<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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.)
4545 HORIZON HILL BLVD.
SAN ANTONIO, TEXAS 78229
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (210) 949-8200
----------------
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 [ ].
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF
NOVEMBER 2, 2000 IS 24,931,064.
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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
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INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations - Three and Nine Month Periods Ended
September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows - Nine Month Period Ended
September 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
EXHIBIT 11 - SCHEDULE OF COMPUTATION OF NET LOSS PER SHARE
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
</TABLE>
2
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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 29,214 $ 43,477
Investments in marketable securities 106,196 33,758
Restricted investments 1,250 1,400
Receivables, net of allowance for doubtful accounts of
$284 and $164 in 2000 and 1999, respectively
Billed 5,353 4,414
Unbilled 2,992 2,484
Employee 9 245
Interest 4,109 1,338
Prepaid expenses and other 1,246 576
--------- ---------
Total current assets 150,369 87,692
--------- ---------
NONCURRENT ASSETS:
Investments in marketable securities 66,173 10,216
Restricted investments 3,550 275
Other assets 192 --
Investments in and advances to-
Research and development partnership (5,996) (2,534)
--------- ---------
63,919 7,957
--------- ---------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $4,377 and $3,242 in 2000 and 1999, respectively 6,203 4,705
--------- ---------
Total assets $ 220,491 $ 100,354
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
3
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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
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CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Shares)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable-
Related parties $ 57 $ 165
Other 6,364 2,462
Accrued subcontractor costs-
Related parties 596 739
Other 2,109 1,913
Accrued liabilities 3,333 2,488
Deferred revenue 4,578 2,557
--------- ---------
Total current liabilities 17,037 10,324
--------- ---------
LONG-TERM LIABILITIES 373 369
--------- ---------
17,410 10,693
--------- ---------
COMMITMENTS AND CONTINGENCIES (see Note 11)
MINORITY INTEREST 5,007 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; 100,000,000 shares authorized;
24,965,284 and 21,590,425 shares issued; 24,926,284 and
21,551,425 shares outstanding in 2000 and 1999, respectively 250 216
Additional paid-in capital 292,244 163,821
Accumulated deficit (93,822) (77,338)
Deferred compensation -- (1,603)
Accumulated other comprehensive loss (81) --
Less - Treasury stock at cost; 39,000 shares in 2000 and 1999 (517) (517)
--------- ---------
Total stockholders' equity 198,074 84,579
--------- ---------
Total liabilities and stockholders' equity $ 220,491 $ 100,354
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
4
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ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
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CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Product development $ 851 $ 1,078 $ 2,510 $ 3,147
Contract research services 6,565 3,914 19,049 9,482
-------- -------- -------- --------
Total revenue 7,416 4,992 21,559 12,629
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development costs 10,820 3,890 22,974 11,387
Direct cost of research services 4,638 3,824 15,379 10,324
General and administrative 1,821 754 4,125 2,944
In-process research and development -- 11,124 -- 11,124
Special charges -- -- -- 13,882
-------- -------- -------- --------
Total operating expenses 17,279 19,592 42,478 49,661
-------- -------- -------- --------
OPERATING LOSS (9,863) (14,600) (20,919) (37,032)
OTHER INCOME (EXPENSE):
Equity in losses of-
Research and development partnership (2,088) (1,964) (3,499) (3,851)
Contract research affiliate -- -- -- (3,310)
Interest income, net 3,464 375 8,296 915
Minority interest in consolidated subsidiary (75) (7) (225) (7)
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (8,562) (16,196) (16,347) (43,285)
Provision for foreign income taxes (6) -- 137 --
-------- -------- -------- --------
NET LOSS $ (8,556) $(16,196) $(16,484) $(43,285)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.34) $ (1.00) $ (0.69) $ (3.11)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 24,914 16,168 23,929 13,928
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
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ILEX ONCOLOGY, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,484) $ (43,285)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,497 1,745
Special charges -- 13,882
In-process research and development -- 11,124
Net activity of research and development partnership and contract
research affiliate 3,462 1,398
Minority interest 225 7
Deferred compensation expense for consultants options 1,222 105
Non-cash compensation expense 16 --
Loss on disposal of equipment 30 --
Changes in operating assets and liabilities:
Increase in receivables, net (3,982) (984)
Increase in prepaid expenses and other (670) (14)
(Increase) decrease in other non-current assets (192) 75
Increase in accounts payable and accrued liabilities 4,678 308
Increase in deferred revenue 2,021 179
Decrease in other long-term liabilities (24) (27)
--------- ---------
Net cash used in operating activities (8,201) (15,487)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net activity of marketable securities' transactions (128,395) (1,018)
Net activity in restricted investments (3,125) --
Advances to research and development partnership -- (1,000)
Acquisitions, net of cash acquired (136) (328)
Purchase of property and equipment (2,832) (940)
--------- ---------
Net cash used in investing activities (134,488) (3,286)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for cash, net of issuance costs 127,186 23,014
Payment of note receivable assumed in acquisition -- (1,000)
Proceeds from sale of subsidiary's preferred stock -- 5,000
Collection of receivables on sale of common stock -- 46
Exercise of options and warrants 1,636 --
Payment of cash dividends on subsidiary's preferred stock (300) --
Principal payments for capital lease obligations (15) --
--------- ---------
Net cash provided by financing activities 128,507 27,060
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (81) 12
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (14,263) $ 8,299
CASH AND CASH EQUIVALENTS, beginning of period 43,477 6,581
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 29,214 $ 14,880
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
6
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SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share Information, Per Share Information or As
Otherwise Indicated) (Unaudited)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying interim Consolidated Financial Statements presented herein
include the accounts of ILEX Oncology, Inc. and its subsidiaries ("the Company"
or "ILEX"). All significant intercompany transactions and accounts have been
eliminated in consolidation. These interim consolidated financial statements
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In management's opinion, all
adjustments that are necessary for a fair presentation of financial position and
results of operations have been made.
It is recommended that these interim consolidated financial statements are read
in conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999. The
results of operations for any interim period are not necessarily indicative of
the results of operations for the entire year. Certain prior period amounts have
been reclassified to conform to the current period presentation.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance in applying generally accepted accounting
principles related to revenue recognition issues. SAB 101 is required to be
implemented no later than the fourth quarter of fiscal years beginning after
December 15, 1999. The Company is currently evaluating the effect, if any, that
the implementation of SAB 101 will have on its financial statements and revenue
recognition polices.
2. MERGERS AND ACQUISITIONS
In March 2000, ILEX Oncology Services, Inc. ("ILEX Services") signed a
multi-year services agreement with British Biotech plc ("British Biotech") to
provide contracted drug development services to complete the ongoing clinical
development of British Biotech's drug, marimastat, in North America. In
conjunction with the signing of the agreement, ILEX Services acquired the
assets, consisting primarily of office equipment, of the Annapolis, Maryland
office of British Biotech for approximately $136.
3. FIXED ASSETS
During the third quarter of 2000, the Company disposed of fully depreciated
assets, which consisted primarily of computers and related peripherals, in the
amount of $334. Net loss for the nine months ended September 30, 2000 includes a
loss of $30 resulting from the disposition of certain lab and computer
equipment.
4. STOCKHOLDERS' EQUITY
In March 2000, the Company sold 3.0 million shares of its common stock at $45
per share to selected institutional and other accredited investors. Gross
proceeds to the Company were approximately $135 million. Net proceeds to the
Company were approximately $127 million. ILEX is using 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.
In May 2000, ILEX shareholders unanimously approved a proposal to amend the
Company's Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of the Company's common stock from 40 million to 100
million.
In July 1999, the Company acquired Convergence Pharmaceuticals, Inc.
("Convergence"), of Boston, Massachusetts, a privately held research-based
pharmaceutical company with an emerging portfolio of angiogenesis and DNA repair
inhibitors. In connection 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. Previously, the options vested at a rate of 25 percent per year
beginning in July 2000. In April 2000, the Company elected to immediately vest
the
7
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ILEX ONCOLOGY, INC.
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options. Using an option pricing model, the fair value of the options was
calculated as approximately $1.8 million, which resulted in the recognition of
approximately $1.2 million in consulting expense during the first six months of
2000.
ILEX acquired Convergence in exchange for 1.0 million shares of the Company's
common stock and an additional earn-out of up to 1.0 million shares to be issued
to Convergence's founders, paid out in two equal increments of 500,000 shares,
if certain development milestones are met. The first milestone is defined as the
initiation of treatment of the first patient following initiation of a Phase I
trial of one of the Convergence compounds in the United States or Europe, which
must occur no later than December 31, 2001. The second milestone is defined as
the initiation of treatment of the first patient following initiation of a Phase
II trial of one of the Convergence compounds in the United States or Europe,
which must occur no later than December 31, 2002. The Company believes the first
milestone will be met in the fourth quarter of 2000, and anticipates a
significant non-cash income statement charge at that time.
5. LOSS PER SHARE
Diluted net loss per share is equal to basic net loss per share, as the effect
of all common stock equivalents is antidilutive.
6. STATEMENTS OF CASH FLOWS:
Non-cash financing and investing activities for the nine months ended September
30, 2000 and 1999, include the following:
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Issuance of common stock for acquisition $ -- $9,938
Issuance of common stock to PRN -- 6,292
Assets acquired in acquisitions -- 774
Liabilities acquired in acquisitions -- 2,199
Settlement of accounts payable through acquisition -- 566
Cashless exercise of warrants 2 2
Purchases of equipment under capital leases 57 --
</TABLE>
Cash paid during the year for the nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest $ 1 $ --
Foreign income taxes 98 --
</TABLE>
7. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. The
following table presents the components of the Company's comprehensive loss:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (8,556) $(16,196) $(16,484) $(43,285)
Other comprehensive loss:
Foreign currency translation adjustments 2 12 (81) 12
-------- -------- -------- --------
Comprehensive loss $ (8,554) $(16,184) $(16,565) $(43,273)
======== ======== ======== ========
</TABLE>
8. LICENSING AGREEMENTS
In 1998, ILEX entered a development agreement with Symphar S.A. ("Symphar"), a
Swiss company, for the development of APOMINE(TM) (SR-45023A). ILEX and Symphar
share rights to this compound under this agreement. In 2000, Symphar and ILEX
amended their development agreement to allow the Company to make a cash payment
in the amount of $1.0 million in exchange for Symphar's commitment not to
exercise its exclusive right to commercialize APOMINE with any third party for a
period of one year ending April 1, 2001. This payment was made and expensed in
the second quarter of 2000, and is creditable towards the Company's development
services commitment under the original agreement.
8
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In July 2000, the Company entered into an agreement with Knoll AG (BASF Pharma)
for an exclusive, worldwide license of ILX-651, a synthetic pentapeptide analog
of dolastatin. The compound is ready for an Investigational New Drug (IND)
filing and is expected to begin human clinical trials shortly. The Company has
incurred $4.0 million in license issue fees as of September 30, 2000, of which
$1.0 million was paid during the third quarter of 2000, and $3.0 million will be
paid in cash or the Company's common stock by March 31, 2001. The Company may be
required to make future license maintenance fees in either cash or unrestricted
stock in accordance with the agreement if certain drug development and time
based milestones are met.
9. INVESTMENTS IN AND ADVANCES TO RESEARCH AND DEVELOPMENT PARTNERSHIP
In May 1997, the Company entered into an agreement with LeukoSite, Inc., now
Millennium Pharmaceuticals, Inc. ("Millennium"), for an equally owned joint
venture, L&I Partners, L.P., for research collaboration endeavors. In March
2000, the joint venture changed its name to Millennium & ILEX Partners, L.P.
("M&I Partners"). The Company accounts for its investment in M&I Partners using
the equity method of accounting.
M&I Partners has received a total of $20.0 million in advances from Schering AG
("Schering") in accordance with a distribution agreement signed in August 1999,
of which $10.0 million has been received during the first six months of 2000.
These advances from Schering are decreased and revenue recognized at an amount
equal to 110% of research and development fees incurred by the partners, and
charged to the partnership. Additionally, interest expense is accrued on the
outstanding balance of advances from Schering at the prime rate plus one
percent. The Company has recorded product development revenue related to the
research and development fees in the amount of $0.8 million and $2.5 million for
the three and nine-month periods ended September 30, 2000, respectively. For the
three and nine-month periods ended September 30, 1999, the Company has recorded
product development revenue of $1.1 and $3.1 million, respectively.
In June 2000, M&I Partners made a $2.5 million payment to BTG International
Limited ("BTG") pursuant to a licensing agreement for CAMPATH. The payment was
due to achieving a milestone under the distribution agreement between the
partnership and Schering. The following is summarized financial information for
M&I Partners (unaudited):
Summarized Income Statement Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 2,530 $ 1,069 $ 6,938 $ 1,069
Operating expenses 6,460 4,984 13,411 8,802
Operating loss (3,930) (3,915) (6,473) (7,733)
Net loss (4,176) (3,928) (6,998) (7,741)
</TABLE>
Summarized Balance Sheet Information
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets $ 4,361 $ 1,649
Liabilities 17,739 8,029
-------- --------
Partners' equity $(13,378) $ (6,380)
======== ========
</TABLE>
10. 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 ("the Code") as a salary reduction plan.
Employees may elect to contribute a certain percentage of their salary on a
before-tax basis upon meeting enrollment requirements. In January 2000, the
Company elected to begin making voluntary contributions to employee accounts.
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.
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In May 2000, the shareholders approved a proposal to ratify the adoption of the
Employee Stock Purchase Plan ("the Purchase Plan") of the Company. The Purchase
Plan allows eligible employees to purchase shares of common stock periodically
through their accumulated payroll deductions during offering periods as defined
in the Purchase Plan. Initially, 250,000 shares of common stock will be
available for issuance under the Purchase Plan.
Additionally, shareholders approved a proposal to ratify the adoption of the
2000 Employee Stock Compensation Plan ("the Plan") of the Company. The Plan
authorizes a committee of the Board of Directors to issue options intended to
qualify as incentive stock options ("ISOs") as defined in Section 422 of the
Code, stock options that are not intended to conform to the requirements of
Section 422 of the Code ("Non-ISOs"), and restricted stock awards. The total
number of shares of common stock with respect to which awards may be granted
under the Plan is 3.0 million.
11. COMMITMENTS AND CONTINGENCIES
In July 2000, the Company entered a capital lease agreement for office
equipment, with a lease term of 36 months and minimum lease payments of $1 per
month. The Company has recorded $57 as capital equipment, and amortization and
interest expense was $5 and $1, respectively, for the three and nine-months
ended September 30, 2000. At September 30, 2000, the Company had capital lease
obligations of approximately $42, including $14 payable within one year.
In July 2000, the Company entered into an agreement to lease its new corporate
headquarters. The commencement date of the operating lease is October 20, 2000,
with a lease term of eight years. Future minimum lease payments under this new
lease agreement will be between $1.2 million and $1.3 million per year through
November 1, 2008. The lease required a deposit of approximately $140, which was
recorded as an other non-current asset. Additionally, in connection with the
lease the Company obtained a letter of credit, with the lessor as beneficiary,
in the amount of $2.8 million. The letter of credit is 125% collateralized with
$3.6 million in restricted cash.
On August 16, 2000, Cytokine Pharmasciences Inc. ("CPI"), successor-in-interest
to Cytokine Networks, Inc. ("CNI"), filed a lawsuit against Convergence
Pharmaceuticals, Inc. ("Convergence"), a Delaware corporation and wholly owned
indirect subsidiary of ILEX Oncology, Inc., and Glenn Rice, Ph.D. ("Dr. Rice")
in the Superior Court Department of Trial Court of the Commonwealth of
Massachusetts. The suit alleges that Convergence's predecessor which was merged
into Convergence, through Dr. Rice, used intellectual property of CNI and
requests unspecified damages and a permanent injunction against Dr. Rice and
Convergence from using or disclosing any intellectual property developed in
whole or in part by Dr. Rice while he was employed by CNI. The Company believes
there are meritorious defenses to the claims and intends to defend against the
lawsuit vigorously. In addition, the Company believes that the Company and
Convergence are entitled to indemnification for damages from certain
stockholders of Convergence, costs and expenses arising out of this lawsuit up
to $10.0 million under the agreement relating to the acquisition of
Convergence.
Additionally, the Company has entered into Stock Escrow and Pledge Agreements
("the Agreements") with certain stockholders of Convergence to secure the
indemnity obligations under the agreement relating to the acquisition of
Convergence as they may relate to the CPI lawsuit. The Agreements specify that
312,500 shares of common stock, that will be issued upon achieving certain
milestones, will be placed in escrow and grants a security interest to the
Company. These shares may be released from escrow and replaced with cash
deposited in escrow in total, or in part, using an amount calculated in
accordance with the Agreements. The shares will be considered issued and
outstanding by the Company, and therefore eligible for payment of any cash
dividends and entitled to vote on all corporate matters submitted to
stockholders for vote. The Agreements will terminate in the event the lawsuit is
settled or resolved, all claims are either dismissed or all rights of appeal
have been exhausted or have expired.
12. SEGMENT REPORTING
The Company has two reportable segments: ILEX Products, Inc. ("ILEX Products")
and ILEX Services. ILEX Products develops 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, as each business requires different technology and
marketing strategies.
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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 three and
nine-months ended September 30, 1999 is to increase the cost of contract
research services and to decrease corporate general & administrative costs by
$98 and $423, respectively. 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>
Three Months Ended September 30, 2000 Nine Months Ended September 30, 2000
------------------------------------- ------------------------------------
Services Products Total Services Products Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $ 6,565 $ 851 $ 7,416 $ 19,049 $ 2,510 $ 21,559
Intersegment revenue 2,883 -- 2,883 8,131 -- 8,131
--------- --------- --------- --------- --------- ---------
Total revenue 9,448 851 10,299 27,180 2,510 29,690
Direct costs 6,252 12,089 18,341 19,525 26,959 46,484
--------- --------- --------- --------- --------- ---------
Segment operating income (loss) 3,196 (11,238) (8,042) 7,655 (24,449) (16,794)
Equity in losses of partnerships -- (2,088) (2,088) -- (3,499) (3,499)
--------- --------- --------- --------- --------- ---------
Segment net income (loss) $ 3,196 $ (13,326) $ (10,130) $ 7,655 $ (27,948) $ (20,293)
========= ========= ========= ========= ========= =========
Total Assets $ 16,690 $ (4,578) $ 12,112
Corporate 278,878
Elimination of intersegment balances (70,499)
---------
Consolidated total assets $ 220,491
=========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999 Nine Months Ended September 30, 1999
------------------------------------- ------------------------------------
Services Products Total Services Products Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue from external customers $ 3,914 $ 1,078 $ 4,992 $ 9,482 $ 3,147 $ 12,629
Intersegment revenue 2,509 -- 2,509 8,192 -- 8,192
-------- -------- -------- -------- -------- --------
Total revenue 6,423 1,078 7,501 17,674 3,147 20,821
Direct costs 5,095 5,128 10,223 15,616 14,287 29,903
In-process research and development -- 11,124 11,124 -- 11,124 11,124
Special charges -- -- -- 12,847 8 12,855
-------- -------- -------- -------- -------- --------
Segment operating loss 1,328 (15,174) (13,846) (10,789) (22,272) (33,061)
Equity in losses of partnerships -- (1,964) (1,964) (3,310) (3,851) (7,161)
-------- -------- -------- -------- -------- --------
Segment net loss $ 1,328 $(17,138) $(15,810) $(14,099) $(26,123) $(40,222)
======== ======== ======== ======== ======== ========
Total Assets $ 15,112 $ 2,041 $ 17,153
Corporate 88,436
Elimination of intersegment balances (59,361)
--------
Consolidated total assets $ 46,228
========
</TABLE>
Reconciliation of Segment Information to Consolidated Totals
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Research and development costs:
Reportable products segment direct costs $ 12,089 $ 5,128 $ 26,959 $ 14,287
Elimination of intersegment gross profit (1,269) (1,238) (3,985) (2,900)
-------- -------- -------- --------
Consolidated research and development costs $ 10,820 $ 3,890 $ 22,974 $ 11,387
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2000 1999 2000 1999
-------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Direct costs of research services:
Reportable services segment direct costs $ 6,252 $ 5,095 $ 19,525 $ 15,616
Elimination of intersegment expenses (1,614) (1,271) (4,146) (5,292)
-------- -------- -------- --------
Consolidated direct costs of research services $ 4,638 $ 3,824 $ 15,379 $ 10,324
======== ======== ======== ========
Reportable segment operating loss $ (8,042) $(13,846) $(16,794) $(33,061)
Corporate general and administrative (1,821) (754) (4,125) (2,944)
Special charges -- -- -- (1,027)
-------- -------- -------- --------
Consolidated operating loss $ (9,863) $(14,600) $(20,919) $(37,032)
======== ======== ======== ========
Net loss:
Reportable segment net loss $(10,130) $(15,810) $(20,293) $(40,222)
Corporate general and administrative (1,821) (754) (4,125) (2,944)
Special charges -- -- -- (1,027)
Interest income, net 3,464 375 8,296 915
Minority interest in consolidated subsidiary (75) (7) (225) (7)
Provision for foreign income taxes 6 -- (137) --
-------- -------- -------- --------
Consolidated net loss $ (8,556) $(16,196) $(16,484) $(43,285)
======== ======== ======== ========
</TABLE>
12
<PAGE> 13
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
ITEM 2. 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 the three and nine-month
periods ended September 30, 2000. 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 diversified portfolio of
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 operate through two reportable segments: ILEX Products, Inc. ("ILEX
Products"), through which we develop our own portfolio of anticancer compounds,
and ILEX Oncology Services, Inc. ("ILEX Services"), which is our full service
oncology-focused 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 research and development for our products,
and gives us access to product in-licensing opportunities.
We received notification from the U.S. Food and Drug Administration
("FDA") that our lead product candidate, CAMPATH (alemtuzumab), will be reviewed
by the Oncologic Drugs Advisory Committee ("ODAC") at the panel's December 2000
meeting. CAMPATH is an investigational humanized monoclonal antibody, and has
received "fast track" designation from the FDA. The FDA has also granted orphan
drug designation to CAMPATH. The development partnership, Millennium & ILEX
Partners, L.P. ("M&I Partners") submitted the Biologics License Application
("BLA") to the U.S. Food and Drug Administration ("FDA") for CAMPATH in December
1999. The application was accepted for filing in February 2000, and the FDA
returned a complete response letter to the partnership in June 2000. M&I
Partners submitted a response to the FDA in August 2000.
Additionally, the Marketing Authorization Application for CAMPATH was
accepted for review in April 2000 by the European Agency for the Evaluation of
Medicinal Products ("EMEA"). The application, which was submitted in late March,
will be reviewed under the EMEA's centralized procedure, required for
biotechnology products. The application is based largely on the results of a
pivotal clinical trial, which were first reported at the European Haematology
Association meeting in Barcelona, Spain in June 1999.
During the third quarter, we initiated clinical trials at a research
institution in France with our drug, NM-3, which is an orally active small
molecule inhibitor of angiogenesis, the process in which tumors develop new
blood vessels to support their growth. This trial will evaluate NM-3's
side-effect profile and preliminary efficacy as well as determine a safe dose
for future studies. In the United States, ILEX plans to submit an
Investigational New Drug Application ("IND") to the FDA by the end of 2000 and
intends to begin clinical trials during the first quarter of 2001.
Additionally, in October 2000, we opened a Phase II clinical study of
APOMINE(TM) for patient accrual in Europe. APOMINE is a potent, orally active
bisphosphonate tetra-ester derivative being co-developed by ILEX and Symphar.
The clinical trial will begin evaluating the effectiveness of APOMINE in the
treatment of prostate cancer and will further study the drug's safety in this
patient category. According to the National Cancer Institute, prostate cancer is
the most common tumor in men in the United States, diagnosed in almost one-fifth
of American males during their lifetimes.
In July 2000, we entered into an agreement with Knoll AG (BASF Pharma)
for an exclusive, worldwide license of ILX-651, a synthetic pentapeptide analog
of dolastatin. The compound is ready for an IND filing and is expected to begin
human clinical trials shortly. Additionally, ILEX and BASF Pharma have agreed on
material business terms and are now finalizing an agreement giving ILEX an
option for an exclusive worldwide license to Elinafide, another anti-cancer
compound, which is in clinical development.
We currently have no products available for sale. We have incurred
losses since inception and had an accumulated deficit through September 30, 2000
of $93.8 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 significant
revenue from the sale of our drug candidates.
13
<PAGE> 14
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
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, and if CAMPATH is successfully commercialized, we will receive a
portion of the profits generated by its sale as equity in income of research and
development partnership. M&I Partners may not obtain marketing approval of
CAMPATH, successfully commercialize it, or ever generate profits from its sale.
We have contributed significantly to the development of CAMPATH on
behalf of M&I Partners. M&I Partners pays us for these services. We have
historically accounted for these CAMPATH development activities as follows:
o our operating revenue includes product development revenue we receive from
M&I Partners;
o our research and development expenses include all of our development costs
for CAMPATH, which are largely offset by product development revenue we
receive; and
o our actual share of CAMPATH operating losses is reported as equity in
losses of research and development partnership.
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.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
OPERATING REVENUES
Total revenue increased to $7.4 million in the third quarter of 2000,
from $5.0 million in the third quarter of 1999. The increase of $2.4 million, or
48%, was due to an additional $2.7 million of CRO revenues, partially offset by
a decrease of $0.2 million in product development revenues. The increase of $2.7
million, or 69%, in CRO revenues to $6.6 million for the quarter in 2000,
compared to $3.9 million in the same quarter in 1999, is attributable to
improved labor utilization, an increase in the effective hourly billing rate, as
well as a 35% increase in billable hours, due partly to an increase in active
contracts.
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased to $17.3
million in the third quarter of 2000 from $8.5 million in 1999, excluding
in-process research and development expenses totaling $11.1 million incurred in
the third quarter of 1999. This increase of $8.8 million, or 104%, is primarily
due to an increase in research and development costs, largely due to the
agreement signed with BASF Pharma to license ILX-651. ILEX believes that
research and development costs will continue to increase in future periods as
the Company evaluates in-licensing opportunities, and expands its preclinical
research and clinical trials associated with developing additional compounds.
Research and Development Costs. Research and development costs
increased to $10.8 million in the third quarter of 2000, from $3.9 million in
1999. This increase of $6.9 million, or 177%, was due to increased development
spending on the Company's product pipeline, particularly for NM-3 and
OXYPRIM(TM), as well as expense related to an in-licensing agreement totaling
$4.0 million for ILX-651.
Direct Cost of Research Services. Direct cost of research services
expense increased to $4.6 million during the third quarter of 2000, from $3.8
million in 1999. This increase of $0.8 million, or 21%, is attributable to the
addition of new contracts, including the size and complexity of contract
research projects. Additionally, as a result of the increasing number of
contracts, the number of employees related to CRO services has increased over
20% to approximately 210 at September 30, 2000.
General and Administrative Costs. General and administrative costs
increased to $1.8 million for the third quarter of 2000, compared to $0.8
million for the same quarter in 1999. This increase of $1.0 million, or 125%, is
due primarily to an increase in external consulting and professional fees
related to operations. Additionally, salaries and related benefits have
increased as a result of additional employees.
14
<PAGE> 15
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
OPERATING LOSS
Excluding in-process research and development expense of $11.1 million
incurred in the prior year, loss from operations increased to $9.9 million in
the third quarter of 2000, from $3.5 million in 1999. This increase of $6.4
million, or 183%, is due to an increase in research and development costs, as
well as an increase in general and administrative expense, partially offset by
improved profitability of the Company's CRO business, which had operating income
of $2.0 million for the third quarter of 2000, compared to $0.1 million in the
same quarter of 1999.
EQUITY IN LOSSES OF RESEARCH AND DEVELOPMENT PARTNERSHIP
Equity in losses of research and development partnership was $2.1
million for the third quarter of 2000, compared to $2.0 million in 1999, an
increase of $0.1 million, or 5%. The loss for the third quarter of 2000 is
primarily attributable to the CAMPATH joint venture incurring
pre-commercialization marketing and selling expenses. The loss for the third
quarter of 1999 was attributable to development expenses, which were partially
offset by advances made to the partnership from Schering AG, as required by a
distribution and development agreement signed in August 1999.
NET INTEREST INCOME
Net interest income increased to $3.5 million for the three months
ended September 30, 2000, from $0.4 million for the three months ended September
30, 1999. This increase of $3.1 million, or 775%, is attributable to an increase
in average cash and investment balances during the first nine months of the
year, as a result of proceeds received from a common stock offering during the
last quarter of 1999, as well as a private placement in March 2000.
NET LOSS
Net loss decreased $7.6 million for the third quarter 2000, or 47%, to
$8.6 million, from $16.2 million in 1999. Net loss per share decreased $0.66 per
share to $0.34 per share in 2000, from $1.00 per share in 1999, due to a
decrease in net loss primarily as a result of the in-process research and
development expense of $11.1 million incurred in 1999, as well as an increase in
the weighted average number of shares outstanding due to recent stock sales.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
OPERATING REVENUES
Total revenue increased to $21.6 million in the first nine months of
2000, from $12.6 million in the first nine months of 1999. The increase of $9.0
million, or 71%, was due to an additional $9.5 million in CRO revenue, partially
offset by a slight decrease of $0.5 million in product development revenues. The
increase of $9.5 million, or 100%, in CRO revenues to $19.0 million in 2000,
compared to $9.5 million in 1999, is attributable to improved labor utilization,
an increase in the effective hourly billing rate, as well as a 48% increase in
billable hours, due partly to an increase in active contracts.
OPERATING EXPENSES
Total Operating Expenses. Total operating expenses increased to $42.5
million in the first nine months of 2000 from $24.7 million in 1999, excluding
in-process research and development expense of $11.1 million and special charges
of $13.9 million incurred in the prior year. This increase of $17.8 million, or
72%, is due to a $11.6 million increase in research and development costs, as
well as a $5.1 million increase in direct costs of research services during the
first nine months of 2000. ILEX believes that research and development costs
will continue to increase in future periods as the Company expands its
preclinical and clinical trials associated with developing additional compounds.
Research and Development Costs. Research and development costs
increased to $23.0 million in the first nine months of 2000, from $11.4 million
in 1999. This increase of $11.6 million, or 102%, was due to recognizing expense
of $4.0 million associated with an in-licensing agreement with BASF Pharma for
ILX-651. The increase is also attributable to a license payment in April 2000 of
$1.0 million for APOMINE, as well as increased levels of spending on the
Company's product pipeline, including NM-3 and the other emerging angiogenesis
inhibitors, and OXYPRIM, which is in a pivotal study. Additionally, the Company
recognized $1.2 million in consulting expense during the first nine months of
2000, related to the options issued in connection with the acquisition of
Convergence.
15
<PAGE> 16
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
Direct Cost of Research Services. Direct cost of research services
expense increased to $15.4 million during the first nine months of 2000, from
$10.3 million in 1999. This increase of $5.1 million, or 50%, is attributable to
an increase in the number of active new contracts, including the size and
complexity of contract research projects. Additionally, as a result of the
increasing number of contracts, the number of employees related to CRO services
has increased over 20% to approximately 210 at September 30, 2000.
General and Administrative Costs. General and administrative costs
increased to $4.1 million for the first nine months of 2000, compared to $2.9
million in 1999. This increase of $1.2 million, or 41%, is due primarily to an
increase in external consulting and professional fees related to operations.
Additionally, salaries and related benefits have increased as a result of
additional employees.
OPERATING LOSS
Excluding in-process research and development expenses of $11.1
million, and special charges in the aggregate amount of $13.9 million incurred
in the prior year, loss from operations increased to $20.9 million in the first
nine months of 2000, from $12.0 million for the same period in 1999. This
increase of $8.9 million, or 74%, is due to an increase in research and
development expenses, partially offset by improved profitability of the
Company's CRO business, which had operating income of $3.6 million for the first
nine months of 2000, compared to an operating loss of $0.8 million in 1999.
EQUITY IN LOSSES OF RESEARCH AND DEVELOPMENT PARTNERSHIP AND CONTRACT RESEARCH
AFFILIATE
Equity in losses of research and development partnership was $3.5
million for the first nine months of 2000, compared to $3.9 million in 1999, or
a decrease of $0.4 million, or 10%. The loss for the first nine months of 2000
was due to the CAMPATH joint venture incurring pre-commercialization marketing
and selling expenses, as well as license fees of $2.5 million incurred by the
partnership in June 2000. The loss for the third quarter of 1999 was
attributable to development expenses, which were partially offset by advances
made to the partnership from a third party, as required by a distribution and
development agreement signed in August 1999. Additionally, in the first six
months of 1999 we incurred a loss of $3.3 million related to the termination of
an agreement with a contract research affiliate.
NET INTEREST INCOME
Net interest income increased to $8.3 million in 2000, from $0.9
million in 1999. This increase of $7.4 million, or 822%, is due to an increase
in average cash and investment balances during the first nine months of 2000, as
a result of proceeds from a common stock offering during the last quarter of
1999, as well as a private placement in March 2000.
NET LOSS
Net loss decreased $26.8 million during 2000, or 62%, to $16.5 million,
from $43.3 million in 1999. Net loss per share decreased $2.42 per share to
$0.69 per share in 2000, from $3.11 per share in 1999, due to a reduction in the
net loss primarily as a result of in-process research and development expense of
$11.1 million, and special charges of $13.9 million incurred in 1999, as well as
an increase in the weighted average number of shares outstanding due to recent
stock sales.
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. We receive payments under collaborative agreements primarily in the
form of development funding, milestone payments, and royalties for
commercialized products.
In March 2000, we sold 3.0 million shares of common stock at $45 per
share to selected institutional and other accredited investors in a private
placement. Gross proceeds to the Company were approximately $135 million. Net
proceeds to the Company were approximately $127 million.
At September 30, 2000, we had cash, cash equivalents, restricted
investments and investments in marketable securities of $206.4 million and
working capital of $133.3 million. Cash, cash equivalents, restricted
investments and investments in marketable securities increased $117.3 million
compared to December 31, 1999, primarily as a result of the private placement
previously mentioned, partially offset by general operating requirements,
including capital purchases and licensing fees. 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.
16
<PAGE> 17
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
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 (SFAS)
No. 133, and amended by SFAS No. 138.
Our future expenditures and capital requirements will depend on
numerous factors, including without limitation, the progress of our research and
development programs, the progress of our preclinical 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, our ability to establish, maintain and avoid
termination of collaborative arrangements, and the purchase of capital equipment
and acquisitions of compounds, technologies or businesses. Our cash requirements
are expected to continue to increase each year as we expand our activities and
operations. At September 30, 2000, we had no material commitments outside the
normal course of business for capital expenditures. In connection with the
agreement to lease its future corporate headquarters, the Company expects to
record a liability during the fourth quarter of 2000 equal to the remaining
lease payments, partially offset by anticipated sublease amounts. There can be
no assurance that we will ever be able to generate product revenue or achieve or
sustain profitability.
We believe our existing cash, cash equivalents, and marketable
securities will be adequate to support our operations for the near term,
including any potential acquisitions or in-licensing opportunities. There can be
no assurance, however, that we will not require additional financing in the
future, or that such additional funding, if needed, will be available on terms
acceptable to us or at all.
FORWARD-LOOKING STATEMENTS - CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-Q 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
limitation, competitive factors, general economic conditions, failure to receive
FDA approval of our drugs, including CAMPATH, 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 initiate or achieve positive results in clinical trials, failure to
complete current or secure new contracts with contract research services
clients, litigation to which the Company or any subsidiary is a party,
uncertainty regarding the Company's or any subsidiary' 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.
17
<PAGE> 18
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
ITEM 3. 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.
We are exposed to some market risk through interest rates, related to
our investment of cash, cash equivalents, restricted investments and investments
in marketable securities of $206.4 million at September 30, 2000. 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, we are exposed to changes in market interest rates.
This risk is not considered material and we manage such risk by continuing to
evaluate the best investment rates available for short-term high quality
investments. We have not used derivative financial instruments in our investment
portfolio.
Our European operations are denominated in local currency. We have
unhedged transaction exposures in these currencies which are not considered
material. We have not entered into any forward foreign exchange contracts for
speculative, trading or other purposes.
18
<PAGE> 19
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 16, 2000, Cytokine Pharmasciences Inc. ("CPI"),
successor-in-interest to Cytokine Networks, Inc. ("CNI"), filed a
lawsuit against Convergence Pharmaceuticals, Inc. ("Convergence"), a
Delaware corporation and wholly owned indirect subsidiary of ILEX
Oncology, Inc., and Glenn Rice, Ph.D. ("Dr. Rice") in the Superior
Court Department of Trial Court of the Commonwealth of Massachusetts.
The suit alleges that Convergence's predecessor which was merged into
Convergence, through Dr. Rice, used intellectual property of CNI and
requests unspecified damages and a permanent injunction against Dr.
Rice and Convergence from using or disclosing any intellectual property
developed in whole or in part by Dr. Rice while he was employed by CNI.
The Company believes there are meritorious defenses to the claims and
intends to defend against the lawsuit vigorously. In addition, the
Company believes that the Company and Convergence are entitled to
indemnification for damages from certain stockholders of Convergence,
costs and expenses arising out of this lawsuit up to $10.0 million
under the agreement relating to the acquisition of Convergence.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
10.1* Office Lease Agreement dated July 14, 2000, between
Orion Fountainhead Two Partners, Ltd., and ILEX
Oncology, Inc.
11.1* Computation of Net Loss Per Share
27.1* Financial Data Schedule
(b) Reports on Form 8-K:
The Company has recently filed the following Form 8-K's:
Dated September 15, 2000, to disclose the filing of a
lawsuit against Glenn C. Rice, Ph.D. and Convergence
Pharmaceuticals, Inc., an indirect wholly owned subsidiary
of ILEX Oncology Inc.
* Filed herewith.
19
<PAGE> 20
ILEX ONCOLOGY, INC.
SEPTEMBER 30, 2000 - QUARTERLY REPORT ON FORM 10-Q
--------------------------------------------------------------------------------
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 November 13, 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)
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1* Office Lease Agreement dated July 14, 2000, between Orion
Fountainhead Two Partners, Ltd., and ILEX Oncology, Inc.
11.1* Computation of Net Loss Per Share
27.1* Financial Data Schedule
</TABLE>
* Filed herewith.
