approximately 9,000 square foot current Good
Manufacturing Processes ("cGMP") facility which was specifically designed to
handle such toxic materials. In addition, we provide support activity for
preclinical drug development including:
o formulation development;
o stability testing of drug candidates; and
o fill, finish and package on a small scale.
Toxicology. We design and perform drug safety studies that satisfy
regulatory requirements and support the intended clinical dosing regimens to be
used in clinical trials. We conduct toxicology studies in a laboratory on the
campus of The University of Texas Health Science Center at San Antonio
(UTHSCSA).
Clinical Services. Our experience in oncology adds value for our
clients by accelerating the development process. We accomplish this by:
o offering strategic planning throughout the product development process;
o consulting on clinical trial design;
o accelerating patient accrual through our associations with leading cancer
treatment institutions and providers and appropriate site selection;
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o enhancing data collection by using experienced clinical research associates;
o providing experienced project leadership; and
o maintaining regular communication and a positive relationship with the FDA.
We provide management of clinical trials. Our project teams have
substantial oncology experience and can develop a strategic plan focused on
eventual market approval. Service elements within clinical trials management
include:
o protocol design;
o study site identification;
o investigator recruitment;
o clinical study budgeting and agreements;
o site initiation and training;
o site monitoring;
o independent response reviews;
o medical monitoring and serious adverse event reporting;
o regulatory affairs consulting services; and
o preparation of regulatory submissions.
Because fewer than 3 to 5% of adult cancer patients in the U.S.
participate in clinical trials, affiliations with sites are a key criterion to
our success. We have access to leading sites and investigators through our
relationships with CTRC and US Oncology, which each enroll large numbers of
oncology patients into clinical trials. We also work to streamline many
processes through continued experience with these organizations.
STRATEGIC ALLIANCES - ILEX SERVICES
CTRC RESEARCH
We began operations in 1994, after the transfer of drug development
programs, intellectual property rights and commercial opportunities from CTRC
Research. CTRC Research was formed as part of a program begun by Cancer Therapy
and Research Center of South Texas, or CTRC, a regional cancer treatment and
research center located in San Antonio, Texas. CTRC was founded in 1972 and
today, in conjunction with the UTHSCSA, is an NCI-designated Comprehensive
Cancer Center, one of two in the state of Texas. Under the leadership of Charles
Coltman, Jr., M.D., Co-Chairman of our Scientific Advisory Board, CTRC has
become known for its expertise in clinical research. Dr. Coltman is also
Chairman of the Southwest Oncology Group. Daniel Von Hoff, M.D., the other
Co-Chairman of our Scientific Advisory Board, served as Director of Research at
CTRC from 1988 to 1999. In 1991, under the direction of Dr. Von Hoff, CTRC
established the Institute for Drug Development, or IDD, under a Program
Agreement with the UTHSCSA, with the mission of accelerating the development of
oncology drugs. Primarily through the efforts of Dr. Von Hoff, IDD has since
established one of the largest groups in the U.S. for conducting Phase I
clinical trials of oncology drugs. CTRC and CTRC Research and their related
entities have had some level of participation in the clinical development of a
majority of the U.S. anticancer drugs developed over the past ten years.
At March 6, 2000, CTRC owns approximately 11% of the Company's
outstanding shares of common stock.
IMPATH, INC.
In September 1999, ILEX Services sold $5.0 million of its preferred
stock (initially convertible beginning in September 2000, or earlier upon the
occurrence of certain events, into 290,867 shares of our common stock) to
IMPATH, Inc. IMPATH is a leading source of cancer information and analysis with
a database of more than 475,000 analyzed cases to date. IMPATH uses
sophisticated technologies to provide patient-specific cancer diagnostic and
prognostic information to pathologists, oncologists, and transplant centers. As
part of the transaction, IMPATH became our preferred provider of these services.
We believe that our association with IMPATH will optimize our clinical
trial design capabilities. The molecular pathology services and cancer outcomes
database offered by IMPATH may allow us to more effectively identify appropriate
patients for clinical trials and thereby achieve better outcomes.
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US ONCOLOGY
Since June 1997, the Company has had a strategic alliance with PRN
Research, which is a now a subsidiary of US Oncology. US Oncology is one of the
most active organizations conducting oncology clinical trials, whose physicians
see approximately 13% of the new cancer patients in the U.S. annually. Through
this alliance with US Oncology, we have access to leading sites and
investigators which enroll large numbers of oncology patients into clinical
trials.
POTENTIAL FUTURE ALLIANCES AND COLLABORATIONS
In the ordinary course of its business, the Company investigates,
evaluates and discusses with others the potential creation of strategic
collaborations, and the acquisition of businesses, technologies and compounds
that complement the Company's business. Although the Company currently has no
definitive understandings or agreements with respect to any such strategic
collaboration or acquisition, the Company is continually engaged in discussions
with parties which may either singly or in the aggregate materially impact the
Company's business, financial condition and results of operations. No assurance
can be given, however, that any such strategic collaboration or acquisition will
be made or, if made, that it will prove to be successful.
PATENTS, TRADEMARKS AND TRADE SECRETS
Patents and other proprietary rights are vital to our business.
Although our policy is to seek appropriate patent protection both in the U.S.
and abroad for our proprietary technology, to date, we have no patents issued in
our name. In addition to seeking our own patents, we enter into license
agreements with various pharmaceutical companies and research, educational and
governmental institutions to obtain patent rights from them to develop and
potentially sell products which use the compounds and technologies protected by
those patents.
Our compounds acquired pursuant to in-licensing arrangements are
protected by patents obtained or applied for by our licensors. This includes
12 U.S. patents, 25 U.S. patent applications, and over 100 foreign patents
and patent applications. We have not conducted in-depth validity and
infringement studies on the patents and patent applications that we have
in-licensed from major biotechnology and pharmaceutical companies, and it is
possible that these patents or patent applications will be challenged or will
not provide protection for our compounds.
CAMPATH(R) is protected by five patents issued in the U.S., European
major market countries, Australia, Canada and New Zealand, which expire between
2011 and 2015. Patent applications are pending in Denmark, Japan and South
Africa. The European patent issued in February 1989 and the U.S. patent in
December 1998. We have licensed five U.S. issued patents on eflornithine that
expire between 2000 and 2014. In addition, we have filed seven patent
applications for the use of eflornithine alone and in combination with other
drugs to treat and to prevent various cancers and in certain novel formulations.
Oxypurinol and aminopterin do not have patent protection, but have received or
qualify for orphan drug designation and a method-of-use patent application has
been filed in the U.S. for aminopterin. ILX-295501, APOMINE(TM)(SR-45023A) and
ILX23-7553 are each covered by issued composition of matter patents. In
addition, numerous patent applications have been filed on our portfolio of
angiogenesis inhibitors including one issued patent in the U.S.
The patent positions of biotechnology and pharmaceutical companies are
generally uncertain and involve complex legal and factual issues. No assurance
can be given that any patent issued to or licensed by us will provide protection
that has commercial significance. We cannot assure you that:
o our patents will afford protection against competitors with similar compounds
or technologies;
o our patent applications will issue;
o others will not obtain patents claiming aspects similar to those covered by
our patents or applications;
o the patents of others will not have an adverse effect on our ability to do
business; or
o the patents issued to or licensed by us will not be infringed, challenged,
invalidated or circumvented.
Moreover, we believe that obtaining foreign patents may, in some cases,
be more difficult than obtaining domestic patents because of differences in
patent laws. We also recognize that our patent position may generally be
stronger in the U.S. than abroad. In addition, the protection provided by
foreign patents may be weaker than that provided by domestic patents.
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We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We generally protect this information with confidential
agreements that provide that all confidential information developed or made
known to others during the course of the employment, consulting or business
relationship shall be kept confidential except in specified circumstances.
Agreements with employees provide that all inventions conceived by the
individual while employed by us are our exclusive property. We cannot guarantee,
however, that these agreements will be honored, that we will have adequate
remedies for breach if they are not honored or that our trade secrets will not
otherwise become known or be independently discovered by competitors.
The following table sets forth the name and status of the Company's
trademarks:
<TABLE>
<CAPTION>
TRADEMARK NAME STATUS
<S> <C>
ILEX U.S. Trademark
CAMPATH(R) Registered U.S. Trademark
OXYPRIM(TM), APOMINE(TM), Restin(TM), Registration Pending for
Canstatin(TM), Tumstatin(TM), Arresten(TM), U.S. Trademark
Apomigren(TM)
</TABLE>
COMPETITION
Product Development
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are developing cancer drugs similar to ours. There are
products on the market that will compete directly with the products that we are
seeking to develop. In addition, colleges, universities, governmental agencies
and other public and private research institutions will continue to conduct
research and are becoming more active in seeking patent protection and licensing
arrangements to collect license fees, milestone payments and royalties in
exchange for license rights to technologies that they have developed, some of
which may directly compete with our technologies. These companies and
institutions also compete with us in recruiting qualified scientific personnel.
Many of our competitors have substantially greater financial, research and
development, human and other resources than do we. Furthermore, large
pharmaceutical companies have significantly more experience than we do in
preclinical testing, human clinical trials and regulatory approval procedures.
Our competitors may:
o develop safer and more effective products;
o obtain patent protection or intellectual property rights that limit our
ability to commercialize products; or
o commercialize products earlier than us.
We expect technology developments in our industry to continue to occur
at a rapid pace. Commercial developments by our competitors may render some or
all of our potential products obsolete or non-competitive, which would
materially harm our business and financial condition.
CRO
In our CRO business, we primarily compete against in-house departments
of pharmaceutical companies, other more broad-based CROs and, to a lesser
extent, universities and teaching hospitals. Many of these competitors have
substantially greater capital, technical, human and other resources than ILEX.
CROs generally compete on the basis of:
o previous experience;
o relative expertise and sophistication in specific therapeutic areas;
o the quality of contract research;
o the ability to organize and manage trials on a global basis;
o pricing;
o the ability to manage large and complex medical databases;
o the ability to provide statistical and regulatory services;
o the ability to recruit investigators and enroll patients;
o the ability to integrate information technology with systems to improve the
efficiency of contract research;
o an international presence with strategically located facilities; and
o financial viability.
We may not be able to compete favorably in these areas.
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GOVERNMENT REGULATION
The design, research, development, testing, manufacture, labeling,
promotion, marketing, advertising and distribution of drug products are
extensively regulated by the FDA in the U.S. and similar regulatory bodies in
other countries. The steps ordinarily required before a new drug may be marketed
in the U.S., which are similar to steps required in most other countries,
include:
o preclinical laboratory tests, preclinical studies in animals, formulation
studies and the submission to the FDA of an investigational new drug, or
IND, application for a new drug;
o adequate and well-controlled clinical trials to establish the safety and
efficacy of the drug for each indication;
o the submission of an NDA to the FDA; and
o FDA review and approval of the NDA.
Preclinical tests include laboratory evaluation of product chemistry
toxicity and formulation, as well as animal studies. The results of preclinical
testing are submitted to the FDA as part of an IND application. A 30-day waiting
period after the filing of each IND application is required prior to the
commencement of clinical testing in humans. At any time during this 30-day
period or at any time thereafter, the FDA may halt proposed or ongoing clinical
trials until the FDA authorizes trials under specified terms. The IND
application process may be extremely costly and substantially delay development
of our products. Moreover, positive results of preclinical tests will not
necessarily indicate positive results in subsequent clinical trials.
Clinical trials to support NDAs are typically conducted in three
sequential phases, but the phases may overlap. During Phase I, the initial
introduction of the drug into healthy human subjects or patients, the drug is
tested to assess metabolism, pharmacokinetics and pharmacological actions and
safety, including side effects associated with increasing doses. Phase II
usually involves studies in a limited patient population to:
o assess the efficacy of the drug in specific, targeted indications;
o assess dosage tolerance and optimal dosage; and
o identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials are
undertaken to further demonstrate clinical efficacy and to further test for
safety within an expanded patient population at geographically dispersed
clinical trial sites.
After successful completion of the required clinical trials, an NDA is
generally submitted. The FDA may request additional information before accepting
an NDA for filing, in which case the application must be resubmitted with the
additional information. Once the submission has been accepted for filing, the
FDA reviews the application and responds to the applicant. The review process is
often significantly extended by FDA requests for additional information or
clarification. The FDA may refer the NDA to an appropriate advisory committee
for review, evaluation and recommendation as to whether the application should
be approved, but the FDA is not bound by the recommendation of an advisory
committee.
If FDA evaluations of the NDA and the manufacturing facilities are
favorable, the FDA may issue an approval letter or an "approvable" letter. An
approvable letter will usually contain a number of conditions that must be met
in order to secure final approval of the NDA and authorization of commercial
marketing of the drug for certain indications. The FDA may also refuse to
approve the NDA or issue a not approvable letter, outlining the deficiencies in
the submission and often requiring additional testing or information.
The FDA may designate a product as an "orphan drug" if the drug is
intended to treat a rare disease or condition. A disease or condition is
considered rare if it affects fewer than 200,000 people in the U.S., or if it
affects more than 200,000 people but will be sold for less money than it will
cost to develop. If a sponsor obtains the first FDA marketing approval for a
certain orphan drug, the sponsor will have a seven-year exclusive right to
market the drug for the orphan indication.
The manufacturers of approved products and their manufacturing
facilities are subject to continual review and periodic inspections. Because we
currently intend to contract with third parties for commercial scale
manufacturing of our products, our ability to control compliance with FDA
requirements will be limited.
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Approved drugs and manufacturing facilities are subject to ongoing
compliance requirements. Identification of certain side effects or the
occurrence of manufacturing problems after any of our drugs are on the market
could cause subsequent withdrawal of approval, reformulation of the drug, and
additional preclinical studies or clinical trials.
Outside the U.S., our ability to market our products will also be
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The foreign regulatory approval process includes all of
the complexities associated with FDA approval described above. The requirements
governing the conduct of clinical trials and marketing authorization vary widely
from country to country. At present, foreign marketing authorizations are
applied for at a national level, although within the European Union, or the EU,
procedures are available to companies wishing to market a product in more than
one member state.
Under a new regulatory system in the EU, marketing authorizations may
be submitted at either a centralized, a decentralized or a national level. The
centralized procedure is mandatory for the approval of biotechnology products
and high technology products and available at the applicant's option for other
products. The centralized procedure provides for the grant of a single marketing
authorization that is valid in all EU member states. The decentralized procedure
is available for all medicinal products that are not subject to the centralized
procedure. The decentralized procedure provides for mutual recognition of
national approval decisions, changes existing procedures for national approvals
and establishes procedures for coordinated EU actions on products, suspensions
and withdrawals. Under this procedure, the holder of a national marketing
authorization for which mutual recognition is sought may submit an application
to one or more EU member states, certify that the dossier is identical to that
on which the first approval was based or explain any differences and certify
that identical dossiers are being submitted to all member states for which
recognition is sought. Within 90 days of receiving the application and
assessment report, each EU member state must decide whether to recognize
approval. The procedure encourages member states to work with applicants and
other regulatory authorities to resolve disputes concerning mutual recognition.
Lack of objection of a given country within 90 days automatically results in
approval from the member state.
We will choose the appropriate route of European regulatory filing to
accomplish the most rapid regulatory approvals. However, the chosen regulatory
strategy may not secure regulatory approvals or approvals of the chosen product
indications. L&I Partners intends to file for European regulatory approval for
the use of CAMPATH(R) for CLL in parallel with its U.S. and Canadian regulatory
filings.
One element of our strategy is to develop chemoprevention agents that
may prevent the progression of cancer. The clinical development path for
chemoprevention agents is uncertain and may require long-term clinical studies.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims.
The Company has not experienced any product liability claims to date. Although
the Company maintains clinical trials liability insurance with coverage limits
of $5 million per occurrence and an annual aggregate maximum of $5 million, and
general commercial liability insurance with an additional $10 million umbrella
coverage per occurrence and an annual aggregate maximum of $10 million, there
can be no assurance that product liability claims will not exceed such insurance
coverage limits, which could have a materially adverse effect on the Company's
business, financial condition or results of operations, or that such insurance
will continue to be available on commercially reasonable terms, if at all.
EMPLOYEES
At December 31, 1999, the Company had 224 full-time employees, 184 of
whom are engaged in research and development activities for both ILEX Products
and CRO operations. No employees are covered by collective bargaining
agreements, and the Company believes it maintains good relations with its
employees.
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ADDITIONAL BUSINESS RISKS
WE HAVE ONLY A LIMITED OPERATING HISTORY AND WE EXPECT TO CONTINUE TO GENERATE
LOSSES.
We began operations in October 1994 and have only a limited operating
history upon which you can evaluate our business. We have incurred losses every
year since we began operations. As of December 31, 1999, our accumulated deficit
was approximately $77.3 million, including net losses of approximately $46.1
million, $21.2 million, and $8.7 million for the years ended December 31, 1999,
1998, and 1997, respectively. We have not generated any revenue from product
sales to date, and it is possible that significant revenues from product sales
will never be achieved. Even if we do achieve significant revenues from product
sales or we increase revenues from our CRO business, we expect to incur
significant operating losses over the next several years. It is possible that we
will never achieve profitable operations.
IF WE ARE NOT ABLE TO DEMONSTRATE THE EFFICACY OF OUR DRUG CANDIDATES IN OUR
CLINICAL TRIALS OR OUR CLINICAL TRIALS ARE DELAYED, WE MAY NOT BE ABLE TO OBTAIN
REGULATORY CLEARANCE TO MARKET OUR DRUGS.
Many of our research and development programs are at an early stage.
Clinical testing is a long, expensive and uncertain process. The FDA has not
approved any of our product candidates and we cannot assure you that our data
collected from our clinical trials will be sufficient to support approval by the
FDA. We cannot assure you that the clinical trials will be completed on schedule
or that the FDA will ultimately approve our product candidates for commercial
sale. Furthermore, even if initially positive preclinical studies or clinical
trial results are achieved, it is possible that we will obtain different results
in the later stages of drug development. Drugs in late stages of clinical
development may fail to show the desired safety and efficacy traits despite
having progressed through initial clinical testing. For example, positive
results in early Phase I or Phase II trials may not be repeated in larger Phase
II or Phase III trials. All of our potential drug candidates are prone to the
risks of failure inherent in drug development, including the possibility that
none of our drug candidates will or can:
o be safe and effective;
o otherwise meet applicable regulatory standards;
o be manufactured or produced economically and on a large scale;
o be sold without third parties challenging us and enforcing their patent or
other rights;
o be successfully marketed, particularly if a third party introduces an
equivalent or superior product; or
o be reimbursed by government or private payors.
The clinical trials of any of our drug candidates could be
unsuccessful, which would prevent us from commercializing the drug. Our failure
to develop safe, commercially viable drugs would substantially impair our
ability to generate revenues to sustain operations and materially harm our
business and financial condition.
IF L&I PARTNERS IS UNABLE TO COMMERCIALIZE OUR LEAD PRODUCT CANDIDATE,
CAMPATH(R), WE MAY NOT HAVE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.
CAMPATH(R) is our lead product candidate. Our success will depend, to a
great degree, on the success of CAMPATH(R). In particular, L&I Partners must be
able to:
o establish the safety and efficacy of CAMPATH(R) in humans;
o obtain regulatory approvals for CAMPATH(R); and
o achieve market acceptance of CAMPATH(R).
If L&I Partners fails to successfully obtain regulatory approval for
and commercialize CAMPATH(R), our business and financial condition will be
materially harmed.
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OUR DEPENDENCE ON COLLABORATIVE PARTNERS FOR DEVELOPMENT, MANUFACTURING AND
MARKETING MAY DELAY OR IMPAIR OUR ABILITY TO GENERATE SIGNIFICANT REVENUES OR
OTHERWISE ADVERSELY AFFECT OUR PROFITABILITY.
We rely on large pharmaceutical companies for development,
manufacturing, marketing and distribution of our drug products. Our reliance on
pharmaceutical companies and other collaborative partners poses the following
risks:
o our contracts with collaborative partners may expire or be terminated and
we may not be able to replace them;
o a partner involved in the development of our products may not commit enough
capital or other resources to successfully develop our products;
o the terms of our contracts with collaborative partners may not be favorable
to us in the future;
o our partners may not pursue further development and commercialization of
compounds resulting from their collaboration with us;
o a partner with marketing and distribution rights to one or more of our
products may not commit enough resources to the marketing and distribution
of our products;
o disputes with our partners may arise, leading to delays in or termination
of the research, development or commercialization of product candidates or
resulting in significant litigation or arbitration;
o contracts with our partners may fail to provide significant protection or
may fail to be enforced if one of these partners fails to perform; and
o our collaborative partners could independently develop, or develop with
third parties, drugs which compete with our products.
There is a great deal of uncertainty regarding the success of our
current and future collaborative efforts. Failure of these efforts would
materially harm our business and financial condition.
THE SUCCESS OF CAMPATH(R) IS HIGHLY DEPENDENT ON COLLABORATIONS WITH MILLENNIUM
AND SCHERING AG.
As part of our joint venture with LeukoSite, a subsidiary of Millennium
Pharmaceuticals, Inc., for the development and commercialization of CAMPATH(R),
we share 50% of the development costs of CAMPATH(R) with Millennium. If we fail
for any reason to make a required capital contribution to the joint venture,
then Millennium may gain control of the management of the joint venture and
become entitled to a greater share of any profits derived from product sales of
CAMPATH(R). At the same time, if Millennium fails for any reason to make a
required capital contribution to the joint venture, then we may be required to
make additional capital contributions to the joint venture to maintain the
desired level of development activities by the joint venture. It is possible
that we may not have the resources to compensate for any failure by Millennium
to make any capital contributions in its stead and the joint venture may not be
able to continue operations with lesser funding. In addition, the joint venture
agreement with Millennium does not contain a provision to resolve a deadlock
between us and Millennium. As such, in the event of such a deadlock, either we
or Millennium could prevent the joint venture from taking action or proceeding
with business. This could result in failure to gain approval for CAMPATH(R),
which would materially harm our business and financial condition.
Schering. We intend to rely on Schering for the sales, marketing and
distribution of CAMPATH(R). IF Schering does not devote adequate resources to
the marketing of CAMPATH(R) or if disputes between L&I Partners and Schering
otherwise arise in connection with the commercialization of CAMPATH(R), our
business and financial condition would be materially harmed.
WE MAY BE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL NEEDED TO OPERATE AND GROW OUR
BUSINESS, THEREBY REQUIRING US TO CURTAIL OR CEASE OPERATIONS.
We will require substantial funds in order to:
o continue our research and development programs;
o continue our clinical trials;
o manufacture and, where applicable, market our products; and
o expand our CRO operations.
We believe that our existing resources will fund our activities as
currently planned for at least two years. We may use these existing resources
before that time, however, because of changes in our research and development
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and commercialization plans or other factors affecting our operating expenses or
capital expenditures, including potential acquisitions of other businesses,
assets or technologies.
We cannot be sure that we will be able to obtain any future funds that
we may require, either in the public or private equity markets or otherwise on
acceptable terms, or at all. In addition, under the terms of our agreement with
IMPATH Inc., ILEX Services is prohibited from incurring any debt without
IMPATH's consent.
If adequate funds are not available, we may have to delay, scale back
or eliminate one or more of our development programs, or obtain funds by
entering into more arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our products or technologies that
we would not otherwise relinquish. These consequences, in turn, could materially
harm our business.
OUR LACK OF OPERATING EXPERIENCE MAY CAUSE US DIFFICULTY IN MANAGING OUR GROWTH.
We have no experience in selling pharmaceutical products and only
limited experience in negotiating, establishing and maintaining strategic
relationships, manufacturing or procuring products in commercial quantities and
conducting other later-stage phases of the regulatory approval process. We have
less than three years experience operating our CRO business. Our ability to
manage our growth, if any, will require us to improve and expand our management
and our operational and financial systems and controls (particularly with
respect to our CRO business). If our management is unable to manage growth
effectively, our business and financial condition would be materially harmed. In
addition, if rapid growth occurs, it may strain our operational, managerial and
financial resources.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS ENFORCED BY DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF CAMPATH(R) AND OUR OTHER
PRODUCTS WOULD BE PREVENTED OR DELAYED AND OUR ABILITY TO CONDUCT OUR CRO
BUSINESS COULD BE LIMITED.
Our products, including CAMPATH(R), are subject to extensive government
regulations related to development, clinical trials, manufacturing and
commercialization. The process of obtaining FDA and other regulatory approvals
is costly, time-consuming, uncertain and subject to unanticipated delays.
The FDA may refuse to approve an application if it believes that
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy. Foreign regulatory authorities may
also refuse to grant any approval. Even after U.S. regulatory approval is
obtained for CAMPATH(R) or any of our other products, we will be subject to
continual review. Newly discovered or developed safety or efficacy data may
result in revocation of our marketing approval. Moreover, if and when such
approval is obtained, the marketing of CAMPATH(R) and any of our other product
candidates will be subject to extensive regulatory requirements administered by
the FDA and other regulatory bodies. Product manufacturing facilities are also
subject to continual review and periodic inspection and approval of
manufacturing modifications. Domestic manufacturing facilities are subject to
biennial inspections by the FDA and must comply with the FDA's current Good
Manufacturing Practices, or cGMP, and other regulations. In complying with these
regulations, manufacturers must spend funds, time and effort in the areas of
production, record keeping, personnel and quality control to ensure full
technical compliance. The FDA stringently applies regulatory standards for
manufacturing. Failure to comply with any of these post-approval requirements
can result in, among other things, warning letters, product seizures, recalls,
fines, injunctions, suspensions or revocations of marketing licenses, operating
restrictions and criminal prosecutions. Any such enforcement action could
materially harm our business. Unanticipated changes in existing regulatory
requirements or the adoption of new requirements could materially harm our
business and financial condition.
The European Union, Japan and other countries also extensively regulate
pharmaceuticals, including biological drug products. No assurance can be given
that we will be able to obtain or maintain other countries' approvals for
CAMPATH(R) or any of our other products.
IF ANY OF OUR LICENSE AGREEMENTS FOR INTELLECTUAL PROPERTY UNDERLYING CAMPATH(R)
OR ANY OTHER PRODUCT IS TERMINATED, WE MAY LOSE OUR RIGHTS TO DEVELOP OR MARKET
THAT PRODUCT.
We have licensed intellectual property, including patents, patent
applications and know-how, from pharmaceutical companies, research institutions
and others, including the intellectual property underlying our most advanced
product candidates: CAMPATH(R), eflornithine and OXYPRIM(TM). Some of our
product development programs depend on our ability to maintain rights under
these licenses.
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Each licensor has the power to terminate its agreement with us if we
fail to meet our obligations under that license. We may not be able to meet our
obligations under these license agreements.
If we default under any of these license agreements, we may lose our
right to market and sell any products based on the licensed technology. Losing
our marketing and sales rights would materially harm our business and financial
condition.
THERE ARE POTENTIAL LIMITATIONS ON THIRD-PARTY REIMBURSEMENT AND OTHER
PRICING-RELATED MATTERS THAT COULD REDUCE POTENTIAL SALES OF OUR PRODUCTS AND
MAY DELAY OR IMPAIR OUR ABILITY TO GENERATE SIGNIFICANT REVENUES.
The business and financial condition of pharmaceutical and
biotechnology companies will continue to be affected by the efforts of
government and third-party payors to reduce the cost of health care through
various means. In the U.S., there have been, and we expect that there will
continue to be, a number of federal and state proposals to implement government
control regarding pricing and profitability of prescription pharmaceuticals. An
increasing emphasis on managed care in the U.S. will also continue to exert
downward pressure on pharmaceutical pricing. In addition, sales of prescription
pharmaceuticals are dependent in part on the availability of reimbursement to
the consumer from third-party payors, such as government and private insurance
plans that often mandate rebates or predetermined discounts from list prices.
In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to government control. In particular, individual
pricing negotiations are often required in many countries of the European Union,
irrespective of separate government approval to market a drug.
If we succeed in bringing one or more products to the market, there can
be no assurance that these products will be considered cost effective or that
reimbursement to the consumer will be available or will be sufficient to allow
us to sell our products economically. The level of reimbursement available for
CAMPATH(R) wilL greatly impact the profitability of our joint venture with
Millennium and, in turn, ILEX. There can be no assurance that chemoprevention
drugs which we develop, if any, would be eligible for reimbursement.
FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL AND CONSULTANTS COULD ADVERSELY
AFFECT OUR ABILITY TO OBTAIN FINANCING, CONDUCT PRECLINICAL STUDIES AND CLINICAL
TRIALS OR DEVELOP CAMPATH(R) AND OUR OTHER PRODUCT CANDIDATES.
Our success depends greatly on our ability to attract and retain
qualified scientific and technical personnel. Due to the technical expertise and
knowledge required in our identification and evaluation of potentially viable
oncology compounds or technology in-licensing or acquisition targets, we rely
particularly heavily upon Daniel Von Hoff, M.D., a founder of ILEX, member of
the Board of Directors and Co-Chairman of our Scientific Advisory Board. The
consulting agreement between us and Dr. Von Hoff does not obligate Dr. Von Hoff
to devote any specified level of time or resources to the development of
potential products for us. Dr. Von Hoff has other substantial professional time
commitments, including serving on the scientific advisory boards of other
companies, and it is possible that he will not provide us with any product
opportunities in the future.
We do not have an employment agreement with Mr. Richard Love, our
president and chief executive officer. Loss of the services of Dr. Von Hoff or
Mr. Love would be detrimental to:
o our product development and manufacturing programs;
o our ability to identify and obtain rights to commercially viable oncology
compounds; and
o our ability to raise additional funds should we need to do so.
We are also highly dependent on the other principal members of our
scientific and management staff, and the loss of the services of such personnel
could materially harm our business and financial condition.
To expand our research and development programs, pursue our product
development plans and expand our CRO business, we will be required to hire
additional qualified scientific and technical personnel, as well as personnel
with expertise in clinical testing and government regulation. There is intense
competition for qualified staff, and there can be no assurance that we will be
able to attract and retain the necessary qualified staff for the development of
our business. The failure to attract and retain key scientific and technical
personnel would materially harm our business and financial condition.
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WE MAY NOT BE ABLE TO OBTAIN EFFECTIVE PATENTS TO PROTECT OUR TECHNOLOGIES FROM
USE BY OTHER COMPANIES WITH COMPETITIVE PRODUCTS, AND PATENTS OF OTHER COMPANIES
COULD PREVENT US FROM DEVELOPING OR MARKETING CAMPATH(R) OR OUR OTHER PRODUCT
CANDIDATES.
Our success will depend to a significant degree on our ability to:
o obtain, maintain and enforce patents;
o license rights to patents from third parties;
o protect trade secrets; and
o operate without infringing on the proprietary rights of others.
To date, we have no patents issued in our name. It is possible that we
will not develop technologies, drugs or processes that result in obtaining a
patent. It is also possible that our patent position will not provide sufficient
protection against competitors or that patents issued to or licensed by us will
be infringed or will be challenged, invalidated or circumvented. Competitors may
have filed patent applications, may have been issued patents or may obtain
additional patents and proprietary rights relating to technologies, drugs and
processes that compete with our technologies, drugs and processes. If we fail to
adequately protect our technologies, drugs and processes covered by issued
patents or to obtain patents, our business and financial condition could be
materially harmed.
We have not conducted in-depth validity and infringement studies on the
patent applications that we have in-licensed. All of the patents and patent
applications which we have in-licensed are subject to potential challenge and
may not provide protection for our compounds. Oxypurinol and aminopterin do not
have patent protection. Certain patent applications of the ILEX and Millennium
joint venture for CAMPATH(R) end uses and formulations are still pending.
If we infringe on the intellectual property rights of others, there can
be no assurance that we would be able to obtain licenses to use the technology
on commercially reasonable terms, or at all.
We also rely on trade secret protection for our unpatented proprietary
technology. Trade secrets are difficult to protect. Other parties could
independently develop substantially equivalent proprietary information and
techniques or gain access to our trade secrets.
We have attempted to prevent the disclosure and use of our know-how and
trade secrets by entering into confidentiality agreements with our employees,
consultants and third parties. However, there are risks that:
o these parties will not honor our confidentiality agreements;
o others will independently develop equivalent or competing technology;
o disputes will arise concerning the ownership of intellectual property or
the applicability of confidentiality obligations; or
o disclosure of our trade secrets will occur regardless of these contractual
protections.
We often work with consultants and research collaborators at
universities and other research organizations. If any of these consultants or
research collaborators use intellectual property owned by others as part of
their work with us, disputes may arise between us and these other parties as to
which one of us has the rights to intellectual property related to or resulting
from the work done.
Costly litigation might be necessary to protect our orphan drug
designations or patent position or to determine the scope and validity of
third-party proprietary rights, and it is possible that we will not have the
required resources to pursue such litigation or to protect our patent rights. An
adverse outcome in litigation with respect to the validity of any of our patents
could subject us to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require us to cease using a product
or technology. Any of these results could materially harm our business and
financial condition.
WE FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE WHICH COULD RESULT IN
PRODUCTS SUPERIOR TO THOSE WE ARE DEVELOPING.
The technological areas in which we work evolve at a rapid pace. Our
future success depends upon our ability to compete in the research, development
and commercialization of products and technologies in oncology,
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our area of focus. Many of our competitors have substantially greater research
and development capabilities and experience and greater manufacturing,
marketing, financial and managerial resources than do we. These competitors may
develop products that are superior to those we are developing and render our
products or technologies non-competitive or obsolete. In addition, we may not be
able to keep pace with technological change.
Products currently exist in the market that will compete directly with
the products that we are seeking to develop. Any product candidate that we
develop and for which we gain regulatory approval must then compete for market
acceptance and market share. Product competition is particularly intense in
markets that we may target with CAMPATH(R) in the future, including
non-Hodgkin's lymphoma and multiple sclerosis.
Significant competitive factors determining whether we will be able to
compete successfully include:
o capabilities of our collaborators;
o efficacy and safety of our products;
o timing and scope of regulatory approval;
o product availability;
o marketing and sales capabilities;
o reimbursement coverage from insurance companies and others;
o degree of clinical benefits of our product candidates relative to their
costs;
o method of administering a product;
o price; and
o patent protection.
Competitive disadvantages in any of these factors could materially harm
our business and financial condition.
In addition, in our CRO business, we primarily compete against in-house
departments of pharmaceutical companies, other CROs and, to a lesser extent,
universities and teaching hospitals, many of which have substantially greater
capital, technical and other resources. We may not be able to compete
successfully in the CRO business in the future.
WE DEPEND ON A RELATIVELY LIMITED NUMBER OF CLIENTS AND INDUSTRIES FOR OUR CRO
REVENUES.
We have in the past derived, and in the future will derive, a
significant portion of our CRO revenue from a relatively limited number of major
projects or clients. For the year ended December 31, 1999, our top five CRO
customers accounted for 60% of our CRO revenue. Our top three clients
represented 22%, 14% and 12% of our 1999 CRO revenue. The loss of business from
a significant client could materially harm our business and financial condition.
Our revenues are highly dependent on research and development
expenditures by the pharmaceutical and biotechnology industries. Decreases in
these expenditures, including decreases resulting from an economic downturn in
these industries or from mergers or other consolidations, could have a material
adverse effect on us. Additionally, we have benefited from the trend in these
industries to outsource an increasing percentage of clinical trial projects. A
reversal of this trend could materially harm our business and financial
condition.
IF WE ARE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH CRTC, US ONCOLOGY AND THEIR
RELATED ENTITIES, OUR ABILITY TO CONDUCT CLINICAL TRIALS AND OUR CRO BUSINESS
COULD BE MATERIALLY HARMED.
We have working relationships with CTRC and US Oncology, two of the
most active organizations conducting oncology clinical trials, to support our
CRO business. If we are unable to maintain these relationships, including the
elements providing us with access to patients of affiliated doctors,
investigators and to potential CRO clients, our business and financial condition
could be materially harmed.
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THERE ARE RISKS ASSOCIATED WITH THE NATURE AND PRICING OF OUR CRO CONTRACTS.
Most of our CRO contracts can be terminated upon 60 to 90 days notice
by our customer. Customers terminate or delay service contracts for a variety of
reasons, including:
o the failure of a compound being tested to satisfy safety requirements;
o unexpected or undesired clinical results of the compound;
o the customer's decision to forgo a particular study;
o insufficient patient enrollment or investigator recruitment; or
o production problems resulting in shortages of the compound.
The loss or delay of a large contract or the loss or delay of multiple
contracts could materially harm our business and financial condition.
All of our CRO contracts for the provision of services are fixed-price
or fee-for-service with a cap. Our CRO revenues are earned under contracts which
generally range in duration from a few months to two years. For the year ended
December 31, 1999, fixed-price contracts accounted for 65% of our CRO net
revenues and fee-for-service accounted for 35% of our CRO net revenues. We bear
the risks of cost overruns in contracts structured as fixed-price contracts or
fee-for-service with a cap. Underpricing of contracts or significant cost
overruns could materially harm our business and financial condition.
Competition in the CRO industry has resulted in significant price and
other competition. Further increases in such competition, and the resultant
price pressure, could materially harm our business and financial condition.
MANY CRO CUSTOMERS AND POTENTIAL CUSTOMERS MAY PERCEIVE A CONFLICT OF INTEREST
BETWEEN THEIR BUSINESS AND ILEX PRODUCTS, INC., WHICH MAY DETER THEM FROM
CONTRACTING WITH US FOR CRO SERVICES.
Many potential customers of our CRO business are other drug development
companies which may be, or may perceive themselves to be, competitors of ILEX in
the context of our product development business. These drug development
companies may thus be deterred from contracting with us for CRO services and
thereby limit revenue growth potential for our CRO business.
IF WE BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS IN OUR CRO BUSINESS OR IN
CONNECTION WITH COMMERCIALIZATION OF OUR PRODUCTS, THEY MAY RESULT IN DAMAGES
EXCEEDING OUR INSURANCE LIMITATION OR REDUCE DEMAND FOR THE APPLICABLE PRODUCTS.
Clinical research involves the testing of new drugs on human
volunteers, and such testing involves a risk of liability for personal injury or
death to patients from possible unforeseen adverse side effects or improper
administration of the new drug. Many of these patients are already seriously ill
and at risk of further illness or death. Although we maintain our own product
liability and clinical trial insurance and generally obtain indemnification from
our clients, our business could be materially harmed if we were required to pay
damages or incur defense costs:
o in connection with a claim outside the scope of indemnity or insurance
coverage;
o if the indemnity, although applicable, were not performed in accordance
with the terms of the relevant contract; or
o if our liability exceeded the amount of applicable insurance coverage.
In addition, we cannot be sure such insurance will continue to be
available on terms acceptable to us, if at all, or that the insurance coverage,
if obtained, will be sufficient to cover any potential claims or liabilities.
Similar risks would exist for product liability upon the commercialization or
marketing of any products by us or our partners. In addition, regardless of
merit or eventual outcome, product liability claims may result in decreased
demand for the applicable product or our products in general and in injury to
our general reputation.
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OUR LACK OF EXPERIENCE IN HANDLING HAZARDOUS MATERIALS AND IN OTHER
ENVIRONMENTAL MATTERS MAY CAUSE US TO INCUR SUBSTANTIAL COSTS.
We use hazardous materials, chemicals and various other toxic compounds
in our development and other programs. We are therefore subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of hazardous materials and certain waste products. We
cannot eliminate the risk of contamination or injury from these materials. In
such event, we could be held liable for any damages that result and any such
liability could exceed our resources. We may also incur substantial costs to
comply with environmental regulations if and when we develop commercial-scale
manufacturing capacity.
OUR ABILITY TO CONDUCT ANIMAL TESTING COULD BE LIMITED IN THE FUTURE.
Certain of our CRO business activities involve animal testing. Such
activities have been the subject of controversy and adverse publicity. Animal
rights groups and various other organizations and individuals have attempted to
stop animal testing activities by pressing for legislation and regulation in
these areas. To the extent the activities of these groups are successful, our
business could be materially harmed.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT DIFFICULT TO
RESELL YOUR SHARES WHEN YOU WANT TO AT PRICES YOU FIND ATTRACTIVE.
The market price of our common stock has been highly volatile. This
volatility may adversely affect the price of our common stock in the future. You
may not be able to resell your shares of common stock following periods of
volatility because of the market's adverse reaction to this volatility. We
anticipate that this volatility, which frequently affects the stock prices of
biotechnology and pharmaceutical companies, will continue. Factors that could
cause such volatility include:
o our quarterly operating results;
o deviations in our operating results from the estimates of securities
analysts;
o FDA and/or international regulatory actions;
o limited trading volumes;
o general economic conditions or economic conditions specific to the
biotechnology and pharmaceutical industries; and
o other developments affecting our competitors or us.
On occasion the equity markets, and in particular the markets for
biotechnology and pharmaceutical stocks, have experienced significant price and
volume fluctuations. These fluctuations have affected the market price for many
companies' securities even though the fluctuations are often unrelated to the
companies' operating performance.
WE ARE SUBJECT TO INFLUENCE FROM PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS AND
DIRECTORS; AND WE ARE SUBJECT TO VARIOUS PROVISIONS THAT COULD DISCOURAGE OR
PREVENT A CHANGE OF CONTROL OF THE COMPANY.
Our executive officers and directors (and their affiliates), in the
aggregate, beneficially own or control approximately 26% of our outstanding
common stock and therefore have the ability to exercise substantial influence
over the outcome of most stockholders' actions, including the election of the
members of the Board of Directors. This concentration of ownership could have an
adverse effect on the price of our common stock or have the effect of delaying
or preventing a change in control of the Company. In addition, certain
provisions of Delaware law and our Certificate of Incorporation could make it
more difficult for a third party to acquire, or discourage a third party from
attempting to acquire, control of ILEX. These provisions could limit the price
that certain investors might be willing to pay in the future for shares of our
common stock. These provisions of Delaware law and our Certificate of
Incorporation may also discourage or prevent certain types of transactions
involving an actual or threatened change in control of ILEX (including
unsolicited takeover attempts), even though such a transaction may offer our
stockholders the opportunity to sell their stock at a price above the prevailing
market price. Certain of these provisions allow us to issue preferred stock
without any vote or further action by the stockholders. These provisions may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of ILEX. In
addition, certain of our corporate partners have the right to terminate their
respective agreements with us upon certain changes in control of ILEX, which may
discourage acquisitions or other changes in control (including those in which
our stockholders might otherwise receive a premium for their shares over
then-current market prices).
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ITEM 2. PROPERTIES
The Company's administrative offices comprise approximately 63,000
square feet of leased office space in San Antonio, Texas. The lease governing
the Company's existing office space expires at periods between December 2003
and December 2011.
The Company leases and operates a 7,200-square-foot manufacturing
facility located in San Antonio that has been designed to produce multi-kilogram
lot sizes of anticancer compounds under cGMP. The design of this facility,
prepared by ILEX staff, has been reviewed by the Regional Compliance Office of
the FDA and found to be suitable for production of bulk drugs. The manufacturing
facility is owned by a non-profit corporation controlled by CTRC Research and
the Texas Research Park Foundation, and provides for the payment by the Company
of fixed monthly rent plus a percentage of gross sales generated from the
facility. These two organizations obtained a grant to build the facility from
the Economic Development Administration. ILEX has a 15-year lease to the
facility with three five-year-extension options. The lease expires at various
dates between 2000 and 2010.
The Company has approximately 10,000 square feet of leased office and
research space in Boston, Massachusetts related to the acquisition of
Convergence that expire in July 2004. Additionally, the Company has
approximately 8,000 square feet of leased office space in Guildford, England and
Edinburgh, Scotland utilized by its subsidiary, ILEX Services Limited, to
support CRO operations.
The Company's facility has sufficient capacity to manufacture the
materials necessary to satisfy the requirements for conducting clinical trials
of ILEX's current clients and collaborative partners. The Company will be
required to expand its manufacturing facilities or to contract with other
manufacturers in the event the Company's CRO manufacturing business is expanded
or there is a need for commercial quantities of the Company's compounds.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to claims and legal proceedings arising in the
ordinary course of business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
would have a material adverse effect on the Company's financial statements;
however, due to the inherent uncertainty of litigation, the range of possible
loss, if any, cannot be estimated with a reasonable degree of precision and
there can be no assurance that the resolution of any particular claim or
proceeding would not have an adverse effect on the Company's results of
operations for the interim period in which such resolution occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of March 6, 2000, the Company had approximately 1,500 beneficial
holders of common stock, including approximately 135 record holders. The
Company's common stock is traded on the Nasdaq National Market under the symbol
"ILXO." The following table sets forth, for the calendar periods indicated, the
range of high and low bid closing prices for the Company's common stock, as
reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $12-3/4 $ 9-1/4 $10 $7-1/4
Second Quarter 11-1/4 8-1/8 18-1/4 9-1/4
Third Quarter 19-5/8 9-1/8 10-1/4 5-1/2
Fourth Quarter 27-11/16 12-3/16 14-1/2 6-7/16
</TABLE>
These price quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. The Company's common stock began trading February 20, 1997. The
closing price of the Company's common stock on March 6, 2000 was $50.00.
The Company has never paid dividends on its common stock and
anticipates that it will not pay such dividends in the foreseeable future.
25
<PAGE> 27
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information relating to the Company
has been taken or derived from the audited financial statements, and notes
related thereto, and other records of the Company. The statements of operations
and balance sheets as of and for the years ended December 31, 1999, 1998, 1997,
and 1996 have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report on those statements. The selected
financial information should be read in conjunction with the Company's financial
statements, including the notes thereto, and Management's Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------------------------------------
1999 1998 1997 1996
--------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
SUMMARY OF OPERATING STATEMENT DATA:
Revenue:
Product development $ 4,407 $ 4,622 $ 5,027 $ 3,831
Contract research services 13,457 9,650 5,903 1,537
Licensing fees -- -- 300 2,775
--------- --------- --------- ---------
Total revenue 17,864 14,272 11,230 8,143
Operating expenses:
Research and development costs 15,990 16,127 6,740 3,637
Direct costs of research services 13,227 10,875 4,587 2,169
General and administrative 4,063 4,354 6,691 2,886
In-process research and development 11,124 -- -- --
Special charges 13,882 -- -- --
--------- --------- --------- ---------
Total operating expenses 58,286 31,356 18,018 8,692
--------- --------- --------- ---------
Operating loss (40,422) (17,084) (6,788) (549)
Other Income (Expense):
Interest income, net 1,700 1,850 2,583 684
Equity in losses of research and
development partnerships and
contract research affiliate (7,134) (5,994) (4,477) (750)
Minority interest in consolidated affiliate (82) -- -- --
--------- --------- --------- ---------
Loss before income taxes (45,938) (21,228) (8,682) (615)
Provision for foreign income taxes 117 -- -- --
--------- --------- --------- ---------
Net loss $ (46,055) $ (21,228) $ (8,682) $ (615)
========= ========= ========= =========
Basic and diluted net loss per share $ (3.04) $ (1.71) $ (.72) $ (.07)
========= ========= ========= =========
Weighted average number of shares of common stock
and common stock equivalents outstanding(1) 15,144 12,450 12,118 8,744
========= ========= ========= =========
BALANCE SHEET DATA:
Cash, cash equivalents and investments in
marketable securities(2) $ 89,126 $ 26,025 $ 42,646 $ 22,984
Working capital 77,368 23,942 33,089 11,682
Total assets 100,354 42,688 55,311 27,374
Accumulated deficit (77,338) (31,283) (10,055) (1,373)
Total stockholders' equity 84,579 35,904 51,076 24,826
</TABLE>
- ---------
(1) See Note 2 of Notes to Financial Statements for information concerning the
computation of net loss per share.
(2) Includes cash, cash equivalents, short and long term investments, and all
restricted investments.
26
<PAGE> 28
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is included to describe the Company's
financial position and results of operations for each of the three years in the
period ended December 31, 1999. The Consolidated Financial Statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion.
GENERAL
ILEX Oncology, Inc. (the "Company" or "ILEX") develops pharmaceuticals
for treating and preventing cancer and provides contract research services to
other companies developing anticancer drugs. We have a portfolio of seven
anticancer products in clinical development and several preclinical stage
products. We built this portfolio by in-licensing and acquiring product
candidates developed by others and do not conduct early-stage drug discovery
research ourselves.
We recently completed a pivotal clinical trial in chronic lymphocytic
leukemia, or CLL, for our most advanced product candidate, CAMPATH(R). We are
developing CAMPATH(R) in partnership with LeukoSite Inc. ("LeukoSite"), now
Millennium Pharmaceuticals, Inc. ("Millennium"). ILEX submitted a Biologics
License Application ("BLA") to the U.S. Food and Drug Administration ("FDA") for
CAMPATH(R) (alemtuzumab) in December 1999. We expect to file for marketing
approval of CAMPATH(R) in the European Union in the second quarter of 2000. The
FDA has granted CAMPATH(R) fast-track status, requiring agency review to be
completed within six months. In August 1999, the partnership licensed worldwide
marketing rights (except for Japan and East Asia) for CAMPATH(R) to Schering AG.
In the future we plan to market or co-market our own products and become an
oncology-focused specialty pharmaceutical company.
We operate through two reportable segments: ILEX Products, through
which we develop our own portfolio of anticancer compounds, and ILEX Services,
which is our full service oncology-focused CRO. ILEX Services manages the
preclinical research and clinical trials for our own product candidates as well
as oncology products being developed by other companies. In addition to building
our expertise in cancer drug development, our CRO business generates revenue,
reduces our cost to perform our own research and development, and gives us
access to product in-licensing opportunities.
We currently have no products available for sale. We have incurred
losses since inception and had an accumulated deficit through December 31, 1999
of $77.3 million. Our losses have resulted primarily from product development
activities, including in-licensing of products for which we pay fees, and
related administrative expenses. We expect to continue to incur operating losses
for the next several years. To date we have not generated any revenue from the
sale of our drug candidates.
Our revenue for the foreseeable future will be limited to product
development funding under our collaborative relationships, our CRO revenue,
interest income, and other miscellaneous income. In addition, if marketing
approval is received from the FDA with respect to our lead product candidate,
CAMPATH(R), and if CAMPATH(R) is successfully commercialized, we will receive a
portion of the profits generated by its sale. The partnership may not obtain
marketing approval of CAMPATH(R), successfully commercialize it or ever generate
profits from its sale.
Most of the development of CAMPATH(R) has been conducted by us on
behalf of L&I Partners. L&I Partners pays us for these services. We have
historically accounted for these CAMPATH(R) development activities as follows:
o our operating revenue includes product development revenue we receive from
L&I Partners;
o our research and development expenses include all of the development costs
for CAMPATH(R), which are largely offset by L&I Partners' revenue we
receive; and
o our actual share of CAMPATH(R) development costs is reported as equity in
losses of research and development partnerships.
27
<PAGE> 29
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
Our CRO business generates revenue by performing services for companies
within the pharmaceutical and biotechnology industries. The terms of our
contracts vary, ranging from several months to two years, and generally may be
terminated upon notice of 60 to 90 days by our customers. We recognize revenue
with respect to our services either on a percentage-of-completion or
fee-for-service basis as work is performed. The CRO business performs all of the
development services for ILEX Products; however, our consolidated CRO revenue
does not include any amounts related to the services provided to ILEX Products.
In August 1997, ILEX formed an alliance with PFK, a European contract
research organization headquartered outside Munich, Germany. ILEX initially
acquired 30% of the ownership interests of PFK. ILEX subsequently increased its
ownership interest to 40%. On June 1, 1999, ILEX Services acquired certain
assets and liabilities of the former PFK offices in the United Kingdom through
its wholly owned subsidiary, ILEX Services Limited. The acquisition, for
$541,000, was accounted for as a purchase and provides ILEX Services with two
locations from which European clinical trials will be managed and supported:
Edinburgh, Scotland, and Guildford, England. Also on June 1, 1999, ILEX Services
incurred one-time exit costs of approximately $2.9 million in letter of credit
guarantee funding costs and a write-off of its remaining investment in PFK.
While the Company continues to hold a 40 percent interest in PFK, management
believes the funding provided to PFK under the letter of credit is uncollectible
and, accordingly, has expensed such amount as additional losses attributable to
its contract research affiliate.
In July 1999, we acquired Convergence and its portfolio of angiogenesis
inhibitors in exchange for 1,000,000 shares of our common stock, and an
additional earn-out of up to 1,000,000 shares of our common stock which will be
issued to Convergence's founders if certain development milestones are met. As
part of the earn-out, we may issue 500,000 shares by the end of 2000. We
expensed approximately $11.1 million in the third quarter of 1999 as a non-cash
in-process research and development cost for this acquisition. Additionally, in
July 1999, we completed a $20.0 million private placement of our common stock.
In August 1999, L&I Partners L.P. (L&I) entered into a distribution and
development agreement with Schering AG. The agreement grants Schering AG
exclusive marketing and distribution rights to CAMPATH(R) in the U.S., Europe
and the rest of the world except Japan and East Asia, where L&I has retained
rights. CAMPATH(R) is a humanized monoclonal antibody in late-stage development.
L&I Partners L.P. submitted the final segment of the Biologics License
Application (BLA) for CAMPATH(R) with the FDA in December 1999.
In September 1999, ILEX Services completed a $5.0 million sale of its
preferred stock, which is convertible, subject to certain conditions, into
290,867 shares of our common stock. Also in November 1999, we completed an
underwritten public offering of 4.6 million shares of common stock, of which 4.2
million shares were offered by ILEX and 400,000 shares were offered by a selling
stockholder. Proceeds, net of offering fees and expenses, to ILEX from the
offering were approximately $54.5 million. We did not receive any of the
proceeds from the sale of shares by the selling stockholder. We intend to use
the net proceeds from these offerings for the expansion of its clinical trials
and preclinical research, with a particular focus on its late-stage clinical
product candidates and angiogenesis inhibitors; for potential acquisitions of
complementary technologies, products or companies; and for general corporate
purposes.
The following is a discussion of the financial condition and results of
operations for the Company for 1999, 1998 and 1997. It should be read in
conjunction with the Report of Independent Public Accountants, Financial
Statements of the Company, the Notes thereto and other financial information
beginning on page F-1 of this report.
RESULTS OF OPERATIONS - DECEMBER 31, 1999 AND 1998
OPERATING REVENUES
Total revenue increased to $17.9 million in 1999, from approximately
$14.3 million in 1998. The increase of approximately $3.6 million, or 25%, was
due to an additional $3.8 million of contract research revenues, partially
offset by a decrease of $0.2 million in product development revenues. The
decrease in revenues reflects a decrease in development revenue for a drug
development joint venture with MPI Enterprises, L.L.C., which was fully
consolidated in 1999. The $3.8 million increase in contract research services
revenues to $13.5 million, compared to $9.7 million in 1998, reflects an
increase in both the number of contracts in process, as well as the size and
complexity of the contract research projects.
28
<PAGE> 30
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased to $58.3
million in 1999 from approximately $31.4 million in 1998. This increase of
approximately $26.9 million, or 86%, includes special charges of $13.9 million
primarily associated with the termination of our agreement with PRN Research,
Inc. ("PRN"). In connection with the acquisition of Convergence, the Company
acquired certain intangible assets including intellectual property in the areas
of angiogenesis inhibition, cancer drug and radiation sensitizers and
chemotherapeutic agents. In connection with this allocation, $11.1 million was
expensed as a charge for the purchase of in-process research and development.
The remaining increase of $1.9 million reflects an increase in direct costs of
research services, partially offset by a reduction in research and development
costs and general and administrative expenses. ILEX believes that research and
development costs will increase in future periods as the Company expands its
pre-clinical and clinical trials associated with developing additional
compounds.
Research and Development Costs. Research and development costs
decreased to $16.0 million in 1999, from approximately $16.1 million in 1998.
This decrease of $0.1 million, or 1%, was primarily attributable to increased
spending for the development of CAMPATH(R), partially offset by reduced spending
for eflornithine, APOMINE(TM), OXYPRIM(TM), and ILX-295501 compared to prior
year. In addition to the $16.0 million in research and development costs
incurred in 1999, the Company recognized a $7.1 million loss as its share in
equity losses of research and development partnerships and contract research
affiliate.
In-process Research and Development. In connection with the acquisition
of Convergence, the Company acquired certain intangible assets including
intellectual property in the area of angiogenesis inhibitors. In connection with
the purchase price allocation, in the third quarter of 1999, $11.1 million was
expensed as a charge for the purchase of in-process research and development.
General and Administrative Costs. General and administrative costs
decreased to $4.1 million in 1999, from approximately $4.4 million in 1998. This
decrease of $0.3 million, or 7%, is due to an overall reduction in other general
and administrative expenses.
Direct Cost of Research Services. Direct cost of research services
expense increased to $13.2 million in 1999, from $10.9 million in 1998. This
increase of $2.3 million, or 21%, is attributable to an increase in both the
number of contracts in process, as well as the size and complexity of the
contract research projects.
OPERATING LOSS
The loss from operations increased to $40.4 million in 1999, from $17.1
million in 1998. This increase of $23.3 million, or 136%, includes the special
charge previously mentioned in the amount of $13.9 million primarily associated
with the termination of our agreement with PRN. Additionally, related to the
acquisition of Convergence, the Company expensed $11.1 million as a charge for
the purchase of in-process research and development.
SPECIAL CHARGES
We incurred special charges of $13.9 million in the first half of 1999.
These charges include $12.3 million in costs associated with the termination of
our agreement with PRN. In July 1997, we entered into a service agreement with
PRN to jointly market our ability to conduct clinical trials. As part of our
arrangement, we issued to PRN 626,788 shares of our common stock in 1997 and
1998. The value of these shares was recorded as an intangible asset to be
amortized over the term of the relevant agreement. Effective June 30, 1999, ILEX
and PRN terminated the agreement and we issued to PRN the remaining 629,200
shares of our common stock issuable under this agreement. We recorded a $12.3
million special charge associated with the value of such common stock and the
write-off, in accordance with Financial Accounting Standard 121, of the net
intangible asset associated with our arrangement with PRN. We have no further
obligation to PRN with respect to this arrangement.
The remaining $1.6 million in special charges consists of a $750,000
accrual for a debt guarantee of an unaffiliated site management organization
which we determined is uncollectible; a $350,000 write-down of computer
equipment; and an approximate $500,000 write-off of an operating lease
commitment for manufacturing equipment which we have determined will no longer
be utilized.
29
<PAGE> 31
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
EQUITY IN LOSSES IN OF RESEARCH AND DEVELOPMENT PARTNERSHIPS AND CONTRACT
RESEARCH AFFILIATE
Equity in losses in joint ventures and contract research affiliate was
$7.1 million in 1999, compared to $6.0 million in 1998, an increase in losses of
$1.1 million, or 18%, primarily due to an increase of $1.8 million in losses of
PFK.
NET INTEREST INCOME
Net interest income decreased to $1.7 million in 1999, from
approximately $1.9 million in 1998. This decrease of $0.2 million, or 11%, is
attributable to a decrease in average cash and investment balances during the
first six months of the year, partially offset by increases in cash and
investment balances during the last six months of the year related to proceeds
from common stock offerings.
NET LOSS
Net loss increased $24.9 million during 1999, or 117%, to $46.1
million, from $21.2 million in 1998. Net loss per share increased $1.32 per
share to $3.04 per share in 1999, from $1.71 per share in 1998.
RESULTS OF OPERATIONS - DECEMBER 31, 1998 AND 1997
OPERATING REVENUES
Total revenue increased from approximately $11.2 million in 1997 to
$14.3 million in 1998. The increase of approximately $3.1 million, or 28%, was
due to an additional $3.8 million of contract research revenues, offset by a
decrease of $400,000 in product development revenues and $300,000 in licensing
fees. The reduction in product development revenues reflects the elimination of
revenue from the development of cristanol and mitoguazone, which was partially
offset by the addition of development revenue for CAMPATH(R). The $3.8 million
increase in contract research services revenues, to $9.7 million, compared to
$5.9 million in 1997, reflects an increase in both the number of contracts under
way and the size and complexity of the contract research projects.
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased from
approximately $18.0 million in 1997 to $31.4 million in 1998. This increase of
approximately $13.4 million, or 74%, includes a one-time, non-cash expense for
$3.1 million for the value of a warrant to purchase shares of common stock of
the Company issued to The Burnham Institute in exchange for the licensing rights
to THP-Dox. The remaining increase of $10.3 million reflects an increase in
research and development costs and direct costs of research services.
Research and Development Costs. Research and development costs
increased from approximately $6.7 million in 1997 to $16.1 million in 1998. This
increase of $9.4 million, or 140%, was primarily attributable to increased
spending for the development of CAMPATH(R), eflornithine, piritrexim, THP-Dox,
and ILX23-7553. In addition to the $16.1 million spent in 1998, an additional
$4.5 million loss was recognized as equity in losses of research and development
partnerships.
General and Administrative Costs. General and administrative costs
decreased from approximately $6.7 million in 1997 to $4.4 million in 1998. This
decrease of $2.3 million, or 34%, is due to redefined segment reporting which
occurred during 1998.
Direct Cost of Research Services. Direct cost of research services
costs increased from $4.6 million in 1997 to $10.9 million in 1998. This
increase of $6.3 million, or 137%, is attributable to the increased amortization
of the amounts associated with the cost of the shares granted to PRN, and
reflects an increase in both the number of contracts under way and the size and
complexity of the contract research projects.
30
<PAGE> 32
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
OPERATING LOSS
The loss from operations increased from $6.8 million in 1997 to $17.1
million in 1998. This increase of $10.3 million, or 151%, includes a one-time,
non-cash charge in the amount of $3.1 million for the value of a warrant to
purchase shares of common stock of the Company issued for payment, in part, of a
licensing fee for the compound THP-Dox.
EQUITY IN LOSSES OF RESEARCH AND DEVELOPMENT PARTNERSHIPS AND CONTRACT
RESEARCH AFFILIATE
Equity in losses in joint ventures and contract research affiliate
increased from $4.5 million in 1997, to $6.0 million in 1998, an increase in
losses of $1.5 million, or 33%, primarily due to the increased losses of PFK.
NET INTEREST INCOME
Net interest income decreased from approximately $2.6 million in 1997
to $1.9 million in 1998. This decrease of $700,000, or 27%, is attributable to a
decrease in interest income resulting from lower average balances of cash, cash
equivalents and investments in marketable securities.
NET LOSS
Net loss increased $12.5 million during 1998, or 144% to $21.2 million
in 1998, from $8.7 million in 1997. Net loss per share increased $0.99 per share
to $1.71 per share in 1998, from $0.72 per share in 1997.
INCOME TAXES
The availability of the net operating loss (NOL) and credit
carryforwards to reduce U.S. federal taxable income is subject to various
limitations under the Internal Revenue Code of 1986 (the Code), as amended, in
the event of a greater than 50 percent ownership change as defined in Section
382 of the Code during the applicable three-year period. As of December 31,
1999, the Company had incurred such an ownership change. However, the Company
does not believe that this change in ownership significantly impacts the
Company's ability to utilize its NOL and tax credit carryforwards as of December
31, 1999, because the amount of the cumulative limitation (based upon the
Company's current market capitalization) during the carryforward period exceeds
the total amount of NOL and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
ILEX has historically financed its operations primarily through the
sale of its capital stock, through development and licensing fee revenues
provided by its collaborative partners under its collaborative agreements and
through fee-for-service or participatory revenues pursuant to contracts with its
CRO clients. The Company receives payments under collaborative agreements
primarily in the form of development funding, milestone payments, if milestones
are achieved, and royalties, if products are commercialized.
On March 8, 1999, the Company sold 0.2 million shares of common stock
for $2.5 million as part of an agreement to develop an oncology compound. In
July 1999, the Company completed a $20.0 million private placement of 2.4
million shares of our common stock. Also in July 1999, the Company repaid debt
of $1.0 million in connection with our acquisition of Convergence. In addition,
in September 1999 the Company received $5.0 million from the sale of preferred
stock of our subsidiary, ILEX Services, to IMPATH, Inc. In November 1999, the
Company completed an underwritten public offering of newly issued common stock
of which 4.2 million shares were sold by the Company. Net proceeds to the
Company from the secondary offering were approximately $54.5 million.
At December 31, 1999, we had cash, cash equivalents, restricted
investments and investments in marketable securities of $89.1 million and
working capital of $77.4 million. Cash, cash equivalents, restricted investments
and investments in marketable securities increased over $63.1 million primarily
as a result of aforementioned stock offerings during 1999.
31
<PAGE> 33
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
In March 2000, the Company entered into definitive agreements to sell
3.0 million shares of its common stock at $45 per share to selected
institutional and other accredited investors. Gross proceeds to the Company are
expected to be approximately $135 million. Net proceeds to the Company are
expected to be approximately $127 million. The transaction is expected to close
during the first quarter of 2000.
Our cash requirements are expected to continue to increase each year as
we expand our activities and operations. It is possible we will never be able to
generate significant product revenue or achieve or sustain profitability. We
expect our current funds, including the proceeds from the anticipated offering,
will be adequate to cover all of our obligations for at least two years
following this offering.
Until our business can generate sufficient levels of cash from product
sales, we expect to continue to finance our operations through existing cash,
revenue from collaborative relationships, CRO revenue, and proceeds from the
sale of equity securities. Under the terms of our agreement with IMPATH Inc.,
ILEX Services is prohibited from incurring any debt without IMPATH's consent.
We plan to continue our policy of investing available funds in
government securities and investment-grade, interest-bearing securities,
primarily with maturities of one year or less. We do not invest in derivative
financial instruments, as defined by Statement of Financial Accounting Standards
No. 119.
ILEX's future expenditures and capital requirements will depend on
numerous factors, including without limitation, the progress of its research and
development programs, the progress of its non-clinical and clinical testing, the
magnitude and scope of these activities, the time and costs involved in
obtaining regulatory approvals, the cost of filing, prosecuting, defending and
enforcing any patent claims and other intellectual property rights, competing
technological and market developments, changes in or termination of existing
collaborative arrangements, the ability of the Company to establish, maintain
and avoid termination of collaborative arrangements, and the purchase of capital
equipment and acquisitions of compounds, technologies or businesses. The
Company's cash requirements are expected to continue to increase each year as it
expands its activities and operations. At December 31, 1999, the Company did not
have any material commitments for capital expenditures. There can be no
assurance that the Company will ever be able to generate product revenue or
achieve or sustain profitability. The Company expects its cash, cash
equivalents, and marketable securities will be adequate to cover all of its
obligations for the next year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, commodity price risk, and other relevant market
rate or price risks.
The Company is exposed to some market risk through interest rates,
related to its investment of its current cash, cash equivalents, and marketable
securities of approximately $89.1 million at December 31, 1999. These funds are
generally invested in highly liquid treasury bills, money market accounts with
short-term maturities and corporate bonds. As such instruments mature and the
funds are reinvested, the Company is exposed to changes in market interest
rates. This risk is not considered material and the Company manages such risk by
continuing to evaluate the best investment rates available for short-term high
quality investments. The Company has not used derivative financial instruments
in its investment portfolio.
The Company's European operations are denominated in local currency.
The Company has unhedged transaction exposures in these currencies which are not
considered material. The Company has not entered into any forward foreign
exchange contracts for speculative, trading or other purposes.
ITEM 8. FINANCIAL STATEMENTS AND SCHEDULES
The reports of the Company's Independent Public Accountants, Financial
Statements and Notes to Financial Statements appear herein commencing on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
32
<PAGE> 34
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by item 10 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by item 11 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by item 12 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by item 13 of Form 10-K is incorporated
herein by reference to such information included in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders.
33
<PAGE> 35
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
PART IV.
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
<S> <C>
(a) 1. Financial Statements
Index to Financial Statements appears on Page F-1.
2. Financial Statement Schedules
The Financial Statement Schedules of fifty percent or less
owned persons required to be filed by Regulation S-X are
attached hereto as Exhibit 99.1.
(b) Reports on Form 8-K
None
(c) Exhibits
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
2.1 Plan of Merger and Acquisition Agreement dated July 16, 1999, by
and among ILEX Oncology, Inc., Convergence Pharmaceuticals,
Inc., Vikas Sukhatme, Raghurom Kalluri, Ralph Weichselbaum,
Donald Kufe, Glenn C. Rice, and Tsuyneya Ohno (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed July 30, 1999)
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
3.2 Bylaws of the Company, as amended (Incorporated herein by
reference to Exhibit 3.2 of the Company's Registration Statement
No. 333-17769 on Form S-1 filed December 12, 1996, as amended)
4.1 Specimen of certificate representing Common Stock, $.01 par
value, of the Company (Incorporated herein by reference to
Exhibit 4.1 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.1 Services Agreement dated November 18, 1994 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.6 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.2 Covenant Not To Sue dated September 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.7 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.3 Lease Agreement dated September 1, 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.10 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.4 Commercial Industrial Sublease Agreement between TRTF/CTRCRF
Building Corporation and the Company (Incorporated herein by
reference to Exhibit 10.11 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996,
as amended)
</TABLE>
34
<PAGE> 36
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
10.5+ License Agreement [Oxypurinol] dated March 31, 1995 by and among
BW Wellcome Co., The Welcome Foundation Limited and the Company
(Incorporated herein by reference to Exhibit 10.14 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.6+ License Agreement [Eflornithine] between ILEX Oncology, Inc. and
Marion Merrell Dow Inc. and its subsidiaries Merrell Dow
Pharmaceuticals Inc. and Marion Merrell Dow France Et Cie
(Incorporated herein by reference to Exhibit 10.17 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.7+ License Agreement [RP 60475] dated November 18, 1994 between
Rhone-Poulenc Rorer S.A. and the Company (Incorporated herein by
reference to Exhibit 10.20 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.8+ Agreement dated November 25, 1996 between Hoffmann-La Roche,
Inc. and the Company [RO23-7553] (Incorporated herein by
reference to Exhibit 10.21 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.9 Subordinated Option Agreement dated March 27, 1995 between CTRC
Research Foundation and the Company (Incorporated herein by
reference to Exhibit 10.35 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.10 Employment Agreement dated November 2, 1994 between Richard L.
Love and the Company (Incorporated herein by reference to
Exhibit 10.36 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.11 Amendment to Employment Agreement dated April 4, 1995 between
Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.37 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.12 Amendment to Employment Agreement dated September 27, 1995
between Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.38 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.13 Employment Agreement dated August 27, 1996 between Pedro
Santabarbara, M.D., Ph.D. and the Company (Incorporated herein
by reference to Exhibit 10.43 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.14 Consulting Services Agreement dated March 16, 1995 between the
Company and Charles A. Coltman, Jr., M.D. (Incorporated herein
by reference to Exhibit 10.45 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.15 1995 Stock Option Plan for the Company (Incorporated herein by
reference to Exhibit 10.47 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.16 1996 Non-Employee Director Stock Option Plan for the Company
(Incorporated herein by reference to Exhibit 10.48 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
</TABLE>
35
<PAGE> 37
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
10.17 Form of Non-Employee Director Stock Option Agreement
(Incorporated herein by reference to Exhibit 10.49 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.18 Fourth Amended and Restated Registration Rights Agreement
between the Company, CTRC and the holders of the Series B, C, D
and E Preferred Stock (Incorporated herein by reference to
Exhibit 10.50 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.19 Form of Pledge Agreement between Cancer Therapy and Research
Center Endowment and each of Gary V. Woods and Ruskin C.
Norman, M.D. (Incorporated herein by reference to Exhibit 10.55
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.20+ Exclusive License Agreement [Oxypurinol] dated November 27, 1996
between MGI Pharma, Inc. and the Company (Incorporated herein by
reference to Exhibit 10.56 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.21 Stock Purchase Agreement dated April 11, 1995 between Daniel Von
Hoff and the Company (Incorporated herein by reference to
Exhibit 10.58 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.22 Stock Purchase Agreement dated April 11, 1995 between Richard L.
Love and the Company (Incorporated herein by reference to
Exhibit 10.60 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.23 Promissory Note dated April 12, 1995 between Daniel Von Hoff and
the Company (Incorporated herein by reference to Exhibit 10.62
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.24 Promissory Note dated April 12, 1995 between Richard L. Love and
the Company (Incorporated herein by reference to Exhibit 10.63
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.25 Ownership Restriction Agreement dated December 11, 1996 between
MPILEX Management, L.L.C., MPILEX Partners, L.P. and holders of
units thereof (Incorporated herein by reference to Exhibit 10.66
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.26 Agreement of Limited Partnership of MPILEX Partners, L.P.
(Incorporated herein by reference to Exhibit 10.67 of the
Company's Registration Statement No. 333-17769 on Form S-1
filed December 12, 1996, as amended)
10.27 Regulations of MPILEX Management, L.L.C. dated December 1996
(Incorporated herein by reference to Exhibit 10.68 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
</TABLE>
36
<PAGE> 38
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
10.28 License Agreement dated December 11, 1996 between MPILEX
Partners, L.P. and the Company (Incorporated herein by reference
to Exhibit 10.69 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.29 Registration Rights Agreement dated July 9, 1997, between the
Company and PRN Research, Inc. (Incorporated herein by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
filed August 14, 1997)
10.30 Service Agreement dated June 30, 1997, between the Company and
PRN Research, Inc. (Incorporated herein by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q filed August
14, 1997)
10.31 Drug Development and Commercialization Agreement dated March 27,
1998, between the Company and The Burnham Institute, Inc.
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed May 15, 1998)
10.32 Office Building Lease Agreement dated April 8, 1998, between the
Company and N.W.A. Limited Partnership (Incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed August 14, 1998)
10.33 Consulting Services Agreement dated July 1, 1997, between the
Company and Dr. Daniel D. Von Hoff, M.D.
10.34 Stock Purchase Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed May 17, 1999)
10.35 Registration Rights Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q filed May 17, 1999)
10.36 Letter of Credit Agreement dated April 5, 1999 between the
Company and PFK (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q filed May
17, 1999)
10.37 Employment Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and Glenn C. Rice (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated July 16, 1999 and filed July 30, 1999)
10.38 Registration Rights Agreement dated July 16, 1999 among ILEX
Oncology, Inc., Vikas Sukhatme, Raghuram Kalluri, Ralph
Weichselbaum, Donald Kufe, Glenn C. Rice, Tsuneya Ohno, Stephen
Dolezalek, Beth Israel Deaconess Medical Center and Arch
Development Corporation (incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
July 16, 1999 and filed July 30, 1999)
10.39 Stock Purchase Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and each of the Investors (as defined therein)
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q filed August 16, 1999)
10.40+ Distribution and Development Agreement between L&I Partners,
L.P. and Schering AG dated August 24, 1999 (incorporated herein
by reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K/A filed September 21, 1999)
10.41* Letter agreement dated September 9, 1999, between the Company
and Al J. Jecminek
11.1* Computation of Earnings Per Share
</TABLE>
37
<PAGE> 39
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
21.1 Subsidiaries of the Company
State of Names Under
Name Incorporation Which Doing Business
ILEX Oncology Services, Inc. Delaware ILEX Services, Inc.
ILEX Products, Inc. Delaware ILEX Products, Inc.
Convergence Pharmaceuticals, Inc. Delaware ILEX Products Research Division
ILEX Services Limited United Kingdom ILEX Services Limited
23* Consent of Arthur Andersen LLP
24.1* Power of Attorney (included on signature page)
27* Financial Data Schedule
99.1* Financial Statements of L&I Partners, L.P.
* Filed herewith.
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
</TABLE>
38
<PAGE> 40
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the city of San Antonio, Texas,
on March 17, 2000.
ILEX ONCOLOGY, INC.
By: /s/ RICHARD L. LOVE
-----------------------
Richard L. Love
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ GREGORY L. WEAVER
-------------------------
Gregory L. Weaver
Vice President and Chief Financial Officer
(Chief Financial and Accounting Officer)
Pursuant to the requirements of Section 13 of 15(d) of the Securities Act of
1934, this report has been signed below by the following persons in the
capacities and on the dates indicated on March 17, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ GARY V. WOODS
- -----------------------------------------
Gary V. Woods Director, Chairman of the Board
/s/ RICHARD L. LOVE
- -----------------------------------------
Richard L. Love President, Chief Executive Officer
Director
/s/ DANIEL D. VON HOFF, M.D.
- -----------------------------------------
Daniel D. Von Hoff, M.D Director
/s/ JOHN L. CASSIS
- -----------------------------------------
John L. Cassis Director
/s/ A. DANA CALLOW, JR.
- -----------------------------------------
A. Dana Callow, Jr. Director
/s/ RUSKIN C. NORMAN, M.D.
- -----------------------------------------
Ruskin C. Norman, M.D Director
/s/ JASON S. FISHERMAN, M.D.
- -----------------------------------------
Jason S. Fisherman, M.D. Director
/s/ JOSEPH S. BAILES, M.D.
- -----------------------------------------
Joseph S. Bailes, M.D. Director
/s/ GLENN C. RICE, PH.D.
- -----------------------------------------
Glenn C. Rice, Ph.D Director
</TABLE>
39
<PAGE> 41
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1999, 1998 and
1997
F-5
Consolidated Statements of Stockholders' Equity - For the Years Ended December 31, 1999, 1998 and
1997
F-6
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and
1997
F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 42
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ILEX Oncology, Inc.:
We have audited the accompanying consolidated balance sheets of ILEX Oncology,
Inc. (a Delaware corporation), and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1999, 1998 and 1997.
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 auditing standards generally accepted
in the United States. 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 ILEX Oncology, Inc., and
subsidiaries as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the years ended December 31, 1999, 1998 and 1997, in
conformity with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 19, 2000
F-2
<PAGE> 43
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
December 31
----------------------
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 43,477 $ 5,331
Investments in marketable securities 33,758 18,849
Restricted investments 1,400 1,400
Accounts receivable, net of allowance for doubtful accounts of
$164 and $150 in 1999 and 1998, respectively
Billed 4,414 2,477
Unbilled 2,484 863
Employee 245 --
Related party -- 208
Prepaid expenses and other 1,914 1,194
--------- ---------
Total current assets 87,692 30,322
--------- ---------
NONCURRENT ASSETS:
Investments in marketable securities 10,216 --
Restricted investments 275 445
Investments in and advances to-
Research and development partnerships (2,534) 228
Contract research affiliate -- 473
Intangible asset, net -- 6,704
Other -- 75
--------- ---------
7,957 7,925
--------- ---------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $3,242 and $1,374 in 1999 and 1998, respectively 4,705 4,441
--------- ---------
Total assets $ 100,354 $ 42,688
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 44
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares and Per Share Amounts)
<TABLE>
<CAPTION>
December 31
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Related parties $ 165 $ 306
Other 2,462 2,000
Accrued subcontractor costs-
Related parties 739 95
Other 1,913 1,038
Accrued liabilities 2,488 908
Deferred revenue 2,557 2,033
--------- ---------
Total current liabilities 10,324 6,380
--------- ---------
LONG-TERM LIABILITIES 369 404
--------- ---------
10,693 6,784
--------- ---------
COMMITMENTS AND CONTINGENCIES (see Note 16)
MINORITY INTEREST 5,082 --
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $0.01 par value; 20,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $0.01 par value; 40,000,000 shares authorized;
21,590,425 and 12,652,593 shares issued; 21,551,425 and
12,613,593 shares outstanding in 1999 and 1998, respectively 216 127
Additional paid-in capital 163,821 67,623
Receivables on sale of common stock -- (46)
Accumulated deficit (77,338) (31,283)
Deferred compensation (1,603) --
Less - Treasury stock at cost; 39,000 shares in 1999 and 1998 (517) (517)
--------- ---------
Total stockholders' equity 84,579 35,904
--------- ---------
Total liabilities and stockholders' equity $ 100,354 $ 42,688
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 45
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
--------- -------- --------
REVENUE:
<S> <C> <C> <C>
Product development $ 4,407 $ 4,622 $ 5,027
Contract research services 13,457 9,650 5,903
Licensing fees -- -- 300
-------- -------- --------
Total revenue 17,864 14,272 11,230
-------- -------- --------
OPERATING EXPENSES:
Research and development costs 15,990 16,127 6,740
Direct cost of research services 13,227 10,875 4,587
General and administrative 4,063 4,354 6,691
In-process research and development 11,124 -- --
Special charges 13,882 -- --
-------- -------- --------
Total operating expenses 58,286 31,356 18,018
-------- -------- --------
OPERATING LOSS (40,422) (17,084) (6,788)
OTHER INCOME (EXPENSE):
Equity in losses of-
Research and development partnerships (3,824) (4,453) (4,295)
Contract research affiliate (3,310) (1,541) (182)
Interest income, net 1,700 1,850 2,583
Minority interest in consolidated subsidiary (82) -- --
-------- -------- --------
LOSS BEFORE INCOME TAXES (45,938) (21,228) (8,682)
Provision for foreign income taxes 117 -- --
-------- -------- --------
NET LOSS $(46,055) $(21,228) $ (8,682)
======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (3.04) $ (1.71) $ (.72)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 15,144 12,450 12,118
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 46
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, except Shares Issued and Outstanding
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
-------------------- -------------------- --------------------
Shares $0.01 Shares $0.01 Shares $0.01
Issued and Par Issued and Par Issued and Par
Outstanding Value Outstanding Value Outstanding Value
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 2,991,477 $ 30 3,101,448 $ 31 1,309,424 $ 13
Issuance of common shares in public offering,
net of issuance costs -- -- -- -- -- --
Conversion of Series A, B, C, D and E preferred
stock to common shares (2,991,477) (30) (3,101,448) (31) (1,309,424) (13)
Exercise of stock options and warrants -- -- -- -- -- --
Issuance of common shares for collaborative
agreement -- -- -- -- -- --
Issuance of common shares for investment in
European affiliate -- -- -- -- -- --
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----- ---------- ----- ---------- -----
BALANCES, December 31, 1997 -- -- -- -- -- --
Issuance of common shares for collaborative
agreement -- -- -- -- -- --
Stock received as a reduction in advances
to partners -- -- -- -- -- --
Exercise of stock options and warrants -- -- -- -- -- --
Warrants issued in payment of licensing fee -- -- -- -- -- --
Collections on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----- ---------- ----- ---------- -----
BALANCES, December 31, 1998 -- -- -- -- -- --
Issuance of common shares in connection
with termination of a collaborative agreement -- -- -- -- -- --
Issuance of common shares for acquisition
of company -- -- -- -- -- --
Issuance of common shares sold in
connection with a collaborative agreement
for drug compound -- -- -- -- -- --
Exercise of stock options and warrants -- -- -- -- -- --
Options issued for consulting agreements -- -- -- -- -- --
Issuance of common shares in private
placement, net of issuance costs -- -- -- -- -- --
Issuance of common shares in secondary
offering, net of issuance costs -- -- -- -- -- --
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----- ---------- ----- ---------- -----
BALANCES, December 31, 1999 -- $ -- -- $ -- -- $ --
=========== ===== ========== ===== ========== =====
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands, except Shares Issued and Outstanding
Series D Convertible Series E Convertible
Preferred Stock Preferred Stock Common Stock
-------------------- -------------------- --------------------
Shares $0.01 Shares $0.01 Shares $0.01
Issued and Par Issued and Par Issued and Par
Outstanding Value Outstanding Value Outstanding Value
----------- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 113,953 $ 1 475,753 $ 5 1,187,539 $ 12
Issuance of common shares in public offering,
net of issuance costs -- -- -- -- 2,700,000 27
Conversion of Series A, B, C, D and E preferred
stock to common shares (113,953) (1) (475,753) (5) 7,992,055 80
Exercise of stock options and warrants -- -- -- -- 70,387 1
Issuance of common shares for collaborative
agreement -- -- -- -- 312,188 3
Issuance of common shares for investment in
European affiliate -- -- -- -- 17,361 --
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----- ----------- ------ ------------ -----
BALANCES, December 31, 1997 -- -- -- -- 12,279,530 123
Issuance of common shares for collaborative
agreement -- -- -- -- 314,600 3
Stock received as a reduction in advances
to partners -- -- -- -- (39,000) --
Exercise of stock options and warrants -- -- -- -- 58,463 1
Warrants issued in payment of licensing fee -- -- -- -- -- --
Collections on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----- ----------- ------ ------------ -----
BALANCES, December 31, 1998 -- -- -- -- 12,613,593 127
Issuance of common shares in connection
with termination of a collaborative agreement -- -- -- -- 629,200 6
Issuance of common shares for acquisition
of company -- -- -- -- 1,000,000 10
Issuance of common shares sold in
connection with a collaborative agreement
for drug compound -- -- -- -- 218,858 2
Exercise of stock options and warrants -- -- -- -- 500,574 5
Options issued for consulting agreements -- -- -- -- -- --
Issuance of common shares in private
placement, net of issuance costs -- -- -- -- 2,389,200 24
Issuance of common shares in secondary
offering, net of issuance costs -- -- -- -- 4,200,000 42
Payments received on receivables on sale of
common stock -- -- -- -- -- --
Net loss -- -- -- -- -- --
-------- ----- ----------- ------ ------------ -----
BALANCES, December 31, 1999 -- $ -- -- $ -- 21,551,425 $ 216
======== ===== =========== ====== ============ =====
<CAPTION>
Receivables
Additional on Sale
Paid-In of Common Accumulated Deferred Treasury
Capital Stock Deficit Compensation Stock Total
---------- ----------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1996 $ 26,218 $ (111) $ (1,373) $ -- $ -- $ 24,826
Issuance of common shares in public offering,
net of issuance costs 29,135 -- -- -- -- 29,162
Conversion of Series A, B, C, D and E preferred
stock to common shares -- -- -- -- -- --
Exercise of stock options and warrants 163 -- -- -- -- 164
Issuance of common shares for collaborative
agreement 5,296 -- -- -- -- 5,299
Issuance of common shares for investment in
European affiliate 278 -- -- -- -- 278
Payments received on receivables on sale of
common stock -- 29 -- -- 29
Net loss -- -- (8,682) -- -- (8,682)
-------- ------ -------- -------- ----- --------
BALANCES, December 31, 1997 61,090 (82) (10,055) -- -- 51,076
Issuance of common shares for collaborative
agreement 3,104 -- -- -- -- 3,107
Stock received as a reduction in advances
to partners -- -- -- -- (517) (517)
Exercise of stock options and warrants 286 -- -- -- -- 287
Warrants issued in payment of licensing fee 3,143 -- -- -- -- 3,143
Collections on receivables on sale of
common stock -- 36 -- -- -- 36
Net loss -- -- (21,228) -- -- (21,228)
-------- ------ -------- -------- ----- --------
BALANCES, December 31, 1998 67,623 (46) (31,283) -- (517) 35,904
Issuance of common shares in connection
with termination of a collaborative agreement 6,286 -- -- -- -- 6,292
Issuance of common shares for acquisition
of company 9,928 -- -- -- -- 9,938
Issuance of common shares sold in
connection with a collaborative agreement
for drug compound 2,498 -- -- -- -- 2,500
Exercise of stock options and warrants 874 -- -- -- -- 879
Options issued for consulting agreements 2,167 -- -- (1,603) -- 564
Issuance of common shares in private
placement, net of issuance costs 19,976 -- -- -- -- 20,000
Issuance of common shares in secondary
offering, net of issuance costs 54,469 -- -- -- -- 54,511
Payments received on receivables on sale of
common stock -- 46 -- -- -- 46
Net loss -- -- (46,055) -- -- (46,055)
-------- ------ -------- -------- ----- --------
BALANCES, December 31, 1999 $163,821 $ -- $(77,338) $ (1,603) $(517) $ 84,579
======== ====== ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE> 47
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------
1999 1998 1997
--------- --------- ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,055) $(21,228) $ (8,682)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,226 2,076 967
Special charges 13,882 -- --
In-process research and development 11,124 -- --
Net activity of research and development partnerships and
contract research affiliate 4,426 435 4,477
Minority interest 82 -- --
Deferred compensation expense for consultants options 564 -- --
Valuation of warrant issued in payment of licensing fees -- 3,143 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable, net (3,622) (143) (3,589)
(Increase) decrease in prepaid expenses and other (443) (474) 327
Increase in other noncurrent assets 75 (75) --
Increase in accounts payable and accrued liabilities 1,468 1,473 1,071
Increase in deferred revenue 524 1,105 398
Increase (decrease) in other long-term liabilities (35) (29) 207
-------- -------- --------
Net cash used in operating activities (15,784) (13,717) (4,824)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net activity of marketable securities' transactions (25,125) 417 (2,144)
Net activity in restricted investments 170 (1,120) 100
Purchase of property and equipment (1,723) (2,708) (2,047)
Advances to research and development partnerships and contract research
affiliate (1,000) (519) (2,736)
Acquisitions, net of cash acquired (328) -- --
-------- -------- --------
Net cash used in investing activities (28,006) (3,930) (6,827)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for cash, net of issuance costs 77,011 -- 29,076
Proceeds from sale of subsidiary's preferred stock 5,000 -- --
Exercise of options and warrants 879 287 164
Collections of receivables on sale of common stock 46 36 29
Payment of note payable assumed in acquisition (1,000) -- --
-------- -------- --------
Net cash provided by financing activities 81,936 323 29,269
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 38,146 $(17,324) $ 17,618
CASH AND CASH EQUIVALENTS, beginning of year 5,331 22,655 5,037
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 43,477 $ 5,331 $ 22,655
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest $ -- $ -- $ --
Income taxes -- -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE> 48
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share Information, Per Share Information or As
Otherwise Indicated)
1. ORGANIZATION AND OPERATIONS
ILEX Oncology, Inc. (the Company), was incorporated in December 1993 under the
laws of the State of Delaware. The Company is a drug development company that is
focused on oncology through its subsidiaries: ILEX Products, Inc. (ILEX
Products) and ILEX Oncology Services, Inc. (ILEX Services). ILEX Products is
focused in the areas of identification, development, manufacturing and
regulatory approval of oncology compounds to develop cancer therapeutics and
build a chemoprevention product platform. ILEX Services manages the preclinical
research and clinical trials for our own product candidates, as well as oncology
products being developed by other companies.
In December 1996, the Company entered into an agreement with MPI Enterprises,
L.L.C. (MPI) in order to form a drug development joint venture, which has been
fully consolidated (see Note 4). In June 1999, ILEX Services acquired certain
assets and liabilities of Pharma Forschung Kaufbeuren GmbH (PFK), a European
contract research affiliate, through its new wholly owned subsidiary ILEX
Services Limited (Services Ltd.), which now provides the Company with two
locations from which European clinical trials will be managed and supported:
Edinburgh, Scotland and Guildford, England (see Note 4). In July 1999, the
Company acquired Convergence Pharmaceutical, Inc. (Convergence), a Boston,
Massachusetts company, and its portfolio of angiogenesis inhibitors (see Note
6).
The accompanying consolidated financial statements include the accounts of ILEX
Oncology, Inc., and its subsidiaries. All significant intercompany transactions
and accounts have been eliminated in consolidation. Certain prior period amounts
have been reclassified to conform to the 1999 presentation.
Currently, the Company has no products available for sale. The Company does have
seven drugs in clinical development and several product candidates in late
preclinical research. All of the product rights are either acquired or
in-licensed. The Company has not generated any revenues from product sales to
date, and there can be no assurance that revenues from product sales will be
achieved. Accordingly, the Company has incurred net losses to date.
The Company's ability to achieve a profitable level of operations in the future
will depend in large part on the ability to complete development of its
compounds, obtaining regulatory approvals for such compounds, commercializing
these potential products through marketing agreements with other companies or,
if the Company chooses, marketing such compounds independently, successfully
manufacturing such compounds, achieving market acceptance of such compounds and
expanding its contract research services business. There can be no assurance
that the Company will be successful in developing such compounds, obtaining such
approvals, bringing such compounds to market, developing sales, marketing or
distribution capabilities, manufacturing such products, generating market
acceptance or expanding its contract research services business.
During 1999, the Company received $77,011 in net proceeds from common stock
offerings including common stock sold in connection with a collaborative
agreement for a drug compound. Additionally, the Company received $5,000 from
the sale of preferred stock of a subsidiary. These transactions provide
additional funding to expand preclinical research and clinical trials, potential
acquisitions of complementary technologies, products or companies, and for
general corporate purposes (see Note 8). However, the Company may require
substantial additional funds to conduct research and development, to further
develop its potential pharmaceutical products, to manufacture and market any
pharmaceutical products that may be developed and to expand its contract
research service business (see Note 18). The Company expects its capital and
operating expenditures to increase substantially over the next several years.
The Company's current sources of funding are derived from its collaborative
agreements with its strategic partners, its contract research services, existing
cash and cash equivalents and investments in marketable securities. The Company
believes that its collaborative agreements with strategic partners, its contract
research services, existing cash and cash equivalents and investments in
marketable securities will satisfy its cash requirements for the foreseeable
future. There can be no assurance, however, that additional funds will be
available on acceptable terms, if at all.
F-8
<PAGE> 49
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition.
Product Development - Revenues from drug development studies are based on the
time incurred on such studies. The Company is reimbursed for investigator
costs based on actual costs incurred or predetermined rates together with
out-of-pocket costs incurred during the performance of the study. Revenues
related to milestone payments of the drug development studies are recognized
based on the completion of the milestone measurement.
Contract Research Services - Revenues from contract research services are
related to both fixed price and hourly based customer contracts and are
recognized on a percentage-of-completion basis or as such services are
performed.
Licensing Fees - Revenues from the signing of licensing agreements are
recognized upon the execution of the agreements as the Company has no future
obligations related to the signing of the license agreement and such fees are
nonrefundable.
Current Assets and Current Liabilities. The carrying value of current assets and
current liabilities, excluding investments in marketable securities,
approximates fair value due to the short maturity of these items.
Property and Equipment. Property and equipment are reported at cost and
depreciated over the estimated useful lives of the individual assets using the
straight-line method (see Note 5). Leasehold improvements represent capitalized
employee salaries related to construction and other miscellaneous costs incurred
to bring the leased current Good Manufacturing Practices (cGMP) facility (see
Note 14) into use, as well as improvements made to leased facilities. Leasehold
improvements are amortized over the lesser of the life of the lease or the
useful life of the related property. Expenditures for maintenance and repairs
are charged to expense as incurred. The estimated lives used in computing
depreciation and amortization are as follows:
Office equipment 3 - 10 years
Lab equipment 5 - 10 years
Leasehold improvements 2 - 15 years
Deferred Revenue. Deferred revenue represents advances for services not yet
rendered under fixed fee contract services and billings in excess of revenue
recognized, and should be realized within six months to one year.
Investments in Marketable Securities. At December 31, 1999 and 1998, marketable
debt securities have been categorized as held to maturity and are stated at
amortized cost, as these securities have staggered maturity dates, and
management of the Company does not intend to liquidate these securities before
maturity. Marketable debt securities with an original maturity of less than one
year are classified in the balance sheet as current assets, while securities
with a maturity of greater than one year are classified as noncurrent assets.
The fair value of marketable securities is based on currently published market
quotations (see Note 3).
Credit Risk and Major Customer. The Company places its excess temporary cash and
cash equivalents in a money market account with a high quality financial
institution. At times, such amounts may be in excess of the FDIC insurance
limit. The Company's accounts receivable are primarily from pharmaceutical and
biotechnology companies. Based on the Company's evaluation of the collectibility
of these accounts receivable, an allowance for doubtful accounts of $164 and
$150 was necessary at December 31, 1999 and 1998, respectively. The Company
believes the exposure to credit risk related to the remaining accounts
receivable is minimal.
For the years ended December 31, 1999, 1998 and 1997, the Company's top five
customers accounted for 65 percent, 78 percent and 51 percent of total revenue,
respectively. The following table represents total revenue in excess of ten
percent from significant customers:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$4,330 24% $3,615 25% $ 2,143 19%
3,006 17% 2,714 19% 1,700 15%
1,868 10% 2,149 15%
1,901 13%
</TABLE>
F-9
<PAGE> 50
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
Use of Estimates. 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 may differ from those estimates.
Income Taxes. The Company has incurred losses since inception for both book and
tax purposes. The tax provision recorded in 1999 relates to amounts accrued for
the Company's wholly owned subsidiary acquired during 1999 which operates in the
United Kingdom.
Statements of Cash Flows. The Company considers all highly liquid investments
with maturities of three months or less at the date of purchase to be cash
equivalents.
Noncash financing and investing activities for the years ended December 31,
1999, 1998 and 1997, include the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Conversion of preferred stock into common stock $ -- $ -- $ 80
Contribution payable to MPILEX Partners, L.P. (MPILEX) -- -- 11
Contribution made to MPILEX as a reduction in accounts receivable -- -- 1,089
Issuance of common stock for investment in PFK GmbH (PFK) -- -- 278
Issuance of common stock to Physician Reliance Network, Inc. (PRN) 6,292 3,107 5,299
Treasury shares received from MPILEX as a reduction in advances
to research and development partnerships -- 517 --
Issuance of common stock for acquisition 9,938 -- --
Assets acquired in acquisition 774 -- --
Liabilities assumed in acquisition 2,199 -- --
Settlement of accounts payable through acquisition 566 -- --
</TABLE>
Foreign Currency Translation. Services Ltd. is a wholly owned subsidiary of ILEX
Services based in the United Kingdom. The financial statements of Services Ltd.
were prepared in British pounds and translated to United States (U.S.) dollars
based on the current exchange rate at the end of the period for the balance
sheet and a weighted-average rate for the period on the statement of operations.
Translation adjustments were insignificant for the year ended December 31, 1999.
Net Loss Per Share. Basic net loss per share was computed by dividing net loss
by the weighted average number of shares of common stock outstanding during the
year. Diluted net loss per share is equal to basic net loss per share, as the
effect of all common stock equivalents is antidilutive.
3. INVESTMENTS IN MARKETABLE SECURITIES
At December 31, 1999 and 1998, the following marketable securities due within
one year were classified as current assets:
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
Cost Fair Value Cost Fair Value
-------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Government agency securities $ -- $ -- $ 2,885 $ 2,885
======== ======== ========= ========
Corporate securities $ 33,050 $ 32,991 $ 15,964 $ 15,955
========= ======== ========= ========
U.S. Treasury securities $ 150 $ 150 $ 150 $ 150
========= ======== ========= ========
Foreign government securities $ 708 $ 706 $ -- $ --
========= ======== ======== ========
</TABLE>
F-10
<PAGE> 51
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
At December 31, 1999 and 1998, the following marketable securities with a
maturity greater than one year were classified as noncurrent assets:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Cost Fair Value Cost Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 275 $ 279 $ 445 $ 446
============ ============ ============ ============
Corporate securities $ 10,216 $ 10,164 $ - $ -
============ ============ ============ ============
</TABLE>
Gross unrealized holding gains and losses at December 31, 1999, were
approximately $18 and $127, respectively. Gross unrealized holding gains and
losses at December 31, 1998, were approximately $7 and $15, respectively.
Amounts related to U.S. Treasury securities which are classified as restricted
investments and are attributable to collateral for a lease commitment, are
included in their respective investment categories (see Note 10 and 14).
4. INVESTMENTS IN AND ADVANCES TO RESEARCH AND DEVELOPMENT PARTNERSHIPS AND
CONTRACT RESEARCH AFFILIATE
In December 1996, the Company entered into an agreement with MPI, for an equally
owned joint venture, MPILEX, for research collaboration endeavors. At December
31, 1998, as a result of making contributions to MPILEX in excess of MPI's
contributions, the Company had a majority ownership interest in and controlling
interest of MPILEX. The activity for the venture has been fully consolidated in
the Company's 1999 and 1998 operating results with all significant intercompany
transactions and accounts being eliminated.
In May 1997, the Company entered into an agreement with LeukoSite, Inc.
(LeukoSite), now Millennium Pharmaceutical, Inc. (Millennium), for an equally
owned joint venture, L&I Partners, L.P. (L&I), for research collaboration
endeavors. The Company accounts for its investment in L&I using the equity
method of accounting. The following is summarized financial information for L&I
as of and for the period ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Summarized Income Statement Information
1999 1998 1997
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Revenue $ 3,750 $ - $ -
Operating expenses 11,339 7,784 6,722
Operating loss (7,589) (7,784) (6,722)
Net loss (7,686) (7,716) (6,716)
Summarized Balance Sheet Information
1999 1998
---- ----
(Unaudited)
Assets $ 2,899 $ 64
Liabilities 9,279 737
-------- --------
Partners' equity $ (6,380) $ (673)
======== ========
</TABLE>
In August 1999, L&I entered into an agreement which grants Schering AG exclusive
marketing and distribution rights to CAMPATH(R) in the U.S., Europe, and the
rest of the world except Japan and East Asia, where ILEX and Millennium have
retained rights. The agreement provides that Schering will advance to the
partnership up to $30 million to L&I for the rights to CAMPATH(R) and for the
achievement of certain regulatory milestones. Profits from the sale of CAMPATH
in the U.S. will be shared equally between ILEX, Millennium, and Schering's U.S.
affiliate, Berlex Laboratories, Inc. For sales made in the rest of the
territory, Schering AG will make royalty payments equivalent to the rate of
profit sharing expected in the U.S.
F-11
<PAGE> 52
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
In September 1997, the Company entered into an agreement with PFK, a German
contract research organization, to purchase a 30 percent equity interest in PFK.
In 1998, the Company purchased an additional 10 percent equity interest in PFK
for a cash payment of $519, bringing the Company's total ownership interest in
PFK to 40 percent. In June 1999, ILEX Services acquired certain assets and
liabilities of the former PFK offices in the United Kingdom through its wholly
owned subsidiary, Services Ltd. The acquisition, for $541, was accounted for as
a purchase and provides ILEX Services with two locations from which European
clinical trials will be managed and supported: Edinburgh, Scotland, and
Guildford, England. Also on June 1, 1999, ILEX Services incurred one-time exit
costs of approximately $2.9 million in letter of credit guarantee funding costs
and a write-off of its remaining investment in PFK. While the Company continues
to hold a 40 percent interest in PFK, management believes the funding provided
to PFK under the letter of credit is uncollectible and, accordingly, has
expensed such amount as additional losses attributable to its contract research
affiliate.
5. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Office equipment $ 5,188 $ 4,208
Lab equipment 2,147 1,252
Leasehold improvements 612 355
------- -------
7,947 5,815
Accumulated depreciation and amortization (3,242) (1,374)
------- -------
Net property and equipment $ 4,705 $ 4,441
======= =======
</TABLE>
6. ACQUISITION OF CONVERGENCE
On July 16, 1999, the Company acquired Convergence, of Boston, Massachusetts, a
privately held research-based pharmaceutical company with an emerging portfolio
of angiogenesis and DNA repair inhibitors. The acquisition has been accounted
for using the purchase method of accounting. Under the terms of the agreement,
ILEX acquired Convergence in exchange for 1 million shares of the Company's
common stock, and an additional earn-out of up to 1 million shares to be issued
to Convergence's founders if certain development milestones are met. The Company
also assumed $1.0 million in Convergence debt as part of the purchase.
Accordingly, the Company has included the results of operations for Convergence
from the date of acquisition. Subsequent to the purchase of Convergence by the
Company, the note was called and the Company paid the principal sum of this note
together with the accrued interest.
Concurrent with the acquisition, the Company entered into four consulting
agreements with the founders of Convergence. The agreements specify compensation
levels and grant the four founders of Convergence the option to purchase a total
of 100,000 shares of the Company's common stock at an exercise price of $9.94.
The options vest at the rate of 25 percent per year beginning in July 2000. The
fair value of the options is recorded as deferred compensation as a separate
component of stockholders' equity and adjusted to current market value on a
quarterly basis. Deferred compensation is being amortized to expense over the
vesting period of the options. At December 31, 1999, using an option-pricing
model, the fair value of the options was calculated as approximately $2.2
million, and the Company had recognized approximately $564 in consulting
expense.
In connection with the acquisition of Convergence, the Company acquired certain
intangible assets including intellectual property in the area of angiogenesis
inhibitors. In connection with the purchase price allocation, $11.1 million was
expensed as a charge for the purchase of in-process research and development.
In performing this allocation, the Company considered, among other factors,
Convergence's research and development projects that were in process at the date
of acquisition. With regard to the in-process research and development projects,
the Company considered factors such as the stage of development of the
technology at the time of acquisition, the importance of each project to the
overall development plan, alternative future use of the technology and the
projected incremental cash flows from the projects when completed and any
associated risks. Due to their specialized nature, the in-process research and
development projects had no alternative future use, either for re-deployment
elsewhere in the business or in liquidation, in the event the projects failed.
F-12
<PAGE> 53
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
The Income Approach was the primary technique utilized in valuing the purchased
research and development projects. The value assigned to these projects was
limited because technological feasibility had not been established; including
development, testing and regulatory activities associated with the introduction
of projected product launches. The value assigned to purchased in-process
technology was determined by estimating the costs to develop the purchased
in-process technology into commercially viable products, estimating the
resulting net cash flows from the projects and discounting the net cash flows to
their present value. The independent appraisal also considered the fact that the
existing know-how diminishes in value over time as new technologies are
developed and changes in market conditions render current products and
methodologies obsolete. The assumptions underlying the cash flow projections
used were derived primarily from investment banking reports, historical results,
company records and discussions with management.
Revenue estimates for each in-process project were developed by management based
on estimates of relevant market sizes and growth factors, expected trends in
technology and the nature and expected timing of new product introductions by
the Company and its competitors. Due to the technological and economic risks
associated with the developmental projects, a discount rate of 100 percent was
used to discount cash flows from the in-process products. The Company believes
that the foregoing assumptions used in the purchase price allocation were
reasonable at the time of the acquisition. No assurance can be given, however,
that the underlying assumptions used to estimate revenue, development costs or
profitability or the events associated with such projects will transpire as
estimated. For these reasons, actual results may vary from projected results.
The most significant and uncertain assumptions relating to the in-process
projects relate to the projected timing of completion and revenues attributable
to each project.
The following table reflects unaudited pro forma combined results of operations
of ILEX, Convergence and Services Ltd. as if the acquisitions had occurred on
January 1, 1999 and 1998 (see Note 4). Such pro forma information is presented
for informational purposes only and is not necessarily indicative of the
consolidated results that would have been achieved had the acquisition actually
been consummated at January 1, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Total revenue $ 18,662 $ 15,822
Net loss $ (46,686) $ (21,864)
Basic loss per share $ (3.08) $ (1.76)
</TABLE>
7. MINORITY INTEREST
On September 23, 1999, ILEX Services issued 290,867 shares of Series A
convertible preferred stock for $5 million to Impath, Inc. The preferred stock
is convertible to the Company's common stock based upon a computation set forth
in the certificate of designation for the preferred stock. The preferred stock
is entitled to liquidation preferences over the ILEX Service's preferred stock.
The preferred stock is eligible for dividends at an annual rate of $1.031 per
share. Dividends are accrued monthly and will be paid to the stockholders
annually in arrears beginning in September 2000, when and as declared by ILEX
Services' board of directors. A member of the Company's board of directors also
serves as a member of the board of directors of Impath, Inc.
At December 31, 1999, the convertible preferred stock is reflected as minority
interest on the Company's consolidated balance sheet. The corresponding
dividends are reflected as minority interest in consolidated subsidiary on the
Company's consolidated statements of operations.
8. STOCKHOLDERS' EQUITY
In April 1995, certain consultants and employees of the Company exercised rights
to purchase, in aggregate, 1,187,481 shares of common stock pursuant to their
respective consulting or employment agreements for $208. A portion of this
amount was paid in cash and the Company financed the remaining balance. The
remaining notes receivable were repaid in 1999.
In February 1997, the Company completed the issuance of an additional 2.7
million common shares through a public offering, resulting in net proceeds
(after deducting issuance costs) of $29.2 million. In connection with the public
offering, the board of directors approved an approximate 1.75 for 1 reverse
stock split of the Company's common stock effective upon the effective date of
the public offering. All common stock, convertible preferred stock, options,
warrants
F-13
<PAGE> 54
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
and per share information included in the accompanying consolidated financial
statements were adjusted to give retroactive effect to the split. All of the
outstanding Series A, Series B, Series C, Series D and Series E convertible
preferred stock were converted into 7,992,055 shares of common stock at the date
of the public offering. In September 1997, the Company acquired a 30 percent
equity interest in PFK, a German contract research organization, followed by an
additional investment of 10 percent in 1998. This purchase was effected through
the issuance of 17,361 common shares and cash payments of $1.4 million and $519
in 1997 and 1998, respectively.
In December 1998, the Company received 39,000 shares of its own stock from
MPILEX as payment for contract research services rendered by the Company. The
cost of the stock at the date of payment was $517 and was recorded as treasury
stock in the accompanying consolidated financial statements.
In January 1999, the Company entered into a development and licensing agreement
for an oncology compound with a pharmaceutical company. In March 1999, the
pharmaceutical company purchased $2.5 million of common stock of the Company
(see Note 12).
In July 1999, the Company completed a $20 million private placement of 2,389,200
shares of common stock. The shares were sold at a 15 percent discount from the
average 30-day trading price prior to closing.
In November 1999, the Company completed an underwritten public offering of its
common stock pursuant to which 4.2 million shares were sold by the Company. The
number of shares sold by the Company includes the underwriters' exercise of
their overallotment option. Proceeds, net of offering costs, to the Company from
this offering were approximately $54.5 million.
9. STOCK OPTIONS AND STOCK PURCHASE WARRANTS
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123) defines a fair value based method of accounting for
employee stock options or similar equity instruments and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the service
period of the award, which is usually the vesting period. However, FAS 123 also
allows entities to continue to measure compensation costs for employee stock
compensation plans using the intrinsic value method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB 25). The Company has adopted FAS 123 and has elected to
remain with the accounting prescribed by APB 25. The Company has made the
required disclosures prescribed by FAS 123.
During 1995, the Company adopted a stock option plan (the Plan). Under the Plan,
stock options may be granted to key employees and consultants of the Company as
approved by a committee of the Company's board of directors. Originally, the
Company had reserved 570,904 shares of common stock for issuance in accordance
with the Plan. In May 1998, the Company increased the number of authorized
shares of common stock reserved for issuance under the Plan to 1.8 million.
Stock options vest pursuant to the individual stock option agreements, usually
25 percent per year beginning one year from the date of grant, with unexercised
options expiring ten years from the date of grant. As of December 31, 1999,
options covering 311,619 shares have been exercised under this plan and options
covering 301,139 shares have expired.
In October 1996, the Company adopted a nonemployee directors' stock option plan
(the Directors' Plan). Under the Directors' Plan, each nonemployee director is
granted a one-time option equaling 17,128 shares of common stock. In October
1996, December 1996, August 1997, and February 1998 the nonemployee directors
were granted 102,768, 17,128, 17,128, and 30,000 options, respectively,
exercisable at $7.01, $7.01, $16.50, and $8.63 per share, respectively. These
options vest at 1/48 per month, with unexercised options expiring ten years from
the date of grant. During both 1997 and 1998, 17,128 of these options were
forfeited when nonemployee directors resigned their positions with the Company.
As of December 31, 1999, no options covering shares under this plan have been
exercised.
F-14
<PAGE> 55
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
A summary of the status of the Company's fixed stock option plans for the years
ended December 31, 1999, 1998 and 1997, and changes during these years on those
dates is presented below:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
--------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 1,178,736 $ 8.56 972,258 $ 7.74 688,680 $ 4.21
Granted 492,530 11.02 396,514 10.37 380,730 12.96
Exercised (184,181) 4.77 (58,463) 5.12 (68,975) 2.20
Forfeited (175,644) 10.25 (131,573) 10.09 (28,177) 5.79
-------- ------- ---------- ------- ------- -------
Outstanding, end of year 1,311,441 $ 9.71 1,178,736 $ 8.56 972,258 $ 7.74
========== ======= ========== ======= ======= =======
Options exercisable at end of year 458,050 $ 7.67 401,144 $ 5.65 232,256 $ 3.77
========== ======= =========== ======= ======= =======
Weighted average fair value of options
granted during the year $ 6.31 $ 7.07 $ 10.39
======= ======= =======
</TABLE>
The following table summarizes the information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Weighted Number Weighted
Average Weighted Exercisable at Average
Number Remaining Average December 31, Exercise
Exercise Prices Outstanding Contractual Life Exercise Price 1999 Price
--------------- ----------- ---------------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
$0.18 - $3.86 184,797 1.9 years $ 3.50 168,194 $ 3.50
$3.87 - $7.73 201,875 4.5 years $ 7.06 132,184 $ 7.05
$7.74 - $11.60 556,107 7.7 years $ 9.69 57,261 $ 8.90
$11.61 - $15.47 228,791 6.2 years $ 12.97 47,315 $ 13.01
$15.48 - $19.34 139,871 4.8 years $ 16.51 53,096 $ 16.34
------------ ------------
1,311,441 5.8 years $ 9.71 458,050 $ 7.67
============ ============
</TABLE>
Had compensation cost for the Company's stock-based compensation plans been
determined on the fair value of the grant dates for awards under those plans
consistent with the method of FAS 123, the Company's net loss and loss per share
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Net loss As reported $(46,055) $(21,228) $(8,682)
Pro forma $(48,362) $(22,900) $(9,468)
Loss per share As reported $ (3.04) $ (1.71) $ (0.72)
Pro forma $ (3.20) $ (1.84) $ (0.78)
</TABLE>
For options granted in 1999, 1998 and 1997, the fair value of each option grant
was estimated on the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions: dividend yield of 0
percent for all years; expected volatility of 72.57 percent, 81.89 percent and
62.18 percent in 1999, 1998 and 1997, respectively; risk free interest rate of
5.875 percent, 4.5 percent and 6.3 percent in 1999, 1998 and 1997, respectively.
The expected life of the options granted for 1999 is 3.78 years, and the
expected life of the options granted for 1998 and 1997 was the term to
expiration.
F-15
<PAGE> 56
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
In connection with the private placement of Series B convertible preferred
stock, the Company issued a warrant for the purchase of 97,044 shares of common
stock at approximately $3.50 per share. The Company's management determined the
value of the warrant issued was immaterial to the financial position and results
of operations of the Company. The value of the warrants was based on the
exercise price of the warrant and the fair value of the Company's common stock
at the date of issuance as well as the terms of the warrant issued. The warrant
may be exercised in whole at any time or in part from time to time, prior to its
expiration in September 2000. In December 1999, a cashless exercise of these
warrants was executed for shares totaling 80,918. As of December 31, 1999, all
outstanding warrants were exercised.
In connection with the private placement of Series C convertible preferred
stock, the Company issued 355,913 warrants for the purchase of common stock at
approximately $8.76 per share to the Series C convertible preferred
stockholders. The value of the warrants issued were immaterial based on the
exercise price of the warrants and the fair value of the Company's common stock
on the date the warrants were issued. As such, no amount was attributed to the
warrants. The warrants may be exercised in whole at any time or in part from
time to time, prior to their expiration in July 2001. The exercise price of
these warrants is subject to an adjustment if the Company issues common stock
subsequent to the date of the warrants at a price per share less than the
exercise price of the warrants. As a result of the Company's private placement
in July 1999 (see Note 8), the exercise price of the warrants was adjusted to
$8.71. During 1999, two warrant holders completed a cashless exercise of
warrants for shares totaling 6,259. As of December 31, 1999, 344,672 of these
warrants remain unexercised.
In March 1998, the Company entered into an agreement with a drug development
institute to license a compound for development by the Company. The agreement
called for an initial payment of $250 and a warrant to purchase 590,113 shares
of the Company's common stock. Using the Black-Scholes pricing model, the value
of the warrant was determined to be $3,143. In 1999, all outstanding warrants
were exchanged for shares totaling 229,216 via a cashless exercise.
10. SPECIAL CHARGES
The Company recorded special charges totaling $13.9 million in the second
quarter of 1999. As discussed below, these charges include the recognition of
$12.3 million of costs associated with the termination of the Company's
agreements with PRN and $1.6 million of charges related to other items.
In July 1997, the Company entered into an assignment agreement and a services
agreement with PRN under which the Company and PRN agreed to jointly market
their clinical trial service capabilities. In accordance with these agreements,
the Company issued 312,188 and 314,600 common shares to PRN in July 1997 and
1998, respectively. The value of the shares issued was recorded as an intangible
asset and was being amortized over the term of the agreements. The Company also
agreed to issue up to an additional 629,200 shares to PRN over a two-year period
if PRN remained in compliance with various provisions of the agreements.
Additionally, 1,255,988 common shares could have been issued over a four-year
period if certain milestones were achieved. Effective June 30, 1999, the Company
and PRN terminated the agreements and the Company recorded an approximate $12.3
million special charge associated with the value of the remaining 629,200 shares
issued and the write-off, in accordance with Financial Accounting Standard 121,
of the net intangible asset associated with the PRN agreements. The Company has
no further obligation with respect to the assignment agreement or with respect
to the contingent shares under the services agreement.
The remaining $1.6 million in special charges is comprised of a $750 accrual for
a debt guarantee of an unaffiliated site management organization which
management determined to be uncollectible, a $350 write-down of computer
equipment, and an approximate $500 write-off of an operating lease commitment
for manufacturing equipment which management has determined will not be
utilized.
11. RELATED-PARTY TRANSACTIONS
CTRC Research Foundation (CTRC Research), a stockholder of the Company, performs
certain administrative and technical support services for the Company. For the
years ended December 31, 1999, 1998 and 1997, the Company paid CTRC Research
approximately $190, $672, and $832, respectively, for these services and
reimbursement of salaries and benefits. As described in Note 14, the Company has
lease agreements with CTRC Research for labs and the cGMP
F-16
<PAGE> 57
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
facility. For the years ended December 31, 1999, 1998 and 1997, the Company paid
CTRC Research approximately $439, $280, and $94, respectively, related to these
lease agreements. At December 31, 1999 and 1998, the Company had payables to
CTRC Research amounting to $92, related to the aforementioned services and lease
agreements.
In March 1995, the Company entered into a subordinated option agreement with
CTRC Research. The agreement gives the Company the subordinated option to
acquire licenses or certain marketable rights, as defined in the agreement,
owned by CTRC Research. The subordinated option for any particular marketable
right is exercisable only after a third party, with which CTRC Research has
contracted, elects not to exercise its primary option on the same marketable
right. The subordinated option agreement expires in fiscal year 2000.
During 1999, the Company had outstanding receivables from employees related to
the exercise of stock options, which are repaid prior to the transfer of stock.
Additionally, during the year the Company made an interest free loan to an
officer of the Company, which was repaid prior to year-end.
Subcontractors provide the Company with consulting services and preclinical and
clinical testing related to certain of its contracts. Such costs may be included
in either research and development costs or subcontractor costs in the
accompanying consolidated financial statements. For the years ended December 31,
1999, 1998 and 1997, the Company incurred the following related-party expenses
for subcontracting costs:
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CTRC Research $ 1,037 $ 699 $ 486
Director of the Company 312 323 388
Stockholders 350 63 305
Company owned by officer/director of the Company - - 1,654
PRN 223 649 540
US Oncology 28 - -
MPI - - 21
PFK 175 1,084 404
-------- -------- --------
$ 2,125 $ 2,818 $ 3,798
======== ======== ========
</TABLE>
At December 31, 1999 and 1998, the following subcontractor costs were payable to
related parties:
<TABLE>
<CAPTION>
December 31
----------------
1999 1998
------- ------
<S> <C> <C>
CTRC Research $ 428 $ -
PRN 225 95
US Oncology 86 -
------- ------
$ 739 $ 95
======= ======
</TABLE>
During 1999 and 1998, the Company performed contract research services on behalf
of L&I and MPILEX, the Company's research and development partnerships. For the
years ended December 31, 1999, 1998 and 1997, the Company recorded the following
revenues related to these services:
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
L&I $ 4,330 $ 3,615 $ 952
MPILEX - 851 1,421
</TABLE>
F-17
<PAGE> 58
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
12. LICENSING AGREEMENTS
In 1994, the Company obtained two licensing agreements for oncology compounds
from CTRC Research. During 1995 and 1996, the Company entered into six
additional licensing agreements. All of the licensing agreements grant the
Company the right to develop and market the oncology compounds covered by such
agreements and to license the rights to such compounds to other third parties.
Under the terms of the agreements, the Company is required to pay upfront fees
and/or annual fees, as defined in the agreements. In addition, the Company must
also pay royalties upon commercialization of the compounds. Under certain
agreements, the Company is required to make milestone payments, as defined in
the agreements. At December 31, 1999, the Company had not attained any of the
events that require a milestone payment.
During 1998, the Company entered into an agreement with a drug development
institute to license a compound for development by the Company. The agreement
called for an initial payment and a warrant to purchase shares of the Company's
common stock. (See Note 9.) The agreement also requires subsequent payments to
the drug development institute at the attainment of various milestones. At
December 31, 1999, the Company had not attained any of the events that require a
milestone payment.
During 1998, the Company entered into an agreement with a customer for the
development of an oncology compound. The agreement requires the Company to
perform clinical research services valued at $3 million in exchange for a 30
percent ownership interest in the compound. The Company also has certain rights
to negotiate for additional ownership interest.
In January 1999, the Company entered into a development and licensing agreement
for an oncology compound with a pharmaceutical company. Under the terms of the
development and licensing agreement, the pharmaceutical company has the option
to further develop and commercialize the compound after completion of specified
clinical trials and, if exercised, the Company is eligible to receive royalties.
Should the pharmaceutical company decide not to exercise its option, the Company
will have to pay the pharmaceutical company milestone payments and royalties on
sales in addition to a license fee to continue development and commercialization
of the compound.
13. EMPLOYEE BENEFITS:
The Company has an employee benefit plan and trust for certain employees who
meet specified length of service requirements. The plan qualifies under Section
401(k) of the Internal Revenue Code as a salary reduction plan. Employees may
elect to contribute a certain percentage of their salary on a before-tax basis.
Employees are immediately fully vested in their contributions and begin vesting
in employer contributions after one year of service, as defined in the plan
document. The plan is a defined contribution plan with employer contributions
made solely at the discretion of the board of directors. Since adoption of the
plan, the Company has made no employer contributions. For the years ended
December 31, 1999, 1998 and 1997, administrative expenses incurred by the
Company related to this plan were not significant. The Company does not provide
postretirement benefits or postemployment benefits to its employees.
14. OPERATING LEASES
The Company has several noncancelable operating leases for office space,
equipment and the cGMP facility. Rent expense associated with these leases was
approximately $1,421, $904, and $885 for the years ended December 31, 1999, 1998
and 1997, respectively. As described in Note 11, one of the leases is with CTRC
Research, a related party.
During 1995, the Company entered into a lease agreement with a non-profit
corporation controlled by CTRC Research and the Texas Research Park Foundation
for the use of the cGMP facility. The cGMP facility will be utilized for the
manufacturing of oncology drugs. Under the terms of the lease agreement, which
expires in 2010, the Company is required to make monthly payments, which
commenced in 1998. The payments are based on a fixed monthly rate plus a
percentage of gross sales, as defined in the agreement.
In February 1996, the Company entered into a noncancelable lease agreement for
equipment to be used in the cGMP facility. The lease required the Company to
make monthly payments of approximately $16 and was to expire in 2001. Under the
terms of the agreement, the Company maintained $425 in the form of securities as
collateral for the equipment. During 1999, the Company expensed the remaining
balance of the lease commitment (see Note 10). Additionally, in
F-18
<PAGE> 59
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
January 2000, the Company paid the balance of the lease commitment, and the
securities held as collateral were released to the Company.
At December 31, 1999, future minimum lease payments under all operating leases
are as follows:
<TABLE>
<CAPTION>
Related
Party Other Total
------- -------- -------
Year ending December 31-
<S> <C> <C> <C>
2000 $ 159 $ 1,507 $ 1,666
2001 159 1,551 1,710
2002 159 1,345 1,504
2003 159 1,372 1,531
2004 159 403 562
Thereafter 891 1,169 2,060
</TABLE>
15. INCOME TAXES
As of December 31, 1999, the Company had net operating loss (NOL) carryforwards
of approximately $60 million for U.S. federal income tax purposes which are
available to reduce future taxable income will expire in 2010 through 2019. The
tax effects of significant temporary differences representing deferred income
tax assets and liabilities are as follows as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforward $ 20,342 $ 9,584
Expense provisions 341 182
Other tax differences, net 1,686 (4)
Valuation allowance (22,369) (9,762)
-------- --------
Total deferred income tax assets $ - $ -
======== ========
</TABLE>
The valuation allowance as of December 31, 1999 and 1998, represents tax
benefits, primarily NOL carryforwards, which were not realizable at that date.
For December 31, 1999, the Company's tax provision of $117 relates solely to
foreign (UK) operations. Otherwise, the Company has not provided any U.S.
deferred income taxes or UK withholding taxes on the undistributed earnings of
its UK subsidiary based on the determination that such earnings will be
indefinitely reinvested. At December 31, 1999, the cumulative undistributed
earnings of this subsidiary were approximately $240. If such earnings were not
considered indefinitely reinvested, deferred U.S. and UK withholding taxes would
have been provided after consideration of foreign tax credits.
The availability of the NOL and credit carryforwards to reduce U.S. federal
taxable income is subject to various limitations under the Internal Revenue Code
of 1986 (the Code), as amended, in the event of a greater than 50 percent
ownership change as defined in Section 382 of the Code during the applicable
three-year period. As of December 31, 1999, the Company had incurred such an
ownership change. However, the Company does not believe that this change in
ownership significantly impacts the Company's ability to utilize its NOL and tax
credit carryforwards as of December 31, 1999, because the amount of the
cumulative limitation (based upon the Company's current market capitalization)
during the carryforward period exceeds the total amount of NOL and tax credit
carryforwards.
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, legal actions and regulatory
proceedings arising in the ordinary course business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to which the
Company is a party will have a material adverse effect on the Company's
financial position or results of operations. However, due to the inherent
uncertainty of litigation, there can be no assurance that the resolution of any
particular
F-19
<PAGE> 60
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
claim or proceeding would not have a material adverse effect on the Company's
results of operations for the period in which such resolution occurred.
During 1998, the Company guaranteed a $1.0 million line of credit for Clinical
Research Group, Inc. (CRG). The guarantee gave the Company access to a network
of clinical sites managed by CRG. The guarantee is limited for a period of three
years beginning in May 1998 and ending in May 2001. If the guarantee comes to
redemption, the Company will obtain an ownership interest in CRG in accordance
with the guarantee agreement. Under the terms of the agreement, the Company
maintained $1.25 million in the form of securities as collateral for the
guarantee. During 1999, the Company expensed $750 related to this guarantee as
part of a special charge (see Note 10). At December 31, 1999, the Company had
yet to fund the guarantee, however management believes that it will be funded
during 2000 and is considered uncollectible.
17. SEGMENT REPORTING
The Company has two reportable segments: ILEX Products and ILEX Services. ILEX
Products is involved in the development of proprietary compounds for the
treatment and prevention of cancer. ILEX Services provides contract research
services for the development, manufacturing, and regulatory approval of oncology
compounds. The Company's reportable segments are strategic business units that
are managed separately because each business requires different technology and
marketing strategies.
The Company has reclassified certain prior year income statement amounts between
its two operating segments for purposes of comparability with current year
presentation. The effect of these reclassifications for the year ended December
31, 1998 is to increase research & development costs by $618, increase the cost
of contract research services by $1,562, and to reduce corporate general &
administrative costs by $2,180.
The accounting policies of the segments are the same as those of the Company.
The Company evaluates performance based on the profit or loss from operations
before income taxes.
Selected Segment Information
<TABLE>
<CAPTION>
Services Products Total
-------- -------- --------
For the Year Ended December 31, 1999
<S> <C> <C> <C>
Revenue from external customers $ 13,457 $ 4,407 $ 17,864
Intersegment revenue 11,322 -- 11,322
-------- -------- --------
Total revenue 24,779 4,407 29,186
Direct costs 20,165 20,374 40,539
In-process research and development -- 11,124 11,124
Special charges 12,847 8 12,855
-------- -------- --------
Segment operating loss (8,233) (27,099) (35,332)
Equity in losses of partnerships (3,310) (3,824) (7,134)
-------- -------- --------
Segment net loss $(11,543) $(30,923) $(42,466)
======== ======== ========
For the Year Ended December 31, 1998
Revenue from external customers $ 9,650 $ 4,622 $ 14,272
Intersegment revenue 7,513 -- 7,513
-------- -------- --------
Total revenue 17,163 4,622 21,785
Direct costs 17,015 17,500 34,515
-------- -------- --------
Segment operating income (loss) 148 (12,878) (12,730)
Equity in losses of partnerships (1,541) (4,453) (5,994)
-------- -------- --------
Segment net income (loss) $ (1,393) $(17,331) $(18,724)
======== ======== ========
</TABLE>
F-20
<PAGE> 61
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Services Products Total
-------- -------- --------
For the Year Ended December 31, 1997
<S> <C> <C> <C>
Revenue $ 5,903 $ 5,327 $ 11,230
Direct costs 4,587 6,740 11,327
-------- -------- --------
Segment operating income (loss) 1,316 (1,413) (97)
Equity in losses of partnerships (182) (4,295) (4,477)
-------- -------- --------
Segment net income (loss) $ 1,134 $ (5,708) $ (4,574)
======== ======== ========
</TABLE>
Reconciliation of Segment Information to Consolidated Totals
<TABLE>
<CAPTION>
For the Years Ended
December 31
---------------------------------
1999 1998 1997
-------- -------- --------
Research and Development Costs:
<S> <C> <C> <C>
Reportable products segment direct costs $ 20,374 $ 17,500 $ 6,740
Elimination of intersegment gross profit (4,384) (1,373) --
-------- -------- --------
Consolidated research and development costs $ 15,990 $ 16,127 $ 6,740
======== ======== ========
CRO Costs:
Reportable services segment direct costs $ 20,165 $ 17,015 $ 4,587
Elimination of intersegment expenses (6,938) (6,140) --
-------- -------- --------
Consolidated direct costs of research services $ 13,227 $ 10,875 $ 4,587
======== ======== ========
Operating net loss:
Reportable segment operating loss $(35,332) $(12,730) $ (97)
Corporate general and administrative expenses (4,063) (4,354) (6,691)
Special charges (1,027) -- --
-------- -------- --------
Consolidated operating loss $(40,422) $(17,084) $ (6,788)
======== ======== ========
Net income (loss)-
Reportable segment net loss $(42,466) $(18,724) $ (4,574)
Corporate general and administrative expenses (4,063) (4,354) (6,691)
Special charges (1,027) -- --
Interest income, net 1,700 1,850 2,583
Minority interest (82) -- --
Foreign income taxes (117) -- --
-------- -------- --------
Consolidated net loss $(46,055) $(21,228) $ (8,682)
======== ======== ========
</TABLE>
18. SUBSEQUENT EVENT (UNAUDITED)
In March 2000, the Company entered into definitive agreements to sell 3.0
million shares of its common stock at $45 per share to selected institutional
and other accredited investors. Gross proceeds to the Company are expected to be
approximately $135 million. Net proceeds to the Company are expected to be
approximately $127 million. The transaction is expected to close during the
first quarter of 2000. ILEX intends to use its share of the proceeds from the
private placement to accelerate its clinical trials and preclinical research,
with a particular focus on its late-stage clinical product candidates and
preclinical angiogenesis inhibitors, as well as for potential acquisitions of
complementary technologies, products, companies and for general corporate
purposes.
F-21
<PAGE> 62
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTIONS
- ------ ------------
<S> <C>
2.1 Plan of Merger and Acquisition Agreement dated July 16, 1999, by
and among ILEX Oncology, Inc., Convergence Pharmaceuticals,
Inc., Vikas Sukhatme, Raghurom Kalluri, Ralph Weichselbaum,
Donald Kufe, Glenn C. Rice, and Tsuyneya Ohno (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed July 30, 1999)
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated herein by reference to Exhibit 3.1 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
3.2 Bylaws of the Company, as amended (Incorporated herein by
reference to Exhibit 3.2 of the Company's Registration Statement
No. 333-17769 on Form S-1 filed December 12, 1996, as amended)
4.1 Specimen of certificate representing Common Stock, $.01 par
value, of the Company (Incorporated herein by reference to
Exhibit 4.1 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.1 Services Agreement dated November 18, 1994 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.6 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.2 Covenant Not To Sue dated September 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.7 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.3 Lease Agreement dated September 1, 1995 between CTRC Research
Foundation and the Company (Incorporated herein by reference to
Exhibit 10.10 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.4 Commercial Industrial Sublease Agreement between TRTF/CTRCRF
Building Corporation and the Company (Incorporated herein by
reference to Exhibit 10.11 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
</TABLE>
<PAGE> 63
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
10.5+ License Agreement [Oxypurinol] dated March 31, 1995 by and among
BW Welcome Co., The Welcome Foundation Limited and the Company
(Incorporated herein by reference to Exhibit 10.14 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.6+ License Agreement [Eflornithine] between ILEX Oncology, Inc. and
Marion Merrell Dow Inc. and its subsidiaries Merrell Dow
Pharmaceuticals Inc. and Marion Merrell Dow France Et Cie
(Incorporated herein by reference to Exhibit 10.17 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.7+ License Agreement [RP 60475] dated November 18, 1994 between
Rhone-Poulenc Rorer S.A. and the Company (Incorporated herein by
reference to Exhibit 10.20 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.8+ Agreement dated November 25, 1996 between Hoffmann-La Roche,
Inc. and the Company [RO23-7553] (Incorporated herein by
reference to Exhibit 10.21 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.9 Subordinated Option Agreement dated March 27, 1995 between CTRC
Research Foundation and the Company (Incorporated herein by
reference to Exhibit 10.35 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.10 Employment Agreement dated November 2, 1994 between Richard L.
Love and the Company (Incorporated herein by reference to
Exhibit 10.36 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.11 Amendment to Employment Agreement dated April 4, 1995 between
Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.37 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.12 Amendment to Employment Agreement dated September 27, 1995
between Richard L. Love and the Company (Incorporated herein by
reference to Exhibit 10.38 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.13 Employment Agreement dated August 27, 1996 between Pedro
Santabarbara, M.D., Ph.D. and the Company (Incorporated herein
by reference to Exhibit 10.43 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.14 Consulting Services Agreement dated March 16, 1995 between the
Company and Charles A. Coltman, Jr., M.D. (Incorporated herein
by reference to Exhibit 10.45 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.15 1995 Stock Option Plan for the Company (Incorporated herein by
reference to Exhibit 10.47 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.16 1996 Non-Employee Director Stock Option Plan for the Company
(Incorporated herein by reference to Exhibit 10.48 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
</TABLE>
<PAGE> 64
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
10.17 Form of Non-Employee Director Stock Option Agreement
(Incorporated herein by reference to Exhibit 10.49 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
10.18 Fourth Amended and Restated Registration Rights Agreement
between the Company, CTRC and the holders of the Series B, C, D
and E Preferred Stock (Incorporated herein by reference to
Exhibit 10.50 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.19 Form of Pledge Agreement between Cancer Therapy and Research
Center Endowment and each of Gary V. Woods, and Ruskin C.
Norman, M.D. (Incorporated herein by reference to Exhibit 10.55
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.20+ Exclusive License Agreement [Oxypurinol] dated November 27, 1996
between MGI Pharma, Inc. and the Company (Incorporated herein by
reference to Exhibit 10.56 of the Company's Registration
Statement No. 333-17769 on Form S-1 filed December 12, 1996, as
amended)
10.21 Stock Purchase Agreement dated April 11, 1995 between Daniel Von
Hoff and the Company (Incorporated herein by reference to
Exhibit 10.58 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.22 Stock Purchase Agreement dated April 11, 1995 between Richard L.
Love and the Company (Incorporated herein by reference to
Exhibit 10.60 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.23 Promissory Note dated April 12, 1995 between Daniel Von Hoff and
the Company (Incorporated herein by reference to Exhibit 10.62
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.24 Promissory Note dated April 12, 1995 between Richard L. Love and
the Company (Incorporated herein by reference to Exhibit 10.63
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.25 Ownership Restriction Agreement dated December 11, 1996 between
MPILEX Management, L.L.C., MPILEX Partners, L.P. and holders of
units thereof (Incorporated herein by reference to Exhibit 10.66
of the Company's Registration Statement No. 333-17769 on Form
S-1 filed December 12, 1996, as amended)
10.26 Agreement of Limited Partnership of MPILEX Partners, L.P. among
MPILEX Management, L.L.C. (Incorporated herein by reference to
Exhibit 10.67 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.27 Regulations of MPILEX Management, L.L.C. dated December 1996
(Incorporated herein by reference to Exhibit 10.68 of the
Company's Registration Statement No. 333-17769 on Form S-1 filed
December 12, 1996, as amended)
</TABLE>
<PAGE> 65
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
10.28 License Agreement dated December 11, 1996 between MPILEX
Partners, L.P. and the Company (Incorporated herein by reference
to Exhibit 10.69 of the Company's Registration Statement No.
333-17769 on Form S-1 filed December 12, 1996, as amended)
10.29 Registration Rights Agreement dated July 9, 1997, between the
Company and PRN Research, Inc. (Incorporated herein by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
filed August 14, 1997)
10.30 Service Agreement dated June 30, 1997, between the Company and
PRN Research, Inc. (Incorporated herein by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q filed August
14, 1997)
10.31 Drug Development and Commercialization Agreement dated March 27,
1998, between the Company and The Burnham Institute, Inc.
(Incorporated herein by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q filed May 15, 1998)
10.32 Office Building Lease Agreement dated April 8, 1998, between the
Company and N.W.A. Limited Partnership (Incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed August 14, 1998)
10.33 Consulting Services Agreement dated July 1, 1997, between the
Company and Dr. Daniel D. Von Hoff, M.D.
10.34 Stock Purchase Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q filed May 17, 1999)
10.35 Registration Rights Agreement dated January 22, 1999 between the
Company and Eli Lilly and Company (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q filed May 17, 1999)
10.36 Letter of Credit Agreement dated April 5, 1999 between the
Company and PFK (incorporated herein by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q filed May
17, 1999)
10.37 Employment Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and Glenn C. Rice (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated July 16, 1999 and filed July 30, 1999)
10.38 Registration Rights Agreement dated July 16, 1999 among ILEX
Oncology, Inc., Vikas Sukhatme, Raghuram Kalluri, Ralph
Weichselbaum, Donald Kufe, Glenn C. Rice, Tsuneya Ohno, Stephen
Dolezalek, Beth Israel Deaconess Medical Center and Arch
Development Corporation (incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K dated
July 16, 1999 and filed July 30, 1999)
10.39 Stock Purchase Agreement dated July 16, 1999 by and between ILEX
Oncology, Inc. and each of the Investors (as defined therein)
(incorporated herein by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q filed August 16, 1999)
10.40+ Distribution and Development Agreement between L&I Partners,
L.P. and Schering AG dated August 24, 1999 (incorporated herein
by reference to Exhibit 99.1 to the Company's Current Report on
Form 8-K/A filed September 21, 1999)
10.41* Letter agreement dated September 9, 1999, between the Company
and Al J. Jecminek.
11.1* Computation of Earnings Per Share
</TABLE>
<PAGE> 66
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
21.1 Subsidiaries of the Company
State of Names Under
Name Incorporation Which Doing Business
---- ------------- --------------------
ILEX Oncology Services, Inc. Delaware ILEX Services, Inc.
ILEX Products, Inc. Delaware ILEX Products, Inc.
Convergence Pharmaceuticals, Inc. Delaware ILEX Products Research Division
ILEX Services Limited United Kingdom ILEX Services Limited
23* Consent of Arthur Andersen LLP
24.1* Power of Attorney (included on signature page)
27* Financial Data Schedule
99.1* Financial Statements of L&I Partners, L.P.
* Filed herewith.
+ Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
</TABLE>
<PAGE> 1
EXHIBIT 10.41
ILEX ONCOLOGY, INC.
PROMISSORY NOTE
AND
AGREEMENT
$200,000.00 San Antonio, Texas
FOR VALUE RECEIVED, the undersigned promises to pay to Ilex Oncology,
Inc. ("ILEX") or order, at 11550 IH 10 West, Suite 100, San Antonio, Texas
78230-1064, the sum of Two Hundred Thousand and 00/100 dollars ($200,000.00),
without interest. Principal shall be payable on the earlier of (1) when the
undersigned should sell, convey or alienate his interest in the property
located at 105 Ponca Bend, San Antonio, Texas 78231 or any part thereof, or
shall be divested of his title or any interest therein any manner or way,
whether voluntarily or involuntarily; or (2) when the undersigned ceases
to be an employee of ILEX; or (3) within one month after the undersigned
completes the sale of his property located at 581 Torland Court, Sunnyvale,
California 94087; or (4) six (6) months after the date on which this agreement
is signed by the undersigned.
The undersigned agrees to cooperate fully with ILEX in causing this
note to be recorded by the County Recorder's Office as a lien on the San
Antonio, Texas property described above.
ILEX agrees to execute a subordination agreement in the event the
undersigned refinances the mortgage on the San Antonio, Texas property
described above.
Should this note or any portion thereof be referred to an attorney for
collection, a reasonable attorney's fee shall be owed by the undersigned.
Principal shall be payable in lawful money of the United States of America.
/s/ AL A. JECMINEK
-----------------------
AL A. JECMINEK
Sept 10, 1999
-----------------------
DATE
<PAGE> 1
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
EXHIBIT 11.1
COMPUTATION OF NET LOSS PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
COMPUTATION OF BASIC NET LOSS PER SHARE:
Net loss $ (46,055) $ (21,228) $ (8,682)
========== ========== ==========
Weighted average shares of common stock outstanding 15,144 12,450 12,118
========== ========== ==========
Basic net loss per share $ (3.04) $ (1.71) $ (.72)
========== ========== ==========
COMPUTATION OF DILUTED NET LOSS PER SHARE:
Net loss $ (46,055) $ (21,228) $ (8,682)
Preferred stock dividends not incurred upon assumed conversion of
preferred stock 82 -- --
---------- ---------- ----------
Loss available to common stockholders assuming conversion of subsidiary's
preferred stock $ (45,973) $ (21,228) $ (8,682)
========== ========== ==========
Weighted average number of shares of common stock and common stock equivalents
outstanding-
Weighted average shares of common stock outstanding 15,144 12,450 12,118
Weighted average number of common stock equivalents applicable
to stock options, warrants and subsidiary's preferred stock 563 411 1,204
---------- ---------- ----------
Common stock and common stock equivalents 15,707 12,861 13,322
========== ========== ==========
Diluted net loss per common stock and common stock equivalents(a) $ (2.93) $ (1.65) $ (.65)
========== ========== ==========
</TABLE>
(a) This calculation is submitted in accordance with Item 601(b)(11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement (File No. 333-25537).
/S/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1999, AND THE STATEMENT OF OPERATIONS FOR THE PERIOD
THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 43,477
<SECURITIES> 43,974
<RECEIVABLES> 7,062
<ALLOWANCES> 164
<INVENTORY> 0
<CURRENT-ASSETS> 87,692
<PP&E> 7,947
<DEPRECIATION> 3,242
<TOTAL-ASSETS> 100,354
<CURRENT-LIABILITIES> 10,324
<BONDS> 0
0
0
<COMMON> 216
<OTHER-SE> 84,363
<TOTAL-LIABILITY-AND-EQUITY> 100,354
<SALES> 0
<TOTAL-REVENUES> 17,864
<CGS> 0
<TOTAL-COSTS> 29,217
<OTHER-EXPENSES> 25,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (45,938)
<INCOME-TAX> 117
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,055)
<EPS-BASIC> (3.04)
<EPS-DILUTED> (3.04)
</TABLE>
<PAGE> 1
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
EXHIBIT 99.1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the General Partners of
L&I Partners, L.P.:
We have audited the accompanying balance sheets of L&I Partners, L.P. (a
Delaware limited partnership in the development stage), as of December 31, 1998
and 1997, and the related statements of operations, partners' capital and cash
flows for the year ended December 31, 1998, and for the period from inception
(May 2, 1997) through December 31, 1997, and for the cumulative period from
inception (May 2, 1997) through December 31, 1998. These financial statements
are the responsibility of the Partnership'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 L&I Partners, L.P., as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the year ended December 31, 1998, and for the period from inception through
December 31, 1997, and for the cumulative period from inception through December
31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
January 29, 1999
<PAGE> 2
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
L&I PARTNERS, L.P.
(A Development Stage Company)
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31
------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 1,523 $ 60 $ 353
INVENTORY 1,250 -- --
PREPAID EXPENSES 126 4 --
---------- ---------- ----------
Total assets $ 2,899 $ 64 $ 353
========== ========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Trade accounts payable $ 1,567 $ -- $ 3,210
Related party payable 1,302 737 1,202
Accrued interest payable 160 -- --
Advances in connection with distribution agreement 6,250 -- --
---------- ---------- ----------
Total liabilities 9,279 737 4,412
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL:
Limited partners' capital (6,296) (666) (4,006)
General partner's capital (64) (7) (40)
Receivable from general partner (20) -- (13)
---------- ---------- ----------
Total partners' capital (6,380) (673) (4,059)
---------- ---------- ----------
Total liabilities and partners' capital $ 2,899 $ 64 $ 353
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
L&I PARTNERS, L.P.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Cumulative
From
Inception Inception
Year Ended Through Through
December 31 December 31, December 31,
1999 1998 1997 1999
---------- ---------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE FROM DISTRIBUTION AGREEMENT $ 3,750 $ -- $ -- $ 3,750
---------- ---------- ---------- ----------
OPERATING EXPENSES:
General and administrative 384 154 -- 538
Costs of contract research services
performed by related parties 7,349 4,875 1,202 13,426
Subcontractor costs 671 2,755 5,520 8,946
Licensing fees 2,935 -- -- 2,935
---------- ---------- ---------- ----------
Total operating expenses 11,339 7,784 6,722 25,845
---------- ---------- ---------- ----------
OPERATING LOSS (7,589) (7,784) (6,722) (22,095)
---------- ---------- ---------- ----------
INTEREST INCOME 63 68 6 137
---------- ---------- ---------- ----------
INTEREST EXPENSE (160) -- -- (160)
---------- ---------- ---------- ----------
NET LOSS $ (7,686) $ (7,716) $ (6,716) $ (22,118)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 4
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
L&I PARTNERS, L.P.
(A Development Stage Company)
STATEMENTS OF PARTNERS' CAPITAL
(In Thousands)
<TABLE>
<CAPTION>
Limited General
Partners' Partner's
Capital Capital Total
--------- --------- ---------
<S> <C> <C> <C>
BALANCE, inception, May 2, 1997 $ -- $ -- $ --
Contributions 2,643 27 2,670
Receivable from general partner -- (13) (13)
Net loss (6,649) (67) (6,716)
--------- --------- ---------
BALANCE, December 31, 1997 (4,006) (53) (4,059)
Contributions 10,979 123 11,102
Net loss (7,639) (77) (7,716)
--------- --------- ---------
BALANCE, December 31, 1998 (666) (7) (673)
Contributions (unaudited) 1,979 20 1,999
Receivable from general partner (unaudited) -- (20) (20)
Net loss (unaudited) (7,609) (77) (7,686)
--------- --------- ---------
BALANCE, December 31, 1999 (unaudited) $ (6,296) $ (84) $ (6,380)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 5
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
L&I PARTNERS, L.P.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Cumulative
From
Inception Inception
Year Ended Through Through
December 31 December 31, December 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,686) $ (7,716) $ (6,716) $ (22,118)
Revenue from distribution agreement (3,750) -- -- (3,750)
Adjustments to reconcile net loss to net cash
used in operating activities-
Increase in assets-
Inventory (1,250) -- -- (1,250)
Prepaid expenses (122) (4) -- (126)
Increase (decrease) in liabilities-
Accounts payable to related parties 1,014 3,925 1,202 6,141
Trade accounts payable 1,567 (3,210) 3,210 1,567
Accrued interest payable 160 -- -- 160
------------ ------------ ------------ ------------
Net cash used in operating activities (10,067) (7,005) (2,304) (19,376)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances for distribution agreement 10,000 -- -- 10,000
Capital contributions 1,530 6,712 2,657 10,899
------------ ------------ ------------ ------------
Net cash provided by financing activities 11,530 6,712 2,657 20,899
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,463 (293) 353 1,523
CASH AND CASH EQUIVALENTS, beginning of period 60 353 -- --
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,523 $ 60 $ 353 $ 1,523
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Capital contributions of accounts
payable to related parties $ 449 $ 4,390 $ -- $ 4,839
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 6
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
L&I PARTNERS, L.P.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(Amounts in Thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Control
L&I Partners, L.P. (L&I), was founded in May 1997 as a joint venture between
Ilex Oncology, Inc. (Ilex), and Leukosite, Inc. (Leukosite). L&I was formed to
develop and commercialize a monoclonal antibody (Campath 1-H) initially for the
treatment of chronic lymphocytic leukemia, pursuant to an agreement of limited
partnership and a license agreement between Leukosite, Ilex and L&I. The
development and commercialization activities of L&I are jointly managed by
Leukosite and Ilex who will generally share equally in profits and losses (see
Note 4). The joint venture expires in 2017, but provides for either partner to
purchase the other partner's ownership interest in the joint venture in the
event of an unresolved deadlock (relating to the activities of the partnership)
after the earlier of a change in control (as defined therein) of the other party
or October 31, 2000. In addition, in the event that one party is unable or
unwilling to fulfill its funding obligations to the joint venture, then in
certain circumstances, the party that funds the joint venture shall gain control
of the management of the joint venture, subject to certain catch-up rights of
the other party.
L&I is in the development stage and has not yet generated operating revenues
from the sale of product nor is there any assurance of future revenues. Since
inception, L&I has received significant support from Leukosite and Ilex.
Although its affiliation with Leukosite and Ilex puts it in a preferred position
to develop and commercialize a product, L&I continues to be subject to the risks
and challenges associated with other companies in a comparable stage of
development including the ability to obtain adequate financing to fund
operations and development, dependence on key individuals and entities,
competition from larger companies and successful marketing of its products.
Accordingly, L&I's future success is uncertain.
During the period from inception (May 2, 1997) through December 31, 1999, L&I
incurred net losses of approximately $22.1 million (unaudited) and, at December
31, 1999, had negative working capital and partners' capital of approximately
6.4 million, unaudited. The ability of L&I to continue as a going concern is
dependent upon the ongoing support of its partners, funding from the
distribution agreement (Note 4) and ultimately the successful manufacturing and
marketing of their product.
Under the partnership structure, Ilex and Leukosite each hold a 49.5 percent
limited partner interest and L&I LLC holds a 1 percent general partner interest
in L&I. Ilex and Leukosite each hold a 50 percent interest in L&I LLC.
In late 1999, Millennium Pharmaceutical, Inc. (Millennium), acquired Leukosite,
Inc. Accordingly, Millennium acquired the rights granted to Leukosite by the
joint venture and licensing agreements previously mentioned.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles and are not the basis for reporting
taxable income to the partners. The financial statements include the accounts of
L&I only.
<PAGE> 7
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
Estimates in Financial Statements
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 liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ from those estimates.
Statement of Cash Flows
L&I considers all highly liquid investments with maturities of three months or
less at the date of purchase to be cash equivalents.
Income Taxes
Income and deductions of L&I for federal income tax purposes are includible in
the tax returns of the individual partners. Accordingly, no recognition has been
given to federal income taxes in the accompanying financial statements of L&I.
Price Risk Management Activities
L&I may enter into exchange traded futures and options contracts, forward
contracts, swaps and other financial instruments with third parties to hedge
foreign currency commitments. As of December 31, 1999, L&I had not entered into
any such agreements.
Allocation of Net Income (Loss) and Cash Distributions
Net income (loss) is allocated to partners based on their effective ownership
interest in the operating results of L&I. L&I is not required to and has not
made any cash distributions.
2. RELATED-PARTY TRANSACTIONS:
L&I utilizes services extensively from both its limited partners. These services
include contract research, development, scientific expertise, business
development services and general management. The limited partners also provide
certain general management services free of charge to L&I, however, the fair
value of such services is immaterial to the results of operations of L&I for the
period from inception (May 2, 1997) through December 31, 1999. During the years
ended December 31, 1999 and 1998, and for the period from May 2, 1997, through
December 31, 1997, and for the cumulative period from inception through December
31, 1999, L&I incurred the following related-party expenses for contract
research services (in thousands):
<TABLE>
<CAPTION>
Cumulative From
Inception Through
December 31,
1999 1998 1997 1999
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ILEX $ 4,330 $ 3,615 $ 952 $ 8,897
Leukosite 3,019 1,260 250 4,529
---------- ---------- ---------- ----------
$ 7,349 $ 4,875 $ 1,202 $ 13,426
========== ========== ========== ==========
</TABLE>
Of the expenses incurred in 1999 and 1998, $449 (unaudited) and $4,390 were
settled by contributions from ILEX and Leukosite.
L&I had outstanding payables to ILEX and Leukosite related to these services
that are presented as accounts payable to related parties in the accompanying
financial statements.
<PAGE> 8
ILEX ONCOLOGY, INC.
1999 ANNUAL REPORT ON FORM 10-K
- --------------------------------------------------------------------------------
3. LICENSING AGREEMENTS:
L&I has sublicensed the rights to Campath 1-H from Leukosite. The licensing
agreement grants L&I the right to develop and market the product and to license
the rights to the compound to other third parties. Under terms of the agreement,
L&I is required to pay certain fees and royalties to Leukosite as defined in the
agreement. During 1999, L&I paid $2,935 in licensing fees in connection with
this agreement.
4. DISTRIBUTION AND DEVELOPMENT AGREEMENT:
In August 1999, L&I entered into a distribution and development agreement with
Schering AG. The agreement grants Schering AG exclusive marketing and
distribution rights to CAMPATH 1-H in the U.S., Europe and the rest of the world
except Japan and East Asia, where L&I has retained rights. CAMPATH 1-H is a
humanized monoclonal antibody in late-stage development. L&I submitted the final
segment of the Biologics License Application (BLA) for CAMPATH 1-H with the FDA
in December 1999. The agreement that provides advances to the partnership of up
to $30 million in up-front and milestone payments. In 1999, L&I received $10,000
of these payments. The advances will be reduced by amounts of services rendered
by Leukosite/Millennium and Ilex in connection with the development of CAMPATH
1-H. The 1999 revenues recorded by L&I are based upon the research and
development expenses they incurred which, pursuant to the distribution
agreement, offset the advance balances due Schering AG.
