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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 period ended September 30, 2000
OR
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 000-24207
ABGENIX, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3248826
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7601 Dumbarton Circle
Fremont, California 94555
(Address of principal executive offices)
Telephone Number (510) 608-6500
(Registrant's telephone number, including area code)
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 |_|
As of October 31, 2000 there were 81,744,311 shares of the Registrant's Common
Stock outstanding.
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ABGENIX, INC.
Form 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - Financial Information
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 ........... 3
Condensed Consolidated Statements of Operations - Three months and nine months ended
September 30, 2000 and September 30, 1999 .............................................. 4
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 2000 and September 30, 1999 .................................................. 5
Notes to Condensed Consolidated Financial Statements ....................................... 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................. 12
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk ........................ 36
PART II - Other Information
ITEM 1 - Legal Proceedings ................................................................. 37
ITEM 2 - Changes in Securities and Use of Proceeds ......................................... 37
ITEM 3 - Defaults upon Senior Securities ................................................... 37
ITEM 4 - Submission of Matters to a Vote of Security Holders ............................... 37
ITEM 5 - Other Information ................................................................. 37
ITEM 6 - Exhibits and Reports on Form 8-K .................................................. 62
SIGNATURES .................................................................................... 64
</TABLE>
2
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ABGENIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
Unaudited
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 107,516 $ 13,366
Marketable securities 437,825 43,543
Interest receivable 7,482 1,103
Accounts receivable 1,126 4,150
Prepaid expenses and other current assets 9,269 4,861
--------- ---------
Total current assets 563,218 67,023
Property and equipment, net 7,585 5,300
Long-term investments 71,639 29,225
Intangible assets, net 44,261 46,591
Deposits and other assets 703 402
--------- ---------
$ 687,406 $ 148,541
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,603 $ 1,705
Deferred revenue 14,405 3,767
Accrued product development costs 233 1,667
Accrued employee benefits 1,524 1,287
Other accrued liabilities 1,418 725
Current portion of long-term debt 447 1,759
--------- ---------
Total current liabilities 23,630 10,910
Deferred rent 406 150
Long-term debt -- 421
Commitments
Stockholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized, none
issued and outstanding
Common stock, $0.0001 par value; 220,000,000 shares authorized, 81,607,172
and 68,669,092 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively, at amount paid in 683,317 181,263
Additional paid-in capital 32,849 32,254
Deferred compensation (325) (670)
Accumulated other comprehensive income 41,627 14,013
Accumulated deficit (94,098) (89,800)
--------- ---------
Total stockholders' equity 663,370 137,060
--------- ---------
$ 687,406 $ 148,541
========= =========
</TABLE>
See accompanying notes.
3
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ABGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Contract revenue $ 7,634 $ 3,670 $ 13,077 $ 5,390
Interest income 9,213 762 22,334 1,954
-------- -------- -------- --------
Total revenues 16,847 4,432 35,411 7,344
Costs and expenses:
Research and development 12,784 4,493 31,910 14,371
General and administrative 1,762 1,134 5,152 3,428
Amortization of intangible assets 777 -- 2,330 --
Equity in income from the Xenotech joint venture -- (18) -- (558)
Interest expense 17 102 317 347
-------- -------- -------- --------
Total costs and expenses 15,340 5,711 39,709 17,588
-------- -------- -------- --------
Net income (loss) $ 1,507 $ (1,279) $ (4,298) $(10,244)
======== ======== ======== ========
Basic net income (loss) per share $ 0.02 $ (0.02) $ (0.05) $ (0.18)
======== ======== ======== ========
Shares used in computing basic net income (loss) per share 81,323 60,092 78,799 56,196
======== ======== ======== ========
Diluted net income (loss) per share $ 0.02 $ (0.02) $ (0.05) $ (0.18)
======== ======== ======== ========
Shares used in computing diluted net income (loss) per share 88,611 60,092 78,799 56,196
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
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ABGENIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
September 30,
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss $ (4,298) $ (10,244)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Equity in income of Xenotech -- (558)
Depreciation and amortization 3,822 1,257
Stock-based compensation related to stock options issued
to consultants 595 638
Changes for certain assets and liabilities:
Interest receivable (6,379) (430)
Accounts receivable 3,024 (642)
Prepaid expenses and other current assets (4,408) (2,802)
Deposits and other assets (315) 100
Accounts payable 3,898 273
Deferred revenue 10,638 (300)
Accrued product development costs (1,434) (299)
Other accrued liabilities 930 445
Deferred rent 256 --
--------- ---------
Net cash provided by (used in) operating activities 6,329 (12,562)
--------- ---------
Investing activities:
Purchases of marketable securities (803,708) (58,807)
Sales of marketable securities 394,626 22,774
Capital expenditures (3,418) (424)
--------- ---------
Net cash used in investing activities (412,500) (36,457)
--------- ---------
Financing activities:
Net proceeds from issuances of common stock 502,054 53,123
Payments on long-term debt (1,733) (1,268)
--------- ---------
Net cash provided by financing activities 500,321 51,855
--------- ---------
Net increase in cash and cash equivalents 94,150 2,836
Cash and cash equivalents at the beginning of the period 13,366 1,415
--------- ---------
Cash and cash equivalents at the end of the period $ 107,516 $ 4,251
========= =========
</TABLE>
See accompanying notes.
5
<PAGE>
ABGENIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
1. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation - The unaudited condensed financial statements of Abgenix,
Inc. (the "Company" or "Abgenix") included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information or footnote disclosure 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 the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial information
included therein. These financial statements should be read in conjunction with
the audited financial statements for the year ended December 31, 1999 and
accompanying notes included in the Company's Annual Report as filed on Form 10-K
with the Securities and Exchange Commission on March 28, 2000. The results of
operations for the quarter and nine months ended September 30, 2000 are not
necessarily indicative of the results to be expected for the full year or for
any other future period.
Revenue Recognition - In December 1999, the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101--Revenue Recognition in Financial
Statements ("SAB 101"), which provides guidance on the accounting for revenue
recognition. The Company is currently evaluating the applicability of SAB 101 to
its existing agreements. Should the Company conclude that its approach is
different from the approach described in SAB 101, it will change its method of
accounting. As amended, SAB 101 is required to be implemented no later than the
fourth fiscal quarter of 2000, for companies with fiscal years beginning between
December 16, 1999 and March 15, 2000.
The Company receives payments from customers for licenses, options and services.
These payments are generally non-refundable but are reported as deferred revenue
until they are recognizable as revenue. The Company has followed the following
principles in recognizing revenue:
- Research license fees: Fees to license the use of XenoMouse in
research performed by the customer are generally recognized when
both the inception of the license period and delivery of the
technology have occurred. If Abgenix is obligated to provide
significant assistance to enable the customer to practice the
license, then the revenue is recognized over the period of such
obligation.
- Product license fees: Fees to license the production, use and sale
of an antibody generated by XenoMouse are generally recognized when
both the inception of the license period and delivery of the
technology have occurred. If Abgenix is obligated to provide
significant assistance to enable the customer to practice the
license, then the revenue is recognized over the period of such
obligation.
- Option fees: Fees for granting options to obtain product licenses
are recognized as revenue when the option is exercised or when the
option period expires, whichever occurs first.
- Payments for research services performed by Abgenix are recognized
ratably over the period during which these services are performed.
- Milestone payments are recognized as revenue when the milestone is
achieved.
Two-for-One Stock Splits - The accompanying financial statements have been
restated to reflect both a two-for-one common stock split effective on April 6,
2000 and a two-for-one common stock split effective on July 7, 2000.
6
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Earnings per Share
A reconciliation of the shares used in the computation of the company's basic
and diluted earnings per common share is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
Weighted average common shares
outstanding 81,323 60,092 78,799 56,196
Dilutive effect of employee
stock options 7,288 -- -- --
------ ------ ------ ------
Weighted average common shares
outstanding, assuming dilution 88,611 60,092 78,799 56,196
====== ====== ====== ======
Weighted average common shares outstanding, assuming dilution, includes the
incremental shares that would be issued upon the assumed exercise of stock
options. Certain of the company's stock options were excluded from the
calculation of diluted earnings per share because they were antidilutive, but
these options could be dilutive in the future.
2. Marketable Securities
The following is a summary of marketable securities at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
----------------------------------------- ----------------------------------------
As of September 30, 2000 As of December 31, 1999
----------------------------------------- ----------------------------------------
Amortized Unrealized Estimated Amortized Unrealized Estimated
Cost Gain/(Loss) Fair Value Cost Gain/(Loss) Fair Value
--------- ---------- ---------- --------- ----------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial obligations ...................... $ 32,039 $ (25) $ 32,014 $ 22,277 $ (73) $ 22,204
Commercial paper ............................ 505,760 39 505,799 15,358 10 15,368
Obligations of the U.S. government and
its agencies ........................... 5,999 (26) 5,973 17,271 (149) 17,122
Marketable equity securities ................ 30,000 41,639 71,639 15,000 14,225 29,225
--------- --------- --------- --------- --------- ---------
Total ....................................... $ 573,798 $ 41,627 $ 615,425 $ 69,906 $ 14,013 $ 83,919
========= ========= ========= ========= ========= =========
Classified as:
Cash equivalents ......................... $ 105,961 $ 11,151
Marketable securities .................... 437,825 43,543
Long-term investments .................... 71,639 29,225
--------- ---------
$ 615,425 $ 83,919
========= =========
The Company's available-for-sale debt securities have the following maturities
at September 30, 2000:
Due in one year or less ..................... $ 543,786
Due after one year but less than five years.. --
---------
$ 543,786
=========
</TABLE>
7
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3. Comprehensive Income
Other comprehensive gains/(losses) consist of unrealized gains or losses on
available-for-sale securities. The components of comprehensive income, net of
tax, were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income (loss) $ 1,507 $ (1,279) $ (4,298) $(10,244)
Increase (decrease) in net
unrealized gains on
available-for-sale
investments 24,887 (180) 27,614 (180)
-------- -------- -------- --------
Comprehensive income (loss) $ 26,394 $ (1,459) $ 23,316 $(10,424)
======== ======== ======== ========
4. Stockholders' Equity and Follow-on Public Offering
On February 10, 2000, the Company completed a follow-on public offering in which
the Company sold 8,640,000 shares and Cell Genesys sold 3,360,000 shares of the
Company's common stock to the public at a price of $52.50 per share. On February
29, 2000 the Company's underwriters exercised their overallotment option to
purchase 1,800,000 additional shares, of which 1,296,000 shares were sold by the
Company and 504,000 shares were sold by Cell Genesys at a price of $52.50 per
share. The Company received net proceeds from the offerings of approximately
$496.5 million after the underwriters' discount and costs of offering.
In January 2000, Cell Genesys exercised its warrants to purchase 486,668 shares
of the Company's stock at an exercise price of $1.50 per share.
On May 3, 2000, the Company's stockholders approved an increase to the aggregate
number of shares of common stock authorized for issuance under the Company's
1996 Incentive Stock Plan by 1,200,000 shares.
On May 3, 2000, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the authorized number of
shares of common stock from 50,000,000 to 100,000,000.
On August 23, 2000, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the authorized number of
shares of common stock from 100,000,000 to 220,000,000.
5. Customer and License Agreements
Abbott: In May 2000, the Company entered into a collaboration agreement,
including an option and research license, with Abbott Laboratories to generate
fully human antibodies to disease targets. Under this agreement, Abbott is
required to pay the Company to perform the immunizations and certain research
activities.
Corixa: In March 2000, the Company entered into an agreement to discover and
develop fully human antibodies against selected targets from Corixa
Corporation's library of proprietary autoimmune disease, cancer and infectious
disease antigens.
8
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Elan: In January 2000, the Company entered into a research license and option
agreement with Elan Pharmaceuticals Inc. to generate fully human antibodies to
an undisclosed antigen in the field of neurological diseases.
Gliatech: In January 2000, the Company entered into a research agreement, option
and license agreement with Gliatech Medical Inc. to generate fully human
antibodies for use in the fields of cardiovascular and inflammatory diseases.
Under this agreement, Gliatech is required to pay the Company to perform the
immunizations and certain research activities.
Immunex: In July 2000, the Company entered into a joint development and
commercialization agreement with Immunex Corporation, for ABX-EGF, a fully human
antibody created by the Company and currently in a Phase I clinical trial
involving several tumor types. Under the agreement, Immunex has agreed to make
an initial license fee payment to the Company, and a second license fee payment
upon commencement of Phase II clinical trials of ABX-EGF. Development costs will
be shared equally, as would any potential profits from sales of a targeted
product. Payments totaling $5 million were received in the third quarter of 2000
representing the initial license fee. The Company is recognizing this fee
ratably each month over the period ended December 31, 2001, which is the period
Abgenix is obligated to share in development costs. Accordingly, $0.6 million
was recognized as revenue in the quarter ended September 30, 2000. Additionally,
Abgenix recognized $0.5 million as revenue, which represents development costs
incurred in the third quarter by Abgenix, net of development costs incurred by
Immunex.
Lexicon: In July 2000, the Company entered into a collaborative agreement with
Lexicon Genetics Inc. Under the terms of the agreement, Lexicon agreed to
contribute antigen targets that derive from its proprietary portfolio of
full-length human genes whose functions are defined using Lexicon's knockout
mouse technology. The Company will use its XenoMouse technology to generate
fully human antibodies for each of the targets selected by a joint committee.
Each party will have the right to obtain exclusive commercialization rights,
including sublicensing rights, for an equal number of qualifying antibodies.
Each party will receive milestone payments and royalties on sales of antibody
drugs from the collaboration that are commercialized by the other party.
Millennium: In March 2000, the Company granted Millennium BioTherapeutics, Inc.
a license to use XenoMouse in research performed by Millennium and several
licenses to make, use and sell antibodies generated with XenoMouse. Payments
totaling $10 million were made in the first quarter of 2000 representing a
research license fee, product license fees and service fees to establish the
technology at Millennium. The Company is recognizing these fees ratably each
month over the period ended December 31, 2000 during which Abgenix is obligated
to assist in establishing the technology at Millennium, which will enable
Millennium to practice the research license and product licenses. Accordingly,
$3.0 million was recognized as revenue in the quarter ended September 30, 2000
and $7.0 million was recognized as revenue in the nine months ended September
30, 2000. At September 30, 2000, $3.0 million remained in deferred revenue. The
$10 million payment was made in common stock of Millennium, which was
subsequently sold in May 2000 shortly after the shares were registered.
Millennium was obligated to make up the difference, if any, between the fair
value of such stock upon sale and $10 million, and the Company was obligated to
pay, and did pay, the excess of the fair value of such stock upon sale and $10
million.
SangStat: In August 2000, the Company entered into a joint development and
commercialization agreement with SangStat Medical Corporation for ABX-CBL, an
antibody developed by the Company
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and currently in a Phase II/III clinical trial. Under the agreement, SangStat
will make an initial license fee payment and additional milestone payments to
Abgenix. Development costs will be shared equally, as would any potential
profits from sales of collaboration products. Payments totaling $2 million were
made in the third quarter of 2000 representing the initial license fee and
reimbursement of prior costs. The Company is recognizing these fees ratably each
month over the period ended January 31, 2001, which is the period Abgenix is
obligated to share in development costs. Accordingly, $0.7 million was
recognized as revenue in the quarter ended September 30, 2000. Additionally,
Abgenix recognized $0.5 million as revenue, which represents development costs
incurred in the third quarter by Abgenix net of development costs incurred by
Sangstat, and required to be reimbursed to Abgenix.
SmithKline Beecham: In May 2000, the Company entered into a collaboration
agreement, including an option and research license with SmithKline Beecham
Pharmaceuticals Inc. to generate fully human antibodies to an undisclosed
antigen.
6. Other Contractual Obligations
In May 2000, the Company entered into an agreement to produce commercial
quantities of its fully human antibody, ABX-IL8, using Genzyme Transgenics
Corporation's manufacturing system. Under the terms of the agreement, in
exchange for fees and milestone payments, Genzyme Transgenics agreed to develop
transgenic goats that express ABX-IL8 in their milk.
In May 2000, the Company entered into an agreement with a contract manufacturer
of its product candidates, to reserve manufacturing capacity by acquiring an
option to negotiate a supply agreement, the terms of which are generally
outlined in the option agreement. The total amount paid for this agreement was
approximately $3.8 million of which $2.3 million was recorded as an expense in
research and development and approximately $1.5 million was recorded as a
deposit because it is creditable to the supply agreement. If a supply agreement
is not entered into, the $3.8 million is generally non-refundable, except under
limited circumstances.
In September 2000, the Company entered into a collaboration with ImmunoGen
providing the Company with access to ImmunoGen's maytansinoid Tumor-Activated
Prodrug technology. ImmunoGen will receive $5.0 million in technology access fee
payments, as well as potential milestone payments, and royalties on net sales of
any resulting products. In addition, Abgenix purchased $15.0 million of
ImmunoGen common stock at $19.00 per share.
7. Facility Leases and Letter of Credit
In February 2000, the Company signed an operating lease for an additional
100,100 square foot facility to be used primarily for offices. In May 2000, the
Company also signed an operating lease for an additional 100,000 square foot
facility to be built and used for pilot scale manufacturing. Both leases expire
in the year 2015, with options to extend the lease terms. The Company issued a
stand-by letter of credit for $2.0 million to the lessor for the lease term, as
a condition to the lease. Future minimum payments under these non-cancelable
operating leases are as follows (in thousands): 2000--$1,121; 2001--$3,986;
2002--$4,802; 2003--$4,969; 2004--$5,138; and thereafter --$65,509.
10
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8. Subsequent Events
Acquisitions
In November 2000, the Company acquired ImmGenics Pharmaceuticals Inc. in an
all-stock transaction. The transaction will be treated as a purchase and the
total estimated purchase price including estimated acquisition costs was
$77.5 million.
In November 2000, the Company acquired IntraImmune Therapies, Inc. in a cash
transaction. The transaction will be treated as a purchase and the total
estimated purchase price was $9.0 million.
Private Placement
In November 2000, the Company completed a private placement of 3,300,000
shares of its common stock to accredited investors at a price of $70.00
per share for gross proceeds of $231.0 million. After commissions, the
Company received net proceeds of $221.0 million.
11
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS BASED UPON CURRENT
EXPECTATIONS THAT INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS
PROSPECTUS, THE WORDS "INTEND," "ANTICIPATE," "BELIEVE," "ESTIMATE," "PLAN"
AND "EXPECT" AND SIMILAR EXPRESSIONS AS THEY RELATE TO US ARE INCLUDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS AND THE TIMING OF
CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
Overview
We are a biopharmaceutical company that develops and intends to commercialize
antibody therapeutic products for the treatment of a variety of disease
conditions, including transplant-related diseases, inflammatory and
autoimmune disorders, cardiovascular disease, infectious diseases and cancer.
We have developed XenoMouse technology, a proprietary technology that offers
many advantages, including rapid generation of highly specific, fully human
antibody product candidates that bind to essentially any disease target
appropriate for antibody therapy. In addition, we believe our technology
offers advantages in product development and flexibility in manufacturing. We
intend to use XenoMouse technology to build a large and diversified product
portfolio that we plan to develop and commercialize through licensing to
pharmaceutical companies and others, joint development and internal product
development programs. We have contractual arrangements with multiple
pharmaceutical, biotechnology and genomics companies involving our XenoMouse
technology. In addition, we have three proprietary antibody product
candidates currently in clinical trials, two of which we recently agreed to
co-develop and commercialize with others.
Contractual Arrangements
As of November 9, 2000, we have entered into contracts to use our XenoMouse
technology to produce and/or to develop the resulting fully human antibodies
with twenty-three customers covering numerous antigen targets. Pursuant to
these contracts, we and our customers intend to generate antibody product
candidates for the treatment of cancer, inflammation, autoimmune diseases,
transplant rejection, cardiovascular disease, growth factor modulation,
neurological diseases and infectious diseases. Our customers as of November
9, 2000 include Abbott Laboratories, Amgen, AVI BioPharma, BASF Bioresearch
Corporation, Cell Genesys, Centocor/Johnson and Johnson, Chiron, Corixa,
CuraGen, Elan, Genentech, Gliatech, Human Genome Sciences, Immunex, Japan
Tobacco, Lexicon Genetics, Millenium, Pfizer, Research Corporation
Technologies, SangStat, Schering-Plough, SmithKline Beecham and the U.S.
Army. Of these customers, six have entered into new or expanded agreements
with us specifying additional antigens for XenoMouse antibody development.
Additionally, of the customers with whom we have entered technology license
contracts, AVI BioPharma, Japan Tobacco, Millenium, Pfizer and
Schering-Plough have entered into product licenses. Furthermore, one of our
customers, Pfizer, has begun human clinical trials with a fully human
antibody generated with XenoMouse technology. The terms of the arrangements
vary, but can generally be categorized as follows:
- Antigen Target Sourcing Contracts--Four of our contracts are target
sourcing contracts with genomics and biopharmaceutical companies that may
enable us to generate a pipeline of proprietary fully human antibody
product candidates. Typically, these contracts provide that we make fully
human antibodies to the contract parties' antigen targets. There are
12
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various mechanisms for each of the parties to evaluate and select
antibodies from the pool of generated antibodies for further development
and commercialization. The party selecting a product candidate will
generally pay to the other, for rights to develop and commercialize such
product, license fees, milestone payments and royalty payments on any
eventual product sales.
- Proprietary Product Licensing--In July and August 2000, we entered into
two joint development and commercialization agreements. The first is with
Immunex Corporation for ABX-EGF, a fully human antibody created by us.
Under the agreement, Immunex agrees to make an initial license fee payment
to us and second license fee payment to us upon commencement of Phase II
clinical trials of ABX-EGF. Development costs will be shared equally, as
would any potential profits from sales of collaboration products. We both
share responsibility for product development. We will be responsible for
completing the ongoing Phase I trials, and if the Phase I trials are
successful, both companies will share responsibility for the execution of
Phase II trials across a variety of indications. Immunex will have primary
responsibility for Phase III clinical trials and will market any potential
product, while we will retain co-promotion rights. The second agreement is
with SangStat Medical Corporation for ABX-CBL, an antibody developed by
us. Under that agreement, SangStat agrees to make an initial license fee
payment to us and additional milestone payments to us. Development costs
will be shared equally, as would any potential profits from sales of
collaboration products. We both will share responsibility for product
development, including the ongoing Phase II/III clinical trials. SangStat
will market any potential product and we will be responsible for
manufacturing ABX-CBL.
We intend to build our product portfolio by generating antibodies to
antigen targets that we source, self-funding clinical activities to
determine preliminary safety and efficacy and entering into more
development and commercialization agreements with pharmaceutical and
biotechnology companies. These arrangements may or may not involve joint
sharing of costs and profits.
- Technology Licensing--These agreements typically provide our customers
with access to XenoMouse technology for the purpose of generating fully
human antibody product candidates to one or more specific antigen targets
provided by the customer. In most cases, we provide our mice to the
customers who then carry out immunizations with their specific antigen
targets. In other cases, we immunize the mice with the customers' antigen
targets for additional compensation. The customer generally has a period
of time to acquire product licenses for any antibody product they wish to
develop and commercialize, generally referred to as an option. The
financial terms of these agreements may include license fees, option fees
and milestone payments paid to us by our customers. Based on our
agreements, these payments and fees would average $8.0 to $10.0 million
per antigen target if our customer takes the antibody product candidate
into development and ultimately to commercialization. Additionally, we are
entitled to receive royalties on any future product sales by the customer.
Proprietary Products
We have three antibody product candidates that are currently in clinical
trials, as follows:
- ABX-IL8--Generated using XenoMouse technology, ABX-IL8 is our fully human
antibody candidate for the treatment of psoriasis. We completed Phase I
and Phase I/II clinical trials and initiated Phase II clinical trials in
April 2000 in which enrollment is ongoing.
- ABX-EGF--Generated using XenoMouse technology, ABX-EGF is our fully human
antibody candidate for the treatment of a variety of cancers. We initiated
a Phase I clinical trial for
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ABX-EGF in cancer in 1999 in which enrollment is ongoing. In July 2000, we
entered the joint development and commercialization agreement with Immunex
Corporation for ABX-EGF, as described above.
- ABX-CBL--An in-licensed mouse antibody, we developed ABX-CBL for the
treatment of a transplant-related disease known as graft versus host
disease, or GVHD. We completed a multi-center Phase II clinical trial for
ABX-CBL and initiated a Phase II/III clinical trial in December 1999 in
which enrollment is ongoing. In August 2000, we entered into the joint
development and commercialization agreement with SangStat Medical
Corporation for ABX-CBL, as described above.
We will expend significant capital to conduct clinical trials for these product
candidates. We believe that more extensive clinical data will enable us to enter
into more favorable proprietary product licensing agreements. We expect that
this will increase our operating losses until our development expenses can be
covered by increased revenues from licensing of XenoMouse technology and
marketing of proprietary products. If clinical trials of one or more product
candidates at any stage are unsuccessful, we may abandon that product candidate
which would result in the substantial loss of our investment in such candidate.
Acquisitions
In November 2000, the Company acquired ImmGenics Pharmaceuticals Inc. in an
all-stock transaction. Abgenix will issue approximately $77.0 million of its
common stock and stock options for all of ImmGenics' voting securities and
options. The transaction will be treated as a purchase and the total
estimated purchase price including estimated acquisition costs was $77.5
million. As a result of the acquisition, the Company will record the
following: a significant one-time charge in the fourth quarter for in-process
research and development of approximately $4.8 million; significant assets
related to intangible assets and goodwill acquired, and related amortization
over a period of approximately 15 years; and deferred compensation related to
the replacement of unvested stock options of ImmGenics for the Company's
stock options expected to be amortized over approximately two years.
In November 2000, the Company acquired Intraimmune Therapies, Inc in a cash
transaction. The transaction will be treated as a purchase and the total
estimated purchase price was $9.0 million.
In December 1999, we paid $47.0 million to purchase Japan Tobacco's interest in
the Xenotech joint venture, and a non-recurring payment of $10.0 million to
terminate rights to the current XenoMouse technology. Additionally, Japan
Tobacco paid us $6.0 million to acquire a license to new technology, and $4.0
million to acquire a research license and commercialization rights under
existing and future XenoMouse technology on a more limited basis than it had
under our prior collaboration with Japan Tobacco.
Results of Operations
Three Months and Nine Months Ended September 30, 2000 and 1999
Contract revenue totaled $7.6 million and $13.1 million in the three and
nine-month periods ended September 30, 2000 compared to $3.6 million and $5.4
million, respectively, in the comparable 1999 periods.
Contract revenue in the nine months ended September 30, 2000 included the
following:
- Research and license fees of $3.0 million and $7.0 million, respectively,
in the three and nine-month periods ended September 30, 2000, from the $10
million payment received under the agreement with Millennium
BioTherapeutics. Although the payment from Millennium is non-refundable
and was received at the inception of a research license and product
licenses granted to Millennium upon
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signing of the agreement, we are is obligated up to December 31, 2000 to
provide assistance to enable Millennium to practice these licenses, so the
payment from Millennium is being recognized ratably over this period.
- License and certain fees were received in the three and nine-month
periods ended September 30, 2000 from Immunex and Sangstat of $5.0
million and $2.0 million respectively. These fees were related to the
respective joint development and commercialization agreements of
ABX-EGF and ABX-CBL. We are recognizing these fees ratably over the
periods we are obligated to share in development costs. For Immunex
this is the 17-month period ended December 31, 2001 and the amount
recognized in the quarter ended September 30, 2000 was $0.6 million.
For Sangstat this is the six-month period ended January 31, 2001, and
the amount recognized in the quarter ended September 30, 2000 was $0.7
million. Additionally, in the third quarter ended September 30, 2000,
Abgenix recognized in total $1.0 million as revenue from both Immunex
and Sangstat, which represents 50% of the development costs of ABX-EGF
and ABX-CBL incurred and recorded as expense in the third quarter by
Abgenix, net of 50% of the development costs incurred by Immunex and
Sangstat.
- A milestone fee was received and recognized in the three and nine-month
periods ended September 30, 2000 from Pfizer related to Pfizer's filing
of an Investigational New Drug application with the FDA for an antibody
product candidate for the treatment of cancer, which was generated with
our XenoMouse technology under an existing collaborative agreement.
- A product license fee was received and recognized in the three and
nine-month periods ended September 30, 2000 from Amgen for an antibody
product generated with our XenoMouse technology under an existing
collaborative agreement. Additionally, two product license fees were
received and recognized in the nine-month period ended September 30,
2000 from Japan Tobacco under an existing collaborative agreement.
- Research funding and fees for research milestones and certain research
work were recognized in the three and nine-month periods ended September
30, 2000 related to six of our collaborative agreements.
Contract revenue in the three months and nine months ended September 30, 1999
included non-refundable fees totaling $1.6 million and $2.3 million,
respectively, under the collaborative agreement with Japan Tobacco on ABX-IL8
clinical development. Such fees were for the reimbursement of clinical trial
costs and certain joint interest rights in data from the clinical trials.
Additionally, in this period, contract revenue included fees for the
achievement of research milestones, an execution fee for electing another
antigen target and licensing fees for an antigen target, under existing
collaborative agreements. Additionally, in the nine-month period ended
September 30, 1999, contract revenue included non-refundable signing and
option fees in connection with the execution of collaborative agreements,
fees for the achievement of research milestones, an execution fee for
electing another antigen target and licensing fees for an antigen target.
Interest income consists primarily of interest from cash, cash equivalents and
short-term investments. Interest income totaled $9.2 million and $22.3 million
in the three and nine-month periods ended September 30, 2000 compared to $0.8
million and $2.0 million in the comparable 1999 periods. This is a result of our
follow-on offering in February 2000 in which we received net proceeds of
approximately $496.5 million, after the costs of the offering.
Research and development expenses consist primarily of compensation and other
expenses related to research and development personnel, costs associated with
pre-clinical testing and clinical trials of our product candidates, including
the costs of manufacturing the product candidates, and facilities expenses.
Research and development expenses increased to $12.8 million in the three months
ended September 30, 2000 from $4.5 million in the comparable period in 1999 and
to $31.9 million in the nine months ended
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September 30, 2000 from $14.4 million in the comparable period in 1999. The
increase reflects primarily costs associated with the following:
- Increased personnel - Staffing at September 30, 2000 increased by
approximately 88% from September 30, 1999. The increase is to support the
increased level of product development activities, including new target
validation, process sciences, manufacturing and increased clinical
activities. Additionally, the increase in personnel is related to
increased licensing activity. Included in the increase are salary and
related fringe benefits, recruiting and relocation costs. We expect
personnel costs to increase further as we continue to build our
organization.
- Product Supply Agreement - Included in the nine-month period ended
September 30, 2000 is a charge of approximately $2.3 million to reserve
manufacturing capacity by acquiring an option to negotiate a supply
agreement with a contract manufacturer. The total amount paid for this
agreement was approximately $3.8 million, of which approximately $1.5
million is creditable to the supply agreement. If a supply agreement is
not executed, the $3.8 million is non-refundable to us, except under
limited circumstances.
- Research Fee-Included in the nine-month period ended September 30, 2000 is
a fee paid to Genzyme Transgenics Corporation related to research they are
performing in which they agreed to produce our antibody product candidate,
ABX-IL8 using Genzyme's manufacturing system. Under this agreement, for
undisclosed fees and milestone payments, Genzyme will develop transgenic
goats that express ABX-IL8 in their milk. Additionally, several future
payments are required if certain milestones are met.
- Clinical Costs- In the first nine months of 2000, we had clinical trials
in progress for three of our product candidates, ABX-CBL, ABX-IL8 and
ABX-EGF, which are continuing. In 1999, during the comparable period, we
had clinical trials in progress for two of our product candidates, ABX-CBL
and ABX-IL8. The costs of such trials include the clinical investigator
site fees, monitoring costs and data management costs. Additionally, such
costs include the costs of manufacturing the antibody used in clinical
trials. In July and August 2000, we entered into separate agreements with
Immunex and SangStat to share equally in the costs of developing and
commercializing ABX-EGF and ABX-CBL, respectively. However, we expect
clinical costs will increase in the future as we enter additional clinical
trials for both new and existing product candidates.
General and administrative expenses include compensation and other expenses
related to finance and administrative personnel, professional services and
facilities. General and administrative expenses increased to $1.8 million in the
three months ended September 30, 2000 from $1.1 million in the comparable period
in 1999 and to $5.2 million in the nine months ended September 30, 2000 from
$3.4 million in the comparable period in 1999. The increase reflects increased
personnel costs, including an accrual for incentive compensation, and additional
investor relations costs. We expect personnel costs to increase further as we
continue to build our organization.
Amortization of intangible assets relates primarily to patents and certain
royalty rights which were acquired through the acquisition of the Xenotech joint
venture in December 1999.
Equity from the Xenotech joint venture in 1999 reflects our percentage ownership
of the net income from the joint venture, prior to our acquisition of 100% of
the joint venture in December 1999.
Interest expense consists of interest incurred in connection with equipment
lease line financing and loan facilities. Interest expense decreased due to pay
down of debt.
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Liquidity and Capital Resources
At September 30, 2000, we had cash, cash equivalents and marketable securities
of $545.3 million. In November 2000, we completed a private placement in which
we raised net proceeds of $221.0 million by selling 3,300,000 shares of our
common stock to institutional accredited investors. Including our November 2000
sale of stock, our total cash, cash equivalents and marketable securities exceed
$760.0 million. We invest our cash equivalents and marketable securities in
highly liquid, interest bearing, investment grade and government securities in
order to preserve principal.
During the nine months ended September 30, 2000, net cash provided by investing
activities was $502.0 million provided primarily from our follow-on public
offering in which we raised net proceeds of $496.4 million by selling 9,936,000
shares of our common stock in February 2000. Additionally during this period, we
received $0.7 million from Cell Genesys for the exercise of warrants and $4.9
million from the exercise of stock options and our employee stock purchase plan.
In the first nine months of 1999 net cash provided by financing activities was
$51.9 million, received primarily from a secondary offering and the sale of
stock to Genentech.
Net cash provided by operating activities was $6.3 million for the nine months
ended September 30, 2000 and net cash used in operating activities was $12.6
million for the nine months ended September 30, 1999. In the nine months ended
September 30, 2000, cash was provided by interest income of $16.0 million net of
the increase in interest receivable of $6.4 million. Additionally in this
period, customers provided cash of $26.7 million including $10.6 million
recorded as net deferred revenue and $3.0 million from a net reduction in
accounts receivable. Cash was used for operations in both periods primarily to
fund research and development expenses and manufacturing costs related to the
development of new products. Additionally, cash was used in the nine-month
period ended September 30, 2000 for a deposit related to a supply agreement.
Net cash used in investing activities was $412.5 million for the nine months
ended September 30, 2000 and $36.5 million for the nine months ended
September 30, 1999. The activity in both years reflects the purchasing of
investments with the funds we received from follow-on public offerings
earlier in both years. Additionally, in the nine months ended September 30,
2000, we invested $15.0 million in common stock of Immunogen and $3.4 million
in capital expenditures.
In March 2000, we were issued a stand-by letter of credit for $2.0 million
from a commercial bank as a deposit on our new leased facility. The stand-by
letter of credit is secured by an investment account, which must maintain a
$2.0 million balance. Additionally, we have an agreement with a financing
company under which we have financed purchases of about $2.0 million of our
laboratory and office equipment. The lease term is 48 months and bears
interest at rates ranging from 12.5% to 13.0%, which are based on the change
in the five-year U.S. Treasury rate. We also had a construction financing
line with a bank in the amount of $4.3 million that was used to finance
construction of leasehold improvements at our current facility. The line was
paid off in May 2000 and had an interest rate of prime plus one percent (9.5
% per annum at December 31, 1999).
We plan to make significant expenditures to establish our own manufacturing
facility and expand our research and development activities, including
pre-clinical product development and clinical trials. We
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may be required to make substantial expenditures if unforeseen difficulties
arise in the course of our developing product candidates, manufacturing product
candidates, performing pre-clinical development and clinical trials of such
product candidates, obtaining necessary regulatory approvals or in other aspects
of our business. Our future liquidity and capital requirements will depend on
many factors, including:
- scope and results of pre-clinical testing and clinical trials;
- the retention of existing and establishment of further licensing and
contractual agreements, if any;
- continued scientific progress in our research and development programs;
- size and complexity of these programs;
- cost of establishing our manufacturing capabilities, conducting
commercialization activities and arrangements;
- time and expense involved in obtaining regulatory approvals;
- competing technological and market developments;
- time and expense of filing and prosecuting patent applications and
enforcing patent claims;
- investment in, or acquisition of, other companies;
- product in-licensing; and
- other factors not within our control.
We believe that our current cash balances, cash equivalents, marketable
securities, including the proceeds from our November 2000 sale of stock, and
the cash generated from our licensing and contractual agreements will be
sufficient to meet our operating and capital requirements for at least two
years. However, we may need additional financing within this time period. We
may need to raise additional funds through public or private financing,
licensing and contractual agreements or other arrangements. We cannot assure
you that such additional funding, if needed, will be available on terms
favorable to us. Furthermore, any additional equity financing may be dilutive
to our shareholders, and debt financing, if available, may involve
restrictive covenants. Licensing and other contractual agreements may require
us to relinquish our rights to certain of our technologies, products or
marketing territories. Our failure to raise capital when needed may harm our
business, financial condition and results of operations.
We have incurred operating losses in each of the last three years of operation,
including net losses of approximately $35.9 million in 1997, $16.8 million in
1998, $20.5 million in 1999 and $4.3 million in the nine months ended September
30, 2000. As of September 30, 2000, we had an accumulated deficit of
approximately $94.1 million. Our losses have resulted principally from costs
incurred in performing research and development for our technology and
antibody product candidates, costs associated with certain agreements with Japan
Tobacco, costs related to the non-recurring cross-license and settlement charge
in 1997 and from general and administrative costs associated with our
operations. We expect to incur additional operating losses for the foreseeable
future as a result of our expenditures for research and product development,
including pre-clinical testing and clinical trials, and charges related to
purchases of technology or other assets. We intend to invest significantly in
our products prior to entering into licensing arrangements. This may increase
our need for capital and will result in losses for several years. We expect the
amount of such losses will fluctuate significantly from quarter to quarter as a
result
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of increases or decreases in our research and development efforts, the execution
or termination of licensing arrangements, or the initiation, success or failure
of clinical trials.
As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $61.0 million. Our net operating loss carryforwards exclude losses
incurred prior to the organization of Abgenix in July 1996. Further, the amounts
associated with the cross-license and settlement that have been expensed for
financial statement accounting purposes have been capitalized and are being
amortized over a period of approximately fifteen years for tax purposes. The net
operating loss and credit carryforwards will expire in the years 2011 through
2019, if not utilized. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
ADDITIONAL FACTORS THAT MIGHT AFFECT FUTURE RESULTS
The following factors represent current challenges that we face which create
risk and uncertainty. Failure to adequately overcome any of the following
challenges, either singly or in combination, could harm our results of
operations, business, or financial position.
Risks Related to the Development and Commercialization of our Products
Our XenoMouse technology may not produce safe, efficacious or commercially
viable products.
Our XenoMouse technology is a new approach to the generation of antibody
therapeutic products. We have not commercialized any antibody products based
on XenoMouse technology. Moreover, we are not aware of any commercialized,
fully human antibody therapeutic products that have been generated from any
technologies similar to ours. Our antibody product candidates are still at an
early stage of development. Clinical trials have begun with respect to only
three fully human antibody product candidates generated by XenoMouse
technology. We cannot be certain that XenoMouse technology will generate
antibodies against all the antigens to which it is exposed in an efficient
and timely manner, if at all. Furthermore, XenoMouse technology may not
result in any meaningful benefits to our current or potential customers or be
safe and efficacious for patients. If XenoMouse technology fails to generate
antibody product candidates that lead to the successful development and
commercialization of products, our business, financial condition and results
of operations will be materially harmed.
Successful development of our products is uncertain.
Our development of current and future product candidates is subject to the
risks of failure inherent in the development of new pharmaceutical products
and products based on new technologies. These risks include:
- delays in product development, clinical testing or manufacturing;
- unplanned expenditures in product development, clinical testing or
manufacturing;
- failure in clinical trials or failure to receive regulatory approvals;
- emergence of superior or equivalent products;
- inability to manufacture on our own, or through others, product candidates
on a commercial scale;
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- inability to market products due to third-party proprietary rights;
- election by our customers not to pursue product development;
- failure by our customers to develop products successfully; and
- failure to achieve market acceptance.
Because of these risks, our research and development efforts or those of our
customers may not result in any commercially viable products. To date, our
customers' right to obtain a product license has been exercised for only six
product candidates. If a significant portion of these development efforts is
not successfully completed, required regulatory approvals are not obtained or
any approved products are not commercially successful, our business,
financial condition and results of operations will be materially harmed.
Clinical trials for our product candidates will be expensive and their
outcome is uncertain.
Conducting clinical trials is a lengthy, time-consuming and expensive
process. Before obtaining regulatory approvals for the commercial sale of any
products, we must demonstrate through pre-clinical testing and clinical
trials that our product candidates are safe and effective for use in humans.
We will incur substantial expense for, and devote a significant amount of
time to, pre-clinical testing and clinical trials.
Historically, the results from pre-clinical testing and early clinical trials
have often not been predictive of results obtained in later clinical trials.
A number of new drugs and biologics have shown promising results in clinical
trials, but subsequently failed to establish sufficient safety and efficacy
data to obtain necessary regulatory approvals. Data obtained from
pre-clinical and clinical activities are susceptible to varying
interpretations, which may delay, limit or prevent regulatory approval. In
addition, regulatory delays or rejections may be encountered as a result of
many factors, including changes in regulatory policy during the period of
product development.
As of November 9, 2000, three of our product candidates, ABX-CBL, ABX-IL8 and
ABX-EGF, were in clinical trials. Patient follow-up for these clinical trials
has been limited. To date, data obtained from these clinical trials has been
insufficient to demonstrate safety and efficacy under applicable Federal Drug
Administration, or FDA, guidelines. As a result, this data will not support
an application for regulatory approval without further clinical trials.
Clinical trials conducted by us or by third parties on our behalf may not
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals for ABX-CBL, ABX-IL8, ABX-EGF and/or any other potential product
candidates. Regulatory authorities may not permit us to undertake any
additional clinical trials for our product candidates.
In addition, our other product candidates are in pre-clinical development,
but we have not submitted investigational new drug applications nor begun
clinical trials for these product candidates. Our pre-clinical or clinical
development efforts may not be successfully completed, we may not file
further investigational new drug applications and clinical trials may not
commence as planned.
Completion of clinical trials may take several years or more. The length of
time generally varies substantially according to the type, complexity,
novelty and intended use of the product candidate. Our commencement and rate
of completion of clinical trials may be delayed by many factors, including:
- inability to manufacture sufficient quantities of materials for use in
clinical trials;
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- slower than expected rate of patient recruitment;
- inability to adequately follow patients after treatment;
- unforeseen safety issues;
- lack of efficacy during the clinical trials; or
- government or regulatory delays.
We have limited experience in conducting and managing clinical trials. We
rely on third parties, including our customers, to assist us in managing and
monitoring clinical trials. Our reliance on these third parties may result in
delays in completing, or failing to complete, these trials if the third
parties fail to perform under our agreements with them.
Our product candidates may fail to demonstrate safety and efficacy in
clinical trials. This failure may delay development of other product
candidates and hinder our ability to conduct related pre-clinical testing and
clinical trials. As a result of these failures, we may also be unable to
obtain additional financing. Any delays in, or termination of, our clinical
trials will materially harm our business, financial condition and results of
operations.
The clinical success of ABX-CBL is uncertain.
We recently completed a multi-center Phase II trial for the treatment of
graft versus host disease, or GVHD, with our mouse antibody, ABX-CBL.
As of October 11, 2000, ABX-CBL had been administered to a total of only 191
patients for GVHD and organ transplant rejection indications. ABX-CBL was
administered to a total of 85 of these patients by third parties prior to the
time we obtained an exclusive license to ABX-CBL. We cannot rely on data
obtained from patients studied prior to our obtaining an exclusive license to
ABX-CBL to support the efficacy of ABX-CBL in an application for regulatory
approval.
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Data from 27 patients included in the Phase II study was submitted to the
FDA. As an extension to the original Phase II trial protocol, we have
enrolled an additional 32 patients. In December 1999, we initiated a
multicenter randomized and controlled Phase II/III study comparing ABX-CBL to
ATG(R). The study is designed to demonstrate statistically significant
efficacy of a single dose level of ABX-CBL in comparison to a control group
of patients receiving ATG(R). The results of the Phase II/ III trial may not
be favorable or may not extend the findings of the original Phase II study.
The FDA may view the result of our Phase III trial as insufficient and may
require additional clinical trials. There are several issues that could
adversely affect the clinical trial results, including the lack of a standard
therapy for GVHD patients in the control group, unforeseen side effects,
variability in the number and types of patients in the study and response
rates required to achieve statistical significance in the study. In addition,
our clinical trials are being conducted with patients who have failed
conventional treatments and who are in the most advanced stages of GVHD.
During the course of treatment, these patients can die or suffer adverse
medical effects for reasons that may not be related to ABX-CBL. These adverse
effects may affect the interpretation of clinical trial results. There is a
risk that the FDA will not accept the results of the Phase II/III study or
other elements of the product license application as being sufficient for
approval to market. Additional clinical trials will be extensive, expensive
and time-consuming. If ABX-CBL fails to receive regulatory approval, our
business, financial condition and results of operations may be materially
harmed.
We currently rely on a sole source third-party manufacturer.
We currently rely, and will continue to rely for at least the next two years,
on a sole source third-party manufacturer to produce ABX-CBL, ABX-IL8 and
ABX-EGF under good manufacturing practice regulations, for use in our
clinical trials. Our third-party manufacturer has a limited number of
facilities in which our product candidates can be produced and has limited
experience in manufacturing ABX-CBL, ABX-IL8 and ABX-EGF in quantities
sufficient for conducting clinical trials or for commercialization. We
currently rely on our third-party manufacturer to produce our product
candidates under good manufacturing practice regulations, which meet
acceptable standards for our clinical trials.
Third-party manufacturers often encounter difficulties in scaling up
production, including problems involving production yields, quality control
and assurance, shortage of qualified personnel, compliance with FDA
regulations, production costs, and development of advanced manufacturing
techniques and process controls. Our third-party manufacturer may not perform
as agreed or may not remain in the contract manufacturing business for the
time required by us to successfully produce and market our product
candidates. If our third-party manufacturer fails to deliver the required
quantities of our product candidates for clinical use on a timely basis and
at commercially reasonable prices, and we fail to find a replacement
manufacturer or develop our own manufacturing capabilities, our business,
financial condition and results of operations will be materially harmed.
Our own ability to manufacture is uncertain.
We are in the planning stages of establishing our own pilot scale
manufacturing facility for the manufacture of products for Phase I and Phase
II clinical trials, in compliance with FDA good manufacturing practices. In
May 2000, we signed a long-term lease for a building to be built to contain
this pilot scale facility. Construction schedules for this facility may take
longer than expected, and the planned and actual construction costs of
building and qualifying the facility for regulatory compliance may be higher
than expected. The process of manufacturing antibody products is complex. We
have no experience in the clinical or commercial scale manufacturing of
ABX-CBL, ABX-IL8 and ABX-EGF, or any other antibody products. Such antibody
products will also need to be manufactured in a facility and by a process
which complies with FDA and other regulations. It may take a substantial
period of time to begin producing antibodies in compliance with such
regulations. Our manufacturing operations will be subject to ongoing,
periodic unannounced inspection by the FDA and state agencies to ensure
compliance with good manufacturing practices. If we are unable to establish
and maintain a manufacturing facility within our planned time and cost
parameters, the development and sales of our products and our financial
performance may be materially harmed.
We also may encounter problems with the following:
- production yields;
- quality control and assurance;
- shortages of qualified personnel;
- compliance with FDA regulations;
- production costs; and
- development of advanced manufacturing techniques and process controls.
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We are currently evaluating our options for Phase III clinical trial supplies
and commercial production of our antibody products, which include use of
third-party manufacturers, establishing our own commercial scale
manufacturing facility or entering into a manufacturing joint venture
relationship with a third party. We are aware of only a limited number of
companies on a worldwide basis who operate manufacturing facilities in which
our product candidates can be manufactured under good manufacturing practice
regulations, a requirement for all pharmaceutical products. It would take a
substantial period of time for a contract facility which has not been
producing antibodies to begin producing antibodies under good manufacturing
practice regulations. We cannot assure you that we will be able to contract
with any of these companies on acceptable terms, if at all.
In addition, we and any third-party manufacturer will be required to register
manufacturing facilities with the FDA and other regulatory authorities. The
facilities will then be subject to inspections confirming compliance with FDA
good manufacturing practice or other regulations. If we or any of our
third-party manufacturers fail to maintain regulatory compliance, our
business, financial condition and results of operations will be materially
harmed.
We will need to find third parties to license and develop many of our product
candidates.
Our strategy for the development and commercialization of antibody
therapeutic products depends, in large part, upon the formation of
collaboration agreements with third parties. Potential third parties include
pharmaceutical and biotechnology companies, academic institutions and other
entities. We must enter into these agreements to successfully develop and
commercialize product candidates. These agreements are necessary in order for
us to:
- access proprietary antigens for which we can generate fully human antibody
products;
- fund our research and development activities;
- fund pre-clinical development, clinical trials and manufacturing;
- seek and obtain regulatory approvals; and
- successfully commercialize existing and future product candidates.
Only a limited number of fully human antibody product candidates have been
generated pursuant to our collaboration agreements, and only three antibody
product candidates generated with XenoMouse technology have entered clinical
testing. We cannot assure you that any of these product candidates will
result in commercially successful products. Current or future collaboration
agreements may not be successful. If we fail to maintain our existing
collaboration agreements or to enter into additional agreements, our
business, financial condition and results of operations will be materially
harmed.
Our dependence on licensing and other agreements with third parties subjects
us to a number of risks. These agreements may not be on terms favorable to
us, and collaborators typically are afforded significant discretion in
electing whether to pursue any of the planned activities. We cannot control
the amount and timing of resources our collaborators may devote to the
product candidates, and collaborators may not perform their obligations as
expected. Additionally, business combinations or significant changes in a
collaborator's business strategy may adversely affect a collaborator's
willingness or ability to complete its obligations under the arrangement.
Even if we fulfill our obligations under an agreement, typically our
collaborators can terminate the agreement at any time following proper
written notice. If any of our collaborators were to terminate or breach our
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agreement, or otherwise fail to complete its obligations in a timely manner,
our business, financial condition and results of operations may be materially
harmed. If we are not able to establish further collaboration agreements or
any or all of our existing agreements are terminated, we may be required to
seek new collaborators or to undertake product development and
commercialization at our own expense. Such an undertaking may:
- limit the number of product candidates that we will be able to develop and
commercialize;
- reduce the likelihood of successful product introduction;
- significantly increase our capital requirements; and
- place additional strain on our management's time.
Existing or future collaborators may pursue alternative technologies,
including those of our competitors. Disputes may arise with respect to the
ownership of rights to any technology or products developed with any current
or future collaborator. Lengthy negotiations with potential new collaborators
or disagreements between us and our collaborators may lead to delays or
termination in the research, development or commercialization of product
candidates or result in time-consuming and expensive litigation or
arbitration. If our collaborators pursue alternative technologies or fail to
develop or commercialize successfully any product candidate to which they
have obtained rights from us, our business, financial condition and results
of operations may be materially harmed.
We do not have marketing and sales experience.
We do not have marketing, sales or distribution capability. For certain
products, we may establish an internal marketing and sales force. We intend
to enter into arrangements with third parties to market and sell most of our
products. We may not be able to enter into marketing and sales arrangements
with others on acceptable terms, if at all. To the extent that we enter into
marketing and sales arrangements with other companies, our revenues, if any,
will depend on the efforts of others. These efforts may not be successful. If
we are unable to enter into third-party arrangements, then we must develop a
marketing and sales force, which may need to be substantial in size, in order
to achieve commercial success for any product candidate approved by the FDA.
We may not successfully develop marketing and sales experience or have
sufficient resources to do so. If we do develop such capabilities, we will
compete with other companies that have experienced and well-funded marketing
and sales operations. If we fail to establish successful marketing and sales
capabilities or fail to enter into successful marketing arrangements with
third parties, our business, financial condition and results of operations
will be materially harmed.
We are subject to extensive government regulations and we may not be able to
obtain regulatory approvals.
Our product candidates under development are subject to extensive and
rigorous domestic government regulation. The FDA regulates, among other
things, the development, testing, manufacture, safety, efficacy,
record-keeping, labeling, storage, approval, advertising, promotion, sale and
distribution of biopharmaceutical products. If our products are marketed
abroad, they also are subject to extensive regulation by foreign governments.
None of our product candidates has been approved for sale in the United
States or any foreign market. The regulatory review and approval process,
which includes pre-clinical studies and clinical trials of each product
candidate, is lengthy, expensive and uncertain. Securing FDA approval
requires the submission of extensive pre-clinical and clinical data and
supporting information to the FDA for each indication to establish the
product candidates' safety and efficacy. The approval process takes many
years, requires the expenditure of substantial resources, involves
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post-marketing surveillance, and may involve ongoing requirements for
post-marketing studies. Delays in obtaining regulatory approvals may:
- adversely affect the successful commercialization of any drugs that we or
our customers develop;
- impose costly procedures on us or our customers;
- diminish any competitive advantages that we or our customers may attain;
and
- adversely affect our receipt of revenues or royalties.
Certain material changes to an approved product such as manufacturing changes
or additional labeling claims are subject to further FDA review and approval.
Any required approvals, once obtained, may be withdrawn. Compliance with
other regulatory requirements may not be maintained. Further, if we fail to
comply with applicable FDA and other regulatory requirements at any stage
during the regulatory process, we or our third-party manufacturers may be
subject to sanctions, including:
- delays;
- warning letters;
- fines;
- product recalls or seizures;
- injunctions;
- refusal of the FDA to review pending market approval applications or
supplements to approval applications;
- total or partial suspension of production;
- civil penalties;
- withdrawals of previously approved marketing applications; and
- criminal prosecutions.
We expect to rely on our customers to file investigational new drug
applications and generally direct the regulatory approval process for many of
our products. Our customers may not be able to conduct clinical testing or
obtain necessary approvals from the FDA or other regulatory authorities for
any product candidates. If we fail to obtain required governmental approvals,
our customers will experience delays in or be precluded from marketing
products developed through our research. In addition, the commercial use of
our products will be limited. Delays and limitations may materially harm our
business, financial condition and results of operations.
We and our third-party manufacturers also are required to comply with the
applicable FDA current good manufacturing practice regulations. Good
manufacturing practice regulations include requirements relating to quality
control and quality assurance as well as the corresponding maintenance of
records and documentation. Manufacturing facilities are subject to inspection
by the FDA. These facilities must be approved before we can use them in
commercial manufacturing of our products. We or our third-party manufacturers
may not be able to comply with the applicable good manufacturing practice
requirements and other FDA regulatory requirements. If we or our third-party
manufacturers fail to comply, our business, financial condition and results
of operations will be materially harmed.
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Market acceptance of our products is uncertain.
Our product candidates may not gain market acceptance among physicians,
patients, healthcare payors and the medical community. We may not achieve
market acceptance even if clinical trials demonstrate safety and efficacy,
and the necessary regulatory and reimbursement approvals are obtained. The
degree of market acceptance of any product candidates that we develop will
depend on a number of factors, including:
- establishment and demonstration of clinical efficacy and safety;
- cost-effectiveness of our product candidates;
- their potential advantage over alternative treatment methods;
- reimbursement policies of government and third-party payors; and
- marketing and distribution support for our product candidates.
Physicians will not recommend therapies using our products until such time as
clinical data or other factors demonstrate the safety and efficacy of such
procedures as compared to conventional drug and other treatments. Even if the
clinical safety and efficacy of therapies using our antibody products is
established, physicians may elect not to recommend the therapies for any
number of other reasons, including whether the mode of administration of our
antibody products is effective for certain indications. For example, antibody
products are typically administered by infusion or injection, which requires
substantial cost and inconvenience to patients. Our product candidates, if
successfully developed, will compete with a number of drugs and therapies
manufactured and marketed by major pharmaceutical and other biotechnology
companies. Our products may also compete with new products currently under
development by others. Physicians, patients, third-party payors and the
medical community may not accept and utilize any product candidates that we
or our customers develop. If our products do not achieve significant market
acceptance, our business, financial condition and results of operations will
be materially harmed.
Risks Related to our Finances
We are an early stage company.
You must evaluate us in light of the uncertainties and complexities present
in an early stage biopharmaceutical company. Our product candidates are in
early stages of development. We will require significant additional
investment in research and development, pre-clinical testing and clinical
trials, regulatory and sales and marketing activities to commercialize
current and future product candidates. Our product candidates, if
successfully developed, may not generate sufficient or sustainable revenues
to enable us to be profitable.
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We have a history of losses.
We have incurred net losses in each of the last five years of operation,
including net losses of approximately $8.3 million in 1995, $7.1 million in
1996, $35.9 million in 1997, $16.8 million in 1998, $20.5 million in 1999 and
$4.3 million in the nine months ended September 30, 2000. As of September 30,
2000, our accumulated deficit was approximately $94.1 million. Our losses to
date have resulted principally from:
- research and development costs relating to the development of our
XenoMouse technology and antibody product candidates;
- costs associated with certain agreements with Japan Tobacco;
- costs related to a cross-license and settlement agreement relating to our
intellectual property portfolio; and
- general and administrative costs relating to our operations.
We expect to incur additional losses for the foreseeable future as a result
of increases in our research and development costs, including costs
associated with conducting pre-clinical development and clinical trials, and
charges related to purchases of technology or other assets. We intend to
invest significantly in our products prior to entering into licensing
agreements. This may increase our need for capital and will result in losses
for several years. We expect that the amount of operating losses will
fluctuate significantly from quarter to quarter as a result of increases or
decreases in our research and development efforts, the execution or
termination of licensing and contractual agreements, or the initiation,
success or failure of clinical trials.
Our future profitability is uncertain.
Prior to June 1996, our business was owned by Cell Genesys, Inc. and operated
as a business unit. Since that time, we have funded our research and
development activities primarily from:
- initial contributions from Cell Genesys;
- private placements of our capital stock;
- the initial public offering of our common stock;
- the follow-on public offering of our common stock in 1999;
- the follow-on public offering of our common stock in February 2000;
- a private placement of our common stock in November 2000;
- revenues generated from our licensing and contractual agreements;
- equipment leaseline financings; and
- loan facilities.
We expect that substantially all of our revenues for the foreseeable future
will result from payments under licensing and contractual agreements and
interest income. To date, payments under licensing and contractual agreements
have been in the form of option fees, reimbursement for research and
development expenses, license fees and milestone payments. Payments under our
existing and any future customer agreements will be subject to significant
fluctuation in both timing and amount. Our revenues may not be indicative of
our future performance or of our ability to continue to achieve such
milestones. Our revenues and results of operations for any period
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may also not be comparable to the revenues or results of operations for any
other period. We may not be able to:
- enter into further licensing and contractual agreements;
- successfully complete pre-clinical development or clinical trials;
- obtain required regulatory approvals;
- successfully develop, manufacture and market product candidates; or
- generate additional revenues or profitability.
If we fail to achieve any of the above goals, our business, financial
condition and results of operations will be materially harmed.
We may require additional financing.
We will continue to expend substantial resources for the expansion of
research and development, including costs associated with conducting
pre-clinical development and clinical trials. We will be required to expend
substantial funds in the course of completing required additional
development, pre-clinical testing and clinical trials of and regulatory
approval for product candidates. Our future liquidity and capital
requirements will depend on many factors, including:
- the scope and results of pre-clinical development and clinical trials;
- the retention of existing and establishment of further licensing and
contractual agreements, if any;
- continued scientific progress in our research and development programs;
- the size and complexity of these programs;
- the cost of establishing manufacturing capabilities and conducting
commercialization activities and arrangements;
- the time and expense involved in obtaining regulatory approvals, if any;
- competing technological and market developments;
- the time and expense of filing and prosecuting patent applications and
enforcing patent claims;
- investment in, or acquisition of, other companies;
- product in-licensing; and
- other factors not within our control.
We believe that our cash and cash equivalents, short-term investments and
cash generated from our customer agreements will be sufficient to meet our
operating and capital requirements for at least two years. However, we may
need additional financing within this time period. We may need to raise
additional funds through public or private financings, licensing and
contractual agreements or other arrangements. Additional funding may not be
available to us on favorable terms, if at all. Furthermore, any additional
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equity financing would be dilutive to our shareholders, and debt financing, if
available, may involve restrictive covenants. Contractual arrangements may
require us to relinquish our rights to certain of our technologies, product
candidates or marketing territories. If we fail to raise additional funds
when needed, our business, financial condition and results of operations will
be materially harmed.
Risks Related to our Intellectual Property
Our patent position is uncertain and our success depends on our proprietary
rights.
Our success depends in part on our ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
We will be able to protect our proprietary rights from unauthorized use by
third parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade secrets.
We solely own two issued patents in the United States, one granted patent in
Europe, three granted patents in Japan and have several pending patent
applications in the United States and abroad relating to XenoMouse
technology. Our wholly-owned subsidiary, Xenotech, owns two issued U.S.
patents, one Australian patent and several pending U.S. and foreign patent
applications related to methods of treatment of bone disease in cancer
patients. In addition, we have four issued U.S. patents and several pending
patent applications in the United States and abroad that are jointly owned
with Japan Tobacco relating to antibody technology or genetic manipulation.
We attempt to protect our proprietary position by filing U.S. and foreign
patent applications related to our proprietary technology, inventions and
improvements that are important to the development of our business. However,
the patent position of biopharmaceutical companies involves complex legal and
factual questions, and, therefore, enforceability cannot be predicted with
certainty. Patents, if issued, may be challenged, invalidated or
circumvented. Thus, any patents that we own or license from third parties may
not provide any protection against competitors. Our pending patent
applications, those we may file in the future, or those we may license from
third parties, may not result in patents being issued. Also, patent rights
may not provide us with adequate proprietary protection or competitive
advantages against competitors with similar technologies. The laws of certain
foreign countries do not protect our intellectual property rights to the same
extent as do the laws of the United States.
In addition to patents, we rely on trade secrets and proprietary know-how. We
seek protection, in part, through confidentiality and proprietary information
agreements. These agreements may not provide meaningful protection or
adequate remedies for our technology in the event of unauthorized use or
disclosure of confidential and proprietary information, and, in addition, the
parties may breach such agreements. Also, our trade secrets may otherwise
become known to, or be independently developed by, our competitors.
Furthermore, others may independently develop similar technologies or
duplicate any technology that we have developed.
We may face challenges from third parties regarding the validity of our
patents and proprietary rights. Research has been conducted for many years in
the antibody field. This has resulted in a substantial number of issued
patents and an even larger number of pending patent applications. Patent
applications in the United States are, in most cases, maintained in secrecy
until patents are issued. The publication of discoveries in the scientific or
patent literature frequently occurs substantially later than the date on
which the underlying discoveries were made. Our commercial success depends
significantly on our ability to operate without infringing the patents and
other proprietary rights of third parties. Our technologies may
unintentionally infringe the patents or violate other proprietary rights of
third parties. In the event of such infringement or violation, we and our
customers may be prevented from
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pursuing product development or commercialization. Such a result will
materially harm our business, financial condition and results of operations.
In March 1997, we entered into a cross-license and settlement agreement with
GenPharm International Inc. to avoid protracted litigation. Under the
cross-license, we licensed on a non-exclusive basis certain patents, patent
applications, third-party licenses and inventions pertaining to the
development and use of certain transgenic rodents, including mice, that
produce fully human antibodies that are integral to our products and
business. Our business, financial condition and results of operations will be
materially harmed if any of the parties breaches the cross-license agreement.
We have one granted European patent relating to XenoMouse technology that is
currently undergoing opposition proceedings within the European Patent Office
and the outcome of this opposition is uncertain.
Glaxo Wellcome Inc. has a family of patents which it is asserting against
Genentech in ongoing litigation. If any of the claims of these patents are
finally determined in the litigation to be valid and if they can be asserted
by Glaxo to be infringed by ABX-EGF, then we may need to obtain a license
should one be available. Should a license be denied or unavailable on
commercially reasonable terms, our commercialization of ABX-EGF could be
impeded in any territories in which these patents were in force.
Genentech owns a U.S. patent that relates to inhibiting the growth of tumor
cells involving an anti-EGF receptor antibody in combination with a cytotoxic
factor. If the claims of the patent are valid, we may be required to obtain a
license to Genentech's patent to label and sell ABX-EGF for some or all such
combination indications. Should a license be denied or unavailable on
commercially reasonable terms, our commercialization of ABX-EGF could be
impeded in the United States.
ImClone Systems, Inc. has announced that the United States Patent and
Trademark Office has issued a notice of allowability of a patent covering a
composition of matter of any EGFr monoclonal antibody that inhibits the
binding of EGF to its receptor in combination with any anti-neoplastic agent,
as well as the therapeutic use of such combinations. In addition, other third
parties have or may receive other patents relating to EGFr monoclonal
antibodies, their manufacture or their use. The scope and validity of any
such patent may materially impede our planned activities.
The biotechnology and pharmaceutical industries have been characterized by
extensive litigation regarding patents and other intellectual property
rights. The defense and prosecution of intellectual property suits, United
States Patent and Trademark Office interference proceedings and related legal
and administrative proceedings in the United States and internationally
involve complex legal and factual questions. As a result, such proceedings
are costly and time-consuming to pursue and their outcome is uncertain.
Litigation may be necessary to:
- enforce patents that we own or license;
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- protect trade secrets or know-how that we own or license; or
- determine the enforceability, scope and validity of the proprietary rights
of others.
If we become involved in any litigation, interference or other administrative
proceedings, we will incur substantial expense and the efforts of our
technical and management personnel will be significantly diverted. An adverse
determination may subject us to loss of our proprietary position or to
significant liabilities, or require us to seek licenses that may not be
available from third parties. We may be restricted or prevented from
manufacturing and selling our products, if any, in the event of an adverse
determination in a judicial or administrative proceeding or if we fail to
obtain necessary licenses. Costs associated with these arrangements may be
substantial and may include ongoing royalties. Furthermore, we may not be
able to obtain the necessary licenses on satisfactory terms, if at all. These
outcomes will materially harm our business, financial condition and results
of operations.
Risks Related to our Industry
We face intense competition and rapid technological change.
The biotechnology and pharmaceutical industries are highly competitive and
subject to significant and rapid technological change. We are aware of
several pharmaceutical and biotechnology companies that are actively engaged
in research and development in areas related to antibody therapy. These
companies have commenced clinical trials of antibody products or have
successfully commercialized antibody products. Many of these companies are
addressing the same diseases and disease indications as us or our customers.
Also, we compete with companies that offer antibody generation services to
companies that have antigens. These competitors have specific expertise or
technology related to antibody development. These companies include GenPharm
International, Inc., a wholly-owned subsidiary of Medarex, Inc., Medarex's
joint venture partner, Kirin Brewing Co., Ltd., Cambridge Antibody Technology
Group plc, Protein Design Labs, Inc. and MorphoSys AG.
Some of our competitors have received regulatory approval or are developing
or testing product candidates that may compete directly with our product
candidates. For example, SangStat Medical Corp. and Protein Design Labs
market organ transplant rejection products that may compete with ABX-CBL,
which is in clinical trials. In addition, MedImmune, Inc. has a potential
antibody product candidate in clinical trials for graft versus host disease
that may compete with ABX-CBL. We are also aware that several companies,
including Genentech, Inc., have potential product candidates that may compete
with ABX-IL8, which is in clinical trials. Furthermore, we are aware that
ImClone Systems, Inc., Medarex, AstraZeneca and OSI Pharmaceuticals, Inc.,
have potential antibody and small molecule product candidates in clinical
development that may compete with ABX-EGF, which is also in clinical trials.
Many of these companies and institutions, either alone or together with their
customers, have substantially greater financial resources and larger research
and development staffs than we do. In addition, many of these competitors,
either alone or together with their customers, have significantly greater
experience than we do in:
- developing products;
- undertaking pre-clinical testing and human clinical trials; and
- obtaining FDA and other regulatory approvals of products.
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Accordingly, our competitors may succeed in obtaining patent protection,
receiving FDA approval or commercializing products before us. If we commence
commercial product sales, we will be competing against companies with greater
marketing and manufacturing capabilities, areas in which we have limited or
no experience.
We also face, and will continue to face, competition from academic
institutions, government agencies and research institutions. There are
numerous competitors working on products to treat each of the diseases for
which we are seeking to develop therapeutic products. In addition, any
product candidate that we successfully develop may compete with existing
therapies that have long histories of safe and effective use. Competition may
also arise from:
- other drug development technologies and methods of preventing or reducing
the incidence of disease;
- new small molecules; or
- other classes of therapeutic agents.
Developments by competitors may render our product candidates or technologies
obsolete or non-competitive. We face and will continue to face intense
competition from other companies for agreements with pharmaceutical and
biotechnology companies for establishing relationships with academic and
research institutions, and for licenses to proprietary technology. These
competitors, either alone or with their customers, may succeed in developing
technologies or products that are more effective than ours.
We face uncertainty over reimbursement and healthcare reform.
In both domestic and foreign markets, sales of our product candidates will
depend in part upon the availability of reimbursement from third-party
payors. Such third-party payors include government health administration
authorities, managed care providers, private health insurers and other
organizations. These third-party payors are increasingly challenging the
price and examining the cost effectiveness of medical products and services.
In addition, significant uncertainty exists as to the reimbursement status of
newly approved healthcare products. We may need to conduct post-marketing
studies in order to demonstrate the cost-effectiveness of our products. Such
studies may require us to provide a significant amount of resources. Our
product candidates may not be considered cost-effective. Adequate third-party
reimbursement may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investment in product
development. Domestic and foreign governments continue to propose and pass
legislation designed to reduce the cost of healthcare. Accordingly,
legislation and regulations affecting the pricing of pharmaceuticals may
change before our proposed products are approved for marketing. Adoption of
such legislation could further limit reimbursement for pharmaceuticals. If
the government and third-party payors fail to provide adequate coverage and
reimbursement rates for our product candidates, the market acceptance of our
products may be adversely affected. If our products do not receive market
acceptance, our business, financial condition and results of operations will
be materially harmed.
Other Risks Related to our Company
We acquired immgenics pharmaceuticals inc., a Vancouver-based biotechnology
company in November 2000. we may experience difficulty in the integration of
this acquisition, or any future acquisition, with the operations of our
business.
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In early November, we acquired all of the voting stock of ImmGenics
Pharmaceuticals Inc., a Canadian biotechnology company that develops and
intends to commercialize antibody-based therapeutic and diagnostic products
for the treatment and diagnosis of a variety of diseases, for an aggregate
consideration of approximately $77.5 million payable in a special class of
ImmGenics non-voting shares that may be exchanged into our common stock.
We have a limited history of operating the business of our company and
ImmGenics on a consolidated basis, and we have no experience operating a
business outside of the United States. We may have difficulty integrating
ImmGenics' research and development operations with our own. Difficulty
managing the integration of ImmGenics could result from many factors, some of
which are beyond our control, including the following:
- the geographic distance between our Fremont, California headquarters and
our acquired Vancouver, British Columbia office;
- potential differences in research and development protocols between
ImmGenics and ourselves; and
- the potential loss of personnel from our acquired operations.
In the future, we may from time to time seek to expand our business through
additional corporate acquisitions. Our acquisition of companies and
businesses and expansion of operations, including the recent acquisition of
ImmGenics, involve risks such as the following:
- the potential inability to identify target companies best suited to our
business plan;
- the potential inability to successfully integrate acquired operations and
businesses and to realize anticipated synergies, economies of scale or
other expected value;
- incurrence of expenses attendant to transactions that may or may not be
consummated; and
- difficulties in managing and coordinating operations at multiple venues,
which, among other things, could divert our management's attention from
other important business matters.
In addition, our acquisition of companies and businesses and expansion of
operations, including the recent acquisition of ImmGenics, may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs and the creation of goodwill or other intangible
assets that could result in amortization expense.
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We depend on key personnel and must continue to attract and retain key
employees and consultants.
We are highly dependent on the principal members of our scientific and
management staff. For us to pursue product development, marketing and
commercialization plans, we will need to hire additional qualified scientific
personnel to perform research and development. We will also need to hire
personnel with expertise in clinical testing, government regulation,
manufacturing, marketing and finance. Attracting and retaining qualified
personnel will be critical to our success. We may not be able to attract and
retain personnel on acceptable terms given the competition for such personnel
among biotechnology, pharmaceutical and healthcare companies, universities
and non-profit research institutions. If we lose any of these persons, or are
unable to attract and retain qualified personnel, our business, financial
condition and results of operations may be materially harmed.
In addition, we rely on members of our Scientific Advisory Board and other
consultants to assist us in formulating our research and development
strategy. All of our consultants and the members of our Scientific Advisory
Board are employed by other entities. They may have commitments to, or
advisory or consulting agreements with, other entities that may limit their
availability to us. If we lose the services of these advisors, the
achievement of our development objectives may be impeded. Such impediments
may materially harm our business, financial condition and results of
operations.
We have implemented a stockholder rights plan and are subject to other
anti-takeover provisions.
In June 1999, our board of directors adopted a stockholder rights plan, which
was amended in November 1999. The stockholder rights plan provides for a
dividend distribution of one preferred share purchase right on each
outstanding share of our common stock. Each right entitles stockholders to
buy 1/1000th of a share of our Series A participating preferred stock at an
exercise price of $120.00. Each right will become exercisable following the
tenth day after a person or group, other than Cell Genesys or its affiliates,
successors or assigns, announces an acquisition of 15% or more of our common
stock, or announces commencement of a tender offer, the consummation of which
would result in ownership by the person or group of 15% or more of our common
stock. In the case of Cell Genesys, or its affiliates, successors or assigns,
which beneficially owned 11.89% of our outstanding common stock as of
September 30, 2000, each right will become exercisable following the tenth
day after it announces the acquisition of more than 25% of our common stock,
or announces commencement of a tender offer, the consummation of which would
result in ownership by Cell Genesys, or its affiliates, successors or
assigns, of more than 25% of our common stock. We will be entitled to redeem
the rights at $0.01 per right at any time on or before the close of business
on the tenth day following acquisition by a person or group of 15% or more,
or in the case of Cell Genesys, or its affiliates, successors or assigns,
more than 25%, of our common stock.
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The stockholder rights plan and certain provisions of our amended and
restated certificate of incorporation and amended and restated bylaws may
have the effect of making it more difficult for a third party to acquire, or
of discouraging a third party from attempting to acquire, control of us. This
could limit the price that certain investors might be willing to pay in the
future for our common stock. Certain provisions of our amended and restated
certificate of incorporation and amended and restated bylaws allow us to:
- issue preferred stock without any vote or further action by the
stockholders;
- eliminate the right of stockholders to act by written consent without a
meeting;
- specify procedures for director nominations by stockholders and submission
of other proposals for consideration at stockholder meetings; and
- eliminate cumulative voting in the election of directors.
We are subject to certain provisions of Delaware law which could also delay
or make more difficult a merger, tender offer or proxy contest involving us.
In particular, Section 203 of the Delaware General Corporation Law prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years unless certain conditions
are met. The stockholder rights plan, the possible issuance of preferred
stock, the procedures required for director nominations and stockholder
proposals and Delaware law could have the effect of delaying, deferring or
preventing a change in control of us, including, without limitation,
discouraging a proxy contest or making more difficult the acquisition of a
substantial block of our common stock. The provisions could also limit the
price that investors might be willing to pay in the future for shares of our
common stock.
We face product liability risks and may not be able to obtain adequate
insurance.
The use of any of our product candidates in clinical trials, and the sale of
any approved products, may expose us to liability claims resulting from such
use or sale of our products. These claims might be made directly by
consumers, healthcare providers or by pharmaceutical companies or others
selling such products. We may experience financial losses in the future due
to product liability claims. We have obtained limited product liability
insurance coverage for our clinical trials, and insurance coverage limits are
$5.0 million per occurrence and $5.0 million in the aggregate. We intend to
expand our insurance coverage to include the sale of commercial products if
marketing approval is obtained for product candidates in development. We may
not be able to maintain insurance coverage at a reasonable cost or in
sufficient amounts to protect us against losses. If a successful product
liability claim or series of claims is brought against us for uninsured
liabilities or in excess of insured liabilities, our business, financial
condition and results of operations may be materially harmed.
Our operations involve hazardous materials.
Our research and manufacturing activities involve the controlled use of
hazardous materials. We cannot eliminate the risk of accidental contamination
or injury from these materials. In the event of an accident or environmental
discharge, we may be held liable for any resulting damages, which may exceed
our financial resources and may materially harm our business, financial
condition and results of operations.
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We do not intend to pay cash dividends on our common stock.
We intend to retain any future earnings to finance the growth and development
of our business and we do not plan to pay cash dividends on our common stock
in the foreseeable future.
Our stock price is highly volatile.
The market price and trading volume of our common stock are volatile, and we
expect such volatility to continue for the foreseeable future. For example,
during the period between September 30, 1999 and September 30, 2000, our
common stock closed as high as $99.75 per share and as low as $9.32 per
share. This may impact your decision to buy or sell our common stock. Factors
affecting our stock price include:
- fluctuations in our operating results;
- announcements of technological innovations or new commercial therapeutic
products by us or our competitors;
- published reports by securities analysts;
- progress with clinical trials;
- government regulation;
- changes in reimbursement policies;
- developments in patent or other proprietary rights;
- developments in our relationship with customers;
- public concern as to the safety and efficacy of our products; and
- general market conditions.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk.
The objective of our investment activities is to preserve principal, while at
the same time maximizing yields without significantly increasing risk. To
achieve this objective, we invest in highly liquid and high quality debt
securities. Our investments in debt securities are subject to interest rate
risk. To minimize the exposure due to an adverse shift in interest rates, we
invest in short term securities and maintain an average maturity of one year
or less. A hypothetical 1.0% per annum increase in interest rates would
result in an approximate $1.0 million decrease in the fair value of our debt
securities, classified as available-for-sale securities, at September 30,
2000.
The Company is exposed to equity price risk on strategic investments in CuraGen
Corporation and Immunogen. The Company typically does not attempt to reduce or
eliminate its market exposure on these securities. Assuming a 10% adverse change
in the market price of the CuraGen and Immunogen stock, the fair value of these
equity investments would decrease in value by approximately $7,163,900, based
upon the value of the stock as of September 30, 2000. This estimate is not
necessarily indicative of future performance and actual results may differ
materially.
36
<PAGE>
PART II
ITEM 1 - Legal Proceedings
Not applicable.
ITEM 2 - Changes in Securities and Use of Proceeds
Changes in Securities
On August 23, 2000, our stockholders approved an amendment to our certificate of
incorporation to increase our number of authorized shares from 100,000,000 to
220,000,000 shares. The amendment became effective on August 25, 2000, the date
that we filed a Certificate of Amendment to our Amended and Restated Certificate
of Incorporation with the Secretary of State of the State of Delaware.
Use of Proceeds
Not applicable.
Recent Sales of Unregistered Securities
Not applicable.
ITEM 3 - Defaults upon Senior Securities
Not applicable.
ITEM 4 - Submission of Matters to Vote of Security Holders
A special meeting of stockholders was held on August 23, 2000. A description of
the matter and tabulation of votes follows:
1. To amend the Company's Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 100,000,000 to
220,000,000 shares:
Votes
----------------------------------
For Against Abstain
------------ ---------- --------
66,917,976 2,720,675 0
There were no broker nonvotes.
ITEM 5 - Other Information
ACQUISITION OF IMMGENICS PHARMACEUTICALS INC.
On November 3, 2000, we completed the acquisition of ImmGenics
Pharmaceuticals Inc. by acquiring all of its voting securities through a
wholly-owned subsidiary incorporated in the province of Nova Scotia, Canada,
for the sole purpose of this acquisition, for an aggregate consideration of
approximately $77.5 million payable in shares exchangeable into our common
stock. The amount of consideration paid was determined in an arms-length
negotiation between the parties. At closing, former stockholders of ImmGenics
were issued non-voting special shares of ImmGenics on a one-for-one basis and
former option holders of ImmGenics were issued options to purchase our common
stock. These special non-voting special shares will be exchangeable into the
number of shares of our common stock determined by an exchange ratio based on
the five-day average of the closing trading price of our common stock
immediately preceding the effective date of the registration statement
covering the common stock issuable upon the exchange. We have undertaken to
file a registration statement to cover our common stock issuable upon the
exchange by former ImmGenics securityholders of their special shares of
ImmGenics and the exercise of the options by former ImmGenics option holders.
ImmGenics is a Vancouver-based biotechnology company founded in 1993 and has
developed a proprietary technology which may increase the effectiveness and
speed of antibody product discovery efforts. ImmGenics' technology involves
screening antibodies directly from antibody-producing B cells rather than
from hybridoma cell lines. This technology provides a larger pool of
candidates than are available with traditional hybridoma technology.
ImmGenics' technology provides access to the complete immune response for the
identification of antibodies with the desired functional properties and
highest affinities.
The foregoing descriptions of the acquisition are qualified in their entirety
to the texts of the agreements we entered into in connection with the
acquisition, copies of which are attached hereto as exhibits.
The financial statements and pro forma financial information filed herewith
are as follows:
37
<PAGE>
AUDITORS' REPORT
To the Directors of
IMMGENICS PHARMACEUTICALS INC.
We have audited the balance sheets of IMMGENICS PHARMACEUTICALS INC. as at
August 31, 2000 and 1999 and the statements of loss and deficit and cash flows
for each of the years in the three year period ended August 31, 2000. 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 Canada. Those standards require that we plan and perform an audit to
obtain reasonable assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at August 31, 2000 and 1999
and the results of its operations and its cash flows for each of the years in
the three year period ended August 31, 2000 in accordance with accounting
principles generally accepted in Canada. As required by the Company Act (British
Columbia), we report that, in our opinion, these principles have been applied on
a consistent basis.
/s/ ERNST & YOUNG LLP
Chartered Accountants
Vancouver, Canada
October 6, 2000
38
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
Incorporated under the laws of British Columbia
BALANCE SHEETS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
AS AT AUGUST 31
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents................................... $ 3,358,790 $ 486,699
Short-term investments...................................... 6,526,357 1,932,627
Accounts receivable......................................... 74,908 33,640
Investment tax credit receivable............................ 1,152,925 680,659
Prepaid expenses............................................ 21,515 16,653
----------- -----------
TOTAL CURRENT ASSETS........................................ 11,134,495 3,150,278
----------- -----------
Capital assets [NOTE 4]..................................... 774,422 682,483
Technology license [NOTE 5]................................. 10,357 26,177
----------- -----------
$11,919,274 $ 3,858,938
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities.................... 796,047 441,417
Convertible debenture, current portion [NOTE 6]............. 709,388 --
----------- -----------
TOTAL CURRENT LIABILITIES................................... 1,505,435 441,417
----------- -----------
Convertible debenture [NOTE 6].............................. -- 579,046
----------- -----------
TOTAL LIABILITIES........................................... 1,505,435 1,020,463
----------- -----------
Commitments [NOTE 9]
SHAREHOLDERS' EQUITY
Share capital [NOTE 7]
Common shares............................................. 2,906,680 1,333,346
Class A preferred shares.................................. 3,706,988 3,704,010
Class B preferred shares.................................. 3,616,353 --
Contributed surplus......................................... 5,442,229 313,264
Deficit..................................................... (5,258,411) (2,512,145)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................. 10,413,839 2,838,475
----------- -----------
$11,919,274 $ 3,858,938
=========== ===========
</TABLE>
See accompanying notes
39
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
STATEMENTS OF LOSS AND DEFICIT
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Contract research income............................... $ 153,461 $ 101,366 $ --
Government grants...................................... 36,650 7,200 28,268
Interest income........................................ 256,843 81,135 8,961
----------- ----------- -----------
446,954 189,701 37,229
----------- ----------- -----------
EXPENSES
Research and development [NOTE 12]..................... 1,583,471 817,824 275,569
General and administrative [NOTE 13]................... 1,175,888 593,880 210,064
Other expenses [NOTE 8]................................ 277,369 -- --
Accretion of convertible debt [NOTE 6]................. 156,492 130,410 --
----------- ----------- -----------
3,193,220 1,542,114 485,633
----------- ----------- -----------
LOSS FOR THE YEAR...................................... (2,746,266) (1,352,413) (448,404)
Deficit, beginning of year............................. (2,512,145) (1,159,732) (711,328)
----------- ----------- -----------
DEFICIT, END OF YEAR................................... $(5,258,411) $(2,512,145) $(1,159,732)
=========== =========== ===========
</TABLE>
See accompanying notes
40
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
STATEMENTS OF CASH FLOWS
(IN CANADIAN DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31
-------------------------------------
2000 1999 1998
----------- ----------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss for the year....................................... $(2,746,266) $(1,352,413) $(448,404)
Items not involving cash:
Amortization.......................................... 238,764 121,140 11,223
Unrealized foreign exchange gain...................... (26,150) -- --
Accretion of convertible debt......................... 156,492 130,410 --
Net change in non-cash working capital items relating
to operations:
Accounts receivable................................... (41,268) (29,355) (4,285)
Investment tax credit receivable...................... (442,266) (479,538) (13,900)
Prepaid expenses...................................... (4,862) (10,373) 6,278
Accounts payable and accrued liabilities.............. 253,122 225,389 103,084
----------- ----------- ---------
CASH USED IN OPERATING ACTIVITIES....................... (2,612,434) (1,394,740) (346,004)
----------- ----------- ---------
INVESTING ACTIVITIES
Acquisition of capital assets........................... (243,375) (842,032) (4,429)
Funds from (purchase of) short-term investments......... (4,593,730) (1,796,799) 392,913
Other................................................... -- -- (21,682)
----------- ----------- ---------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... (4,837,105) (2,638,831) 366,802
----------- ----------- ---------
FINANCING ACTIVITIES
Issuance of Common shares, net of issue costs........... 1,573,334 -- --
Issuance of preferred shares, net of issue costs........ 8,748,296 3,704,010 --
Issuance of convertible debenture....................... -- 761,900 --
----------- ----------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES................... 10,321,630 4,465,910 --
----------- ----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS FOR THE
YEAR.................................................. 2,872,091 432,339 20,798
Cash and cash equivalents, beginning of year............ 486,699 54,360 33,562
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.................. $ 3,358,790 $ 486,699 $ 54,360
=========== =========== =========
</TABLE>
See accompanying notes
41
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
1. DESCRIPTION OF BUSINESS
ImmGenics Pharmaceuticals Inc. (the "Company") was incorporated on June 10,
1993 under the laws of the Province of British Columbia. The Company conducts
research and development relating to methods for the generation of monoclonal
antibodies or proteins.
The Company has devoted a substantial part of its efforts towards raising
capital, research and development of the Company's products. To date the Company
has not earned significant revenue and is considered to be in the development
stage. Accordingly, the Company will require for the foreseeable future, ongoing
capital infusions in order to continue its operations, fund its research and
development activities, and ensure orderly realization of its assets at their
carrying values.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada. A reconciliation of amounts presented
in accordance with United States accounting principles is detailed in note 15.
Because a precise determination of many assets and liabilities depends on
future events, the preparation of financial statements necessarily involves the
use of management's estimates and approximations. Actual results could differ
from those estimates. A summary of significant accounting policies are as
follows:
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
an original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates market value. Included in
cash and cash equivalents are amounts denominated in U.S. dollars totalling
$1,856,553.
SHORT-TERM INVESTMENTS
Short-term investments, which comprise of U.S. and Canadian money market
funds, corporate bonds and treasury bills with maturities to May 24, 2001 and
average interest rates of 6.2% [1999 - 4.94%] are recorded at the lower of
amortized cost and market. The carrying value of these instruments approximates
their market value. Included in short term investments are investments
denominated in U.S. dollars totalling $3,923,111.
RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed in the year incurred. Development costs are
expensed in the year incurred unless the Company believes a development project
meets generally accepted accounting criteria for deferral and amortization. No
development costs have been deferred to date.
TECHNOLOGY LICENSE
The costs of acquiring technology are capitalized at cost and amortized on a
straight line basis over a period of five years.
42
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Management reviews the intellectual property for impairment whenever events
or changes in circumstances indicate that full recoverability is questionable.
Management measures any potential impairment by comparing the carrying value to
the undiscounted amounts of expected future cash flows.
CAPITAL ASSETS
Capital assets are recorded at acquisition cost less accumulated
amortization and related investment tax credits. Amortization has been provided
over the estimated useful lives of the assets using the following methods:
<TABLE>
<S> <C>
Computer equipment................... 30% declining balance
Computer software.................... 2 years straight line
Research equipment................... 5 years straight line
Furniture and equipment.............. 20%-30% declining balance
Leasehold improvements............... Term of lease
</TABLE>
FINANCIAL INSTRUMENTS
The fair values of the financial instruments, including cash and cash
equivalents, accounts receivable, investment tax credit receivable, and accounts
payable and accrued liabilities, approximate their carrying values due to their
short term nature. Short-term investments are carried at cost plus accrued
interest, which approximates market values. The fair value of the convertible
debenture has been determined using the discounted cash flows model [note 6].
INVESTMENT TAX CREDITS
The benefits of investment tax credits for scientific research and
development expenditures are recognized in the year the qualifying expenditure
is made providing there is reasonable assurance of recoverability. The
investment tax credit reduces the carrying cost of expenditures and capital
assets related to research and development. As a Canadian controlled private
corporation the Company has been eligible for refundable investment tax credits.
In the event the Company is no longer a Canadian controlled private corporation,
it will qualify for investment tax credits as a reduction of taxes payable.
DEBT AND EQUITY
The Company has chosen to present debt and equity in accordance with their
legal form, in accordance with the provisions for private companies permitted in
CICA Section 3860 "FINANCIAL INSTRUMENTS--DISCLOSURE AND PRESENTATION."
REVENUE RECOGNITION
Contract research income and research related government grants are
non-refundable and recorded as revenue in the year the related research
expenditures are incurred pursuant to the terms of the agreements.
43
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Cash and other monetary assets and liabilities representing amounts owing to
or by the Company have been translated into Canadian dollars at the rate of
exchange prevailing at year end. Other assets and liabilities and revenues and
expenses are translated at the rate prevailing when they were acquired or
incurred.
Exchange gains and losses resulting from the translation of foreign currency
transactions are included in the determination of loss for the year, except for
long-term monetary items which are deferred and amortized into income.
FUTURE INCOME TAXES
Future income taxes are recognized for the future income tax consequences
attributable to differences between the carrying values of assets and
liabilities and their respective income tax bases. Future income tax assets and
liabilities are measured using enacted income tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled. The effect on future income tax assets and liabilities of
a change in rates is included in earnings in the period that includes the
enactment date. Future income tax assets are recorded in the financial
statements if realization is considered more likely than not.
STOCK BASED COMPENSATION
The Company grants stock options to executive officers and directors,
employees and consultants pursuant to a stock option plan described in
note 7(d). No compensation expense is recognized for these plans when Common
shares or stock options are issued. Any consideration received on exercise of
stock options is credited to share capital.
3. CHANGE IN ACCOUNTING PRINCIPLE
Effective September 1, 1999, the Company adopted the new recommendations of
The Canadian Institute of Chartered Accountants with respect to accounting for
income taxes under the liability method. The change has been applied
retroactively and, as permitted the comparative financial statements have not
been restated. The change in accounting policy did not result in any adjustment
in the current year or to opening deficit. Before the adoption of the new
recommendations, income tax expense was determined using the deferral method of
tax allocation.
44
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
ACCUMULATED NET BOOK
COST AMORTIZATION VALUE
---------- ------------ --------
<S> <C> <C> <C>
AUGUST 31, 2000
Computer equipment......................... $ 90,271 $ 27,086 $ 63,185
Computer software.......................... 8,076 4,170 3,906
Research equipment......................... 756,221 187,544 568,677
Furniture and equipment.................... 181,919 51,700 130,219
Leasehold improvements..................... 70,151 61,716 8,435
---------- -------- --------
$1,106,638 $332,216 $774,422
========== ======== ========
AUGUST 31, 1999
Computer equipment......................... 50,016 8,632 41,384
Computer software.......................... 4,302 1,076 3,226
Research equipment......................... 558,270 55,827 502,443
Furniture and equipment.................... 138,656 17,096 121,560
Leasehold improvements..................... 40,511 26,641 13,870
---------- -------- --------
$ 791,755 $109,272 $682,483
========== ======== ========
</TABLE>
Capital assets are recorded net of investment tax credits recorded during
the year ended August 31, 2000 of $30,000 [1999--$76,387].
5. TECHNOLOGY LICENSE
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Technology license, cost................................ $ 79,098 $ 79,098
Accumulated amortization................................ (68,741) (52,921)
-------- --------
$ 10,357 $ 26,177
======== ========
</TABLE>
6. CONVERTIBLE DEBENTURE
Pursuant to an investment agreement, during the year ended August 31, 1999,
the Company issued a US $500,000 interest free convertible debenture together
with 200,000 warrants entitling the holder to purchase 200,000 Class A preferred
shares at an exercise price of US $0.01 per share. During the year ended
August 31, 2000, the repayment terms of the debenture were amended by the
inclusion of an additional event requiring repayment [see (iii) below]. The
debenture is repayable at the earliest of (i) November 4, 2000 (ii) the date the
Company completes an Initial Public Offering of its Common shares or (iii) the
date the Company completes a merger, amalgamation, arrangement, compromise, or
takeover bid, (the "Expiry Date"). The debenture is convertible at the option of
the holder into either Class A preferred shares or Class A preferred share
purchase warrants at a conversion rate of US
45
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
6. CONVERTIBLE DEBENTURE (CONTINUED)
$1.4552 per share or warrant, subject to adjustments from time to time to
reflect the capital reorganizations and share issuances, up until the Expiry
Date. Each Class A preferred share purchase warrant entitles the holder to
purchase until the Expiry Date one Class A preferred share at a price of US
$0.01 per share. At August 31, 2000 the fair market value of the convertible
debenture is approximately $725,000 [August 31, 1999--$690,000].
Accordingly, for accounting purposes the Company has segregated the
convertible debenture into two component parts; a liability component of
$448,636 and an equity component reflected in contributed surplus representing
the share purchase warrants of $313,264. The issue discount on the liability
component is amortized to income over the term of the convertible debenture.
During the year ended August 31, 2000, the 200,000 share purchase warrants
were exercised for gross proceeds of $2,978 (US $2,000). Concurrently with the
issuance of the convertible debenture, the convertible debenture holder was
issued a right to acquire an additional 200,000 warrants in the event the
Company failed to complete an equity financing of a certain dollar amount, or
additional warrants to acquire up to 30% of the outstanding share capital in the
event certain milestones were not achieved. Pursuant to the issuance of the
Class B preferred shares the Company amended the investment agreement to
terminate this requirement to issue an additional 200,000 warrants.
7. SHARE CAPITAL
[a] AUTHORIZED
100,000,000 Common shares without par value
100,000,000 Class A preferred shares without par value
100,000,000 Class B preferred shares with a par value of $1 each
During the year ended August 31, 2000, the authorized capital was increased
by the creation of 100,000,000 Class B preferred shares with a par value of $1
each.
[b] RIGHTS
CLASS A PREFERRED SHARES
The Class A preferred shares are voting and entitled to non-cumulative
dividends of US $0.14552 per share after payment of dividends on the Class B
preferred shares. The Class A preferred shares are convertible into Common
shares at the holder's option on a one-for-one basis, subject to an adjustment
to reflect capital reorganizations and share issuances. Mandatory conversion on
the same basis as above, of the Class A preferred shares will occur at the time
the Company completes an underwritten public offering of Common shares raising
net proceeds to the Company of at least $15,000,000 at a minimum share price of
$7.00 per Common share on a specified stock exchange or upon completion of a
merger, amalgamation, arrangement, compromise, or takeover bid or any other
transaction resulting in the sale or liquidation of substantially all of the
assets of the Company.
46
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
7. SHARE CAPITAL (CONTINUED)
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Class A preferred shares will be entitled to receive, after the
payment of US $1.65913 per Class B preferred share plus any declared and unpaid
dividends on the Class B preferred shares, but in preference to holders of
Common shares, their paid-in amount plus any declared and unpaid dividends.
During the year ended August 31, 2000, in conjuction with the issuance of
the Class B preferred shares, the Company amended certain terms of the rights
and restrictions of the Class A preferred shares to remove the right by the
shareholders to require the Company to redeem all or any part of such Class A
Preferred shares.
CLASS B PREFERRED SHARES
The Class B preferred shares are voting and entitled to non-cumulative
dividends of US $0.165913 per share in preference and priority to any payment of
dividends on the Class A preferred shares and Common shares. The Class B
preferred shares are convertible into Common shares at the holder's option on a
one-for-one basis, subject to an adjustment from time to time to reflect capital
reorganizations and share issuance. Mandatory conversion of the Class B
preferred shares will occur at the time the Company completes an underwritten
public offering of Common shares raising net proceeds to the Company of at least
$15,000,000 at a minimum share price of $7.00 per Common share on a specified
stock exchange, or upon completion of a merger, amalgamation, arrangement,
compromise, or takeover bid resulting in the sale or liquidation of
substantially all of the assets of the Company.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Class B preferred shares will be entitled to receive, in
preference to the Class A preferred and holders of Common shares, their paid-in
amount plus any declared and unpaid dividends.
47
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
7. SHARE CAPITAL (CONTINUED)
[c] ISSUED AND OUTSTANDING
<TABLE>
<CAPTION>
NUMBER AMOUNT
--------- ----------
<S> <C> <C>
COMMON SHARES
BALANCE, AUGUST 31, 1997 AND 1998........................... 6,807,566 $1,287,113
Issued for technology license [NOTE 7(e)]................... 18,654 46,233
Issued pursuant to anti-dilution agreements [NOTE 7(f)]..... 122,696 --
Issued pursuant to an amending agreement [NOTE 7(f)]........ 10,000 --
--------- ----------
BALANCE, AUGUST 31, 1999.................................... 6,958,916 1,333,346
Issued for cash pursuant to private placements.............. 506,794 1,608,300
Issued for cash on exercise of stock options [NOTE 7(d)].... 226,600 3,575
Issued pursuant to anti-dilution agreements [NOTE 7(f)]..... 144,227 --
Share issue costs........................................... -- (38,541)
--------- ----------
Balance, August 31, 2000.................................... 7,836,537 $2,906,680
========= ==========
</TABLE>
<TABLE>
<CAPTION>
NUMBER AMOUNT
--------- ----------
<S> <C> <C>
CLASS A PREFERRED SHARES
BALANCE, AUGUST 31, 1998.................................... -- $ --
Issued for cash pursuant to private placement............... 1,718,000 3,764,010
Share issue costs........................................... -- (60,000)
--------- ----------
BALANCE, AUGUST 31, 1999.................................... 1,718,000 3,704,010
Issued for cash on exercise of warrants [NOTE 6]............ 200,000 2,978
--------- ----------
BALANCE, AUGUST 31, 2000.................................... 1,918,000 $3,706,988
========= ==========
</TABLE>
<TABLE>
<CAPTION>
NUMBER AMOUNT
--------- ----------
<S> <C> <C>
CLASS B PREFERRED SHARES
BALANCE, AUGUST 31, 1999.................................... -- $ --
Issued for cash pursuant to private placement............... 3,616,353 3,616,353
--------- ----------
BALANCE, AUGUST 31, 2000.................................... 3,616,353 $3,616,353
========= ==========
</TABLE>
The excess of the net proceeds over par value from the issuance of the
Class B preferred shares during the year ended August 31, 2000 of $5,128,965 has
been credited to contributed surplus. Share issue costs amounting to $188,682
have been charged to contributed surplus.
48
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
7. SHARE CAPITAL (CONTINUED)
[d] STOCK OPTIONS
Options are granted to executive officers and directors, employees and
consultants by way of discretionary grants approved by the board of directors,
and are allocated pursuant to a Stock Option Plan (1996), for which 1,900,000
common shares have been reserved for issuance.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONED AVERAGE
COMMON SHARES EXERCISE PRICE
------------- --------------
<S> <C> <C>
BALANCE, AUGUST 31, 1997 AND 1998................. 659,000 $1.05
Options granted................................... 361,700 2.22
--------- -----
BALANCE, AUGUST 31, 1999.......................... 1,020,700 1.46
Options granted................................... 559,900 2.47
Options exercised................................. (1,600) 2.22
Options forfeited................................. (26,000) 2.22
--------- -----
BALANCE, AUGUST 31, 2000.......................... 1,553,000 $1.81
========= =====
</TABLE>
At August 31, 2000 there are 1,553,000 [1999 - 1,020,700] stock options
outstanding pursuant to the Stock Option Plan (1996) as follows:
<TABLE>
<CAPTION>
NUMBER NUMBER
OUTSTANDING EXERCISABLE
EXERCISE AUGUST 31, AUGUST 31,
EXPIRY DATE PRICE 2000 2000
----------- -------- ----------- -----------
<S> <C> <C> <C>
March 27, 2006................................ $1.05 609,000 609,000
January 7, 2009............................... 2.22 25,600 25,600
February 25, 2009............................. 2.22 100,000 100,000
March 29, 2009................................ 2.22 200,000 200,000
June 9, 2009.................................. 1.05 50,000 50,000
June 9, 2009.................................. 2.22 8,500 8,500
September 17, 2009............................ 2.22 3,600 3,600
February 24, 2010............................. 2.55 2,600 2,600
July 13, 2010................................. 2.47 553,700 71,000
--------- ---------
1,553,000 1,070,300
========= =========
</TABLE>
During the year ended August 31, 2000, the Company extended the expiry date
for 500,300 stock options with exercise prices ranging from $1.05 to $2.55 and
expiry dates from March 27, 2001 to March 27, 2006, by an additional 5 years.
The revised expiry dates are reflected in the above table.
In addition, during the year ended August 31, 2000 the Company granted
600,000 stock options to purchase Common shares to an officer of the Company
with an exercise price of $0.0001 and expiry date of November 1, 2004, outside
of the Stock Option Plan (1996). 150,000 options vested upon granting of the
stock options and 9,375 options vest monthly thereafter. As at August 31, 2000,
375,000 options remain outstanding of which 9,375 are exercisable.
49
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
7. SHARE CAPITAL (CONTINUED)
At the time a director, officer or employee ceases to be a director, officer
or employee of the Company, any unexercised share purchase options held by them
will expire within 30 days.
[e] COMMITMENT TO ISSUE SHARES
Pursuant to a license agreement dated May 9, 1994 the Company was obligated
to issue to the licensor Common shares equal to 1.5% of shares issued until the
aggregate value of the consideration received from share issuances reached
$3 million. At August 31, 1998 the Company was obligated to issue 6,805 Common
shares at a deemed value of $19,928. During the year ended August 31, 1999 the
Company issued the 6,805 Common shares and a further 11,849 Common shares at a
deemed value of $26,305 in respect of its obligation under the license
agreement, which have been capitalized as costs of the technology license
[note 5]. No further shares are required to be issued pursuant to the agreement.
[f] DILUTION
In October 1998, the Company entered into anti-dilution and amending
agreements with holders of 116,666 and 100,000 common shares, such that in the
event the Company issues common or Class A preferred shares of the Company for
less than $3.00 and $4.00 per share respectively, prior to an initial public
offering, the shareholders would receive additional common shares equal to the
original issuance proceeds divided by the subsequent issue price less the
original number of common shares issued. Pursuant to the issuance of Class A
preferred shares during the year ended August 31, 1999, the Company issued
122,696 common shares to fulfill its obligation under these agreements. As a
result of the issuance of these anti-dilution shares, the effective share price
for the shares mentioned above is $2.21 per share. Also, the holder of 6,666 of
the total 116,666 common shares lost any further anti-dilution rights after the
issuance of the dilutive Class A shares.
Pursuant to a private placement agreement dated April 1997, the Company
issued a further 10,000 Common shares during the year ended August 31, 1999, to
fulfill its obligation under this agreement. The agreement provided that the
Company would issue these shares to the subscriber if within eighteen months of
closing of the offering the Company could not obtain a receipt for a preliminary
prospectus. No further shares are issuable under this agreement.
In November 1999, the Company entered into an anti-dilution agreement with
individuals who acquired 457,069 Common shares, through private placements in
1999 such that in the event the Company issues any class of common shares of the
Company for less than $3.25 per share, the shareholders would receive additional
Common shares equal to the original issuance proceeds divided by the subsequent
issue price less the original number of Common shares issued. Pursuant to the
issuance of Class B preferred shares during the year ended August 31, 2000, the
Company issued 144,227 Common shares to fulfill its obligation under this
agreement. No further shares are issuable under this agreement.
8. OTHER EXPENSES
Direct and incremental costs incurred in respect of the proposed sale of the
Company [note 16] have been expensed as other expenses.
50
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
9. COMMITMENTS
[i] The Company has entered into rental agreements for laboratory and office
space which extend to June 30, 2001. The future minimum payments under these
leases are $202,087.
[ii] The Company entered into an agreement related to the sale of the Company
[see note 16] in August 2000. Pursuant to the agreement the Company paid a
fee of US $50,000 and is required to pay additional fees of US $350,000,
plus a transaction fee equal to a percentage of the consideration for the
sale of the business subject to a minimum of US $1 million. The agreement
expires in August 2001.
[iii] The Company entered into a purchase agreement with a supplier for research
equipment in October 2000. Pursuant to the agreement the Company is
committed to pay approximately $440,000 (US $300,000).
10. RELATED PARTY TRANSACTIONS
During the year ended August 31, 2000, the Company paid consulting fees of
$5,518 [1999--$nil; 1998--$24,500] to directors of the Company.
11. INCOME TAXES
As at August 31, 2000 the Company has non-capital loss carryforwards
available to reduce taxable income that expire as follows:
<TABLE>
<S> <C>
2002........................................................ $ 42,000
2003........................................................ 27,000
2004........................................................ 122,000
2005........................................................ 200,000
2006........................................................ 395,000
2007........................................................ 1,276,000
----------
$2,062,000
==========
</TABLE>
In addition, the Company has scientific research and experimental
development expenditures of approximately $3,688,000 available for carryforward
indefinitely and unclaimed investment tax credits of $167,000 which may be used
to reduce future taxable income and income taxes, respectively, otherwise
payable. However, as a result of the potential acquisition of the Company
subsequent to year end [note 16(a)], the non-capital losses, any unclaimed
investment tax credits and scientific research and experimental development
expenditures noted above will be restricted by Canadian tax law and may not be
available for use in future years.
The potential income tax benefits relating to these loss carryforwards,
temporary differences and tax credits have not been recognized in the accounts
as their realization did not meet the requirements of "more likely than not"
under the liability method of tax allocation. In prior periods the Company had
concluded the realization of the loss carryforwards and tax credits under the
deferral method of tax allocation did not meet the virtual certainty and
reasonable assurance test. Accordingly, no future tax assets have been
recognized as at August 31, 2000 and September 1, 1999.
51
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
12. RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ---------
<S> <C> <C> <C>
Salaries and benefits..................... $ 991,062 $ 502,894 $ --
Contract research agreements.............. -- 283,939 384,651
Laboratory supplies....................... 835,770 294,201 --
Consulting................................ 90,465 125,561 --
Patent costs.............................. 88,008 10,792 5,093
Amortization.............................. 145,166 79,975 10,559
---------- ---------- ---------
2,150,471 1,297,362 400,303
Less: investment tax credits.............. (567,000) (479,538) (124,734)
---------- ---------- ---------
$1,583,471 $ 817,824 $ 275,569
========== ========== =========
</TABLE>
13. GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
2000 1999 1998
---------- -------- --------
<S> <C> <C> <C>
Salaries and benefits....................... $ 286,832 $126,667 $ --
Rent........................................ 187,135 135,577 85,899
Professional fees........................... 68,908 69,309 66,000
Legal fees.................................. 90,443 74,675 29,185
Office and miscellaneous.................... 190,139 94,764 23,175
Foreign exchange loss....................... 91,463 -- --
Travel and meetings......................... 167,370 51,723 5,141
Amortization................................ 93,598 41,165 664
---------- -------- --------
$1,175,888 $593,880 $210,064
========== ======== ========
</TABLE>
14. SEGMENT DISCLOSURES AND MAJOR CUSTOMERS
The Company operates in one business segment with all of its assets and
operations located in Canada. All of the Company's revenues are generated in
Canada. During the years ended August 31, 2000 and 1999 all contract research
income was earned from one customer in the United States. As a result of this
contract, 59% [19%--1999] of total receivables is due from this one customer.
15. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company prepares its financial statements in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"), which, as applied in
these financial statements, conform in
52
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
15. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
all material respects to those accounting principles generally accepted in the
United States ("US GAAP"), except as follows:
[a] STOCK-BASED COMPENSATION
For reconciliation purposes to US GAAP, the Company has elected to follow
the intrinsic value approach of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) in accounting for its employee
stock options. Under APB 25, when the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. During the year ended August 31,
2000, $578,883 [1999 and 1998--$nil] in compensation expense would be recognized
for employee stock options granted below the fair price of the underlying stock
on the date of grant. The Company would recognize additional compensation
expense over future vesting periods of $903,057.
On July 13, 2000, the expiry dates for certain fully vested stock options
were extended by an additional five years. Under FASB Interpretation No. 44 to
APB 25, compensation expense equal to the excess intrinsic value of the award on
the date of the modification over the original intrinsic value of the award is
recognized at the date of modification. During the year ended August 31, 2000
$305,167 in compensation expense would be recognized.
Under US GAAP, stock based compensation to non-employees must be recorded at
the fair value of options granted. This compensation, determined using an option
pricing model, is expensed over the vesting periods of each option grant. For
purposes of reconciliation to US GAAP, all options are vested as at year end,
thus the total compensation expense in the current year is $172,000 [1999 and
1998--nil].
[b] TECHNOLOGY LICENSE
Under US GAAP, amounts paid for a technology license used solely in research
and development activities and with no alternative future use, would be
expensed.
[c] FINANCIAL INSTRUMENTS
[i] Under US GAAP, the Company's Class A retractable preferred shares would be
considered mezzanine equity in 1999 and accordingly would be shown outside
of shareholders' equity. With the amendment to the rights and restrictions
of these shares in 2000, they would be reclassified into shareholders'
equity under US GAAP.
[d] RECENT PRONOUNCEMENTS
[i] The United States Securities and Exchange Commission has issued Staff
Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS
(SAB101). This pronouncement is effective for the Company's year ending
August 31, 2001. The Company has not yet determined the impact of SAB101 on
its financial statements and its current revenue recognition policies.
[ii] The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (SFAS 133), as
53
<PAGE>
IMMGENICS PHARMACEUTICALS INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 31, 2000
(IN CANADIAN DOLLARS)
15. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
amended by SFAS 138. SFAS 133 will be effective for the Company's
August 31, 2001 year end. The Company has not determined the impact, if any,
of this pronouncement on its financial statements.
[e] SUMMARY OF EFFECT ON FINANCIAL STATEMENTS
The impact of significant US GAAP variations on the Balance Sheets are as
follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Technology license.......................................... $ -- $ --
Total assets................................................ 11,908,917 3,832,761
Mezzanine equity, Class A preferred shares.................. -- 3,704,010
Share capital............................................... 16,728,300 1,646,610
Deficit..................................................... (6,324,818) (2,538,322)
</TABLE>
The impact of significant US GAAP variations on the Statements of Loss are
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- ---------
<S> <C> <C> <C>
Loss for the year, Canadian GAAP......................... $ 2,746,266 $(1,352,413) $(448,404)
Adjustment for stock based compensation
--non-employees........................................ (172,000) -- --
--employees intrinsic value............................ (578,883) -- --
--employees extension of expiry date................... (305,167) -- --
Adjustment for technology license expense................ 15,820 (13,774) 10,559
----------- ----------- ---------
Loss and comprehensive loss for the year, US GAAP........ $(3,786,496) $(1,366,187) $(437,845)
=========== =========== =========
</TABLE>
16. SUBSEQUENT EVENTS
The following events occurred subsequent to August 31, 2000:
[a] The Company has entered into an Acquisition Agreement with Abgenix, Inc.
dated September 25, 2000 (the "Acquisition"). The Acquisition will be
carried out under a Plan of Arrangement whereby Abgenix, Inc. will
effectively exchange approximately US $77 million of Abgenix common stock
for all outstanding Common shares and securities convertible into Common
shares of the Company. The Plan of Arrangement is subject to the approval of
the Company's shareholders and court approval.
[b] On September 19, 2000, the Company granted options to acquire 59,000 Common
shares with an exercise price of $2.47 per share and an expiry date of
September 19, 2010.
54
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF ABGENIX AND
IMMGENICS
The merger of Abgenix and ImmGenics closed on November 6, 2000. The
following unaudited pro forma condensed combined financial statements give
effect to the merger using the purchase method of accounting and include the pro
forma adjustments described in the accompanying notes.
The following Unaudited Pro Forma Condensed Combined Statement of Operations
of Abgenix and ImmGenics for the year ended December 31, 1999 and the nine-month
period ended September 30, 2000 are based on the historical financial statements
of Abgenix and ImmGenics after giving effect to the merger with ImmGenics under
the purchase method of accounting and the assumptions and adjustments described
in the accompanying Notes to the Unaudited Pro Forma Condensed Combined
Financial Statements of Abgenix and ImmGenics.
The Unaudited Pro Forma Condensed Combined Financial Statements of Abgenix
and ImmGenics should be read in conjunction with the historical financial
statements of Abgenix and ImmGenics, included elsewhere in this prospectus.
The Unaudited Pro Forma Condensed Combined Statements of Operations of
Abgenix and ImmGenics are presented as if the combination had taken place on
January 1, 1999. The Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999 combines the year ended
December 31, 1999 for Abgenix and the twelve months ended November 30, 1999 for
ImmGenics. The Unaudited Pro Forma Condensed Combined Statement of Operations
for the nine months ended September 30, 2000 combines the nine months ended
September 30, 2000 for Abgenix and the nine months ended August 31, 2000 for
ImmGenics. The Unaudited Pro Forma Condensed Combined Balance Sheet is presented
to give effect to the proposed merger as if it occurred on September 30, 2000
and combines the balance sheet of Abgenix as of September 30, 2000 and ImmGenics
as August 31, 2000. The pro forma information does not purport to be indicative
of the results that would have been reported if the above transactions had been
in effect for the period presented or which may result in the future.
In October 2000, Abgenix acquired Intraimmune Therapies, Inc. The Unaudited
Pro Forma Condensed Combined Financial Statements of Abgenix and ImmGenics do
not include this acquisition since it is not significant to Abgenix.
55
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ABGENIX IMMGENICS ADJUSTMENTS COMBINED
------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $107,516 $ 2,283 $ (585) $109,214
Marketable securities............................ 437,825 4,435 -- 442,260
Interest and other receivables................... 7,482 784 -- 8,266
Accounts receivable.............................. 1,126 -- -- 1,126
Prepaid expenses and other current assets........ 9,269 66 -- 9,335
-------- ------- ------- --------
TOTAL CURRENT ASSETS........................... 563,218 7,568 (585) 570,201
Property and equipment, net........................ 7,585 526 -- 8,111
Long-term investment............................... 71,639 -- -- 71,639
Intangible assets, net............................. 44,261 -- 64,333 108,594
Deposits and other assets.......................... 703 -- -- 703
-------- ------- ------- --------
$687,406 $ 8,094 $63,748 $759,248
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 5,603 $ 541 $ -- $ 6,144
Deferred revenue................................. 14,405 -- -- 14,405
Accrued product development costs................ 233 -- -- 233
Accrued employee benefits........................ 1,524 -- -- 1,524
Other accrued liabilities........................ 1,418 -- -- 1,418
Current portion of long-term debt................ 447 483 (483) 447
-------- ------- ------- --------
TOTAL CURRENT LIABILITIES...................... 23,630 1,024 (483) 24,171
Deferred rent...................................... 406 -- -- 406
STOCKHOLDERS' EQUITY:
Preferred stock.................................. -- 4,862 (4,862) --
77,488
483
(585)
Common stock..................................... 683,317 2,747 (2,747) 760,703
Additional paid-in capital....................... 32,849 3,650 (3,650) 32,849
Deferred compensation............................ (325) -- (1,267) (1,592)
Accumulated other comprehensive income........... 41,627 134 (134) 41,627
(4,818)
Accumulated deficit.............................. (94,098) (4,323) 4,323 (98,916)
-------- ------- ------- --------
TOTAL STOCKHOLDERS' EQUITY..................... 663,370 7,070 64,231 734,671
-------- ------- ------- --------
$687,406 $ 8,094 $63,748 $759,248
======== ======= ======= ========
</TABLE>
56
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ABGENIX IMMGENICS ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Contract revenue................................. $ 12,285 $ 86 $ -- $ 12,371
Interest income.................................. 3,045 66 -- 3,111
-------- ------- ------- --------
Total revenues................................. 15,330 152 -- 15,482
Costs and expenses:
Research and development......................... 21,106 619 633 22,358
General and administrative....................... 5,164 707 -- 5,871
Equity in income from the Xenotech joint
venture........................................ (546) -- -- (546)
Non-recurring termination fee.................... 8,667 -- -- 8,667
Amortization of intangible assets................ -- -- 4,338 4,338
Interest expense and other....................... 438 103 -- 541
-------- ------- ------- --------
Total costs and expenses....................... 34,829 1,429 4,971 41,229
-------- ------- ------- --------
Loss before income taxes........................... (19,499) (1,277) (4,971) (25,747)
Foreign income tax expense....................... 1,000 -- -- 1,000
-------- ------- ------- --------
Net loss........................................... $(20,499) $(1,277) $(4,971) $(26,747)
======== ======= ======= ========
Net loss per share................................. $ (0.35) $ (0.45)
======== ========
Shares used in computing net loss per share........ 58,148 802 58,950
</TABLE>
57
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ABGENIX IMMGENICS ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Contract revenue.................................. $13,077 $ 116 $ -- $13,193
Interest income................................... 22,334 156 -- 22,490
------- ------- ------- -------
Total revenues.................................. 35,411 272 -- 35,683
Costs and expenses:
Research and development.......................... 31,910 1,224 317 33,451
General and administrative........................ 5,152 999 -- 6,151
Amortization of intangible assets................. 2,330 -- 3,254 5,584
Interest expense and other........................ 317 77 -- 394
------- ------- ------- -------
Total costs and expenses........................ 39,709 2,300 3,571 45,580
------- ------- ------- -------
Net loss............................................ $(4,298) $(2,028) $(3,571) $(9,897)
======= ======= ======= =======
Net loss per share.................................. $ (0.05) $ (0.12)
======= =======
Shares used in computing net loss per share......... 78,799 802 79,601
</TABLE>
58
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ABGENIX, INC. AND IMMGENICS
1. BASIS OF PRO FORMA PRESENTATION
In November 2000, the Company acquired ImmGenics Pharmaceuticals Inc. in an
all-stock transaction, to be treated as a purchase. As part of the acquisition,
ImmGenics special shares were issued to former shareholders of common and
preferred shares and debenture holders of ImmGenics. The ImmGenics special
shares are convertible into common shares of Abgenix. The Pro Forma Condensed
Combined Financial Statements assumes the effective registration, prior to
February 11, 2001, of the Abgenix common stock to be issued in exchange for the
ImmGenics special shares. Should the registration statement not be declared
effective by that time, the holders of the ImmGenics special shares may have the
right to put those shares to Abgenix for cash. Abgenix will issue approximately
$76.9 million of its common stock and stock options for all of ImmGenics' voting
securities and stock options. This value includes the value of the common stock
and an estimate of the fair value of the stock options to be issued. Estimated
costs and expenses of the acquisition are $0.6 million.
The Company will be required to exchange common stock in a ratio determined
based on the average closing market price of the Company's common stock for the
five trading days prior to the date the registration statement becomes
effective. Assuming an average market value of $85.00, the exchange ratio will
approximate one share of the Company's share for seventeen shares of ImmGenic's
shares. Accordingly the number of the Company's common shares issued will
approximate 802,000 shares and the number of the Company's stock options to be
issued in exchange for ImmGenic's stock options will be approximately 120,000.
The actual number of common stock and stock options issued will depend on the
date the registration statement becomes effective and the final calculation of
the average closing market price.
An independent valuation specialist performed a preliminary allocation of
the total purchase price of ImmGenics among the acquired assets. The income
approach was used to develop the value for the existing technology and the
in-process research and development. The income approach incorporates the
calculation of the present value of future economic benefits such as cash
earnings, cost savings, and tax deductions. The cost approach was utilized to
value the assembled workforce. The cost approach measures the benefits related
to an asset by the cost to reconstruct or replace it with another of like
utility. The purchase price allocation, which is preliminary and therefore
subject to change is as follows (in thousands):
<TABLE>
<CAPTION>
ANNUAL USEFUL
AMOUNT AMORTIZATION LIVES
-------- ------------ --------
<S> <C> <C> <C>
Purchase Price Allocation:
Tangible net assets....................................... $ 7,070 n/a n/a
Intangible assets acquired:
Existing technology..................................... 33,264 2,217 15 years
Assembled workforce..................................... 185 62 3 years
Goodwill................................................ 30,884 2,059 15 years
Deferred compensation..................................... 1,267 633 2 years
In-process research and development....................... 4,818 n/a n/a
------- ------
Total estimated purchase price allocation............... $77,488 $4,971
======= ======
</TABLE>
59
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ABGENIX, INC. AND IMMGENICS (CONTINUED)
1. BASIS OF PRO FORMA PRESENTATION (CONTINUED)
INTANGIBLE ASSETS
The estimated value of the above intangible assets acquired is included in
the pro forma adjustments in the combined balance sheet as of September 30,
2000. The related amortization, on a straight-line basis over the useful lives
as indicated above, is included in the pro forma adjustments in the pro forma
condensed combined statements of operations. The intangible assets acquired
consist of the following:
Existing Technology and Assembled Workforce--The technology is comprised of
ImmGenics' proprietary technology, the Selected Lymphocyte Antibody Method
(SLAM) technology, patented in the United States with applications
outstanding in Canada and Europe. This technology is technologically
feasible and has been licensed to customers. The assembled workforce is
comprised of 27 employees, primarily scientists, with specific experience
and knowledge of the ImmGenics' SLAM technology and other technologies in
process. The combined allocated value of these two intangible assets is
$33.4 million.
Deferred compensation--This represents a portion of the estimated intrinsic
value of unvested ImmGenics stock options assumed by Abgenix in the merger
agreement to the extent that service is required after the closing date of
the merger in order to vest. Abgenix expects to amortize the value assigned
to deferred compensation of approximately $1.3 million over the remaining
vesting period of approximately 2 years.
Goodwill--This represents the excess of the purchase price of an investment
in an acquired business over the fair value of the underlying net
identifiable assets. Approximately $30.9 million will be amortized on a
straight-line basis over its estimated remaining useful life of 15 years.
IN-PROCESS RESEARCH AND DEVELOPMENT
Due to their non-recurring nature, the in-process research and development
attributed to the ImmGenics transaction has been excluded from the pro forma
statements of operations.
ImmGenics' primary in-process research and development activities focus on
two efforts as follows:
<TABLE>
<CAPTION>
PERCENT EXPECTED
PROJECT COMPLETED TECHNOLOGY LIFE
------- --------- ---------------
<S> <C> <C>
Death inducing antibodies............................ 57% 15 years
Agonist antibodies................................... 31% 15 years
</TABLE>
The income approach was utilized to value this technology which incorporates
the present value of future economic benefits such as cash earnings, cost
savings, and tax deductions. The rate utilized to discount the net cash flows to
their present value was 40% and was based on several studies which examine the
rates of return venture capitalists require on their investments.
The estimates used in valuing in-process research and development were based
upon assumptions believed to be reasonable but which are inherently uncertain
and unpredictable. Assumptions may be incomplete or inaccurate, and no assurance
can be given that unanticipated events and circumstances will not occur.
Accordingly, actual results may vary from the projected results. Any such
variance may result in a material adverse effect on ImmGenic's financial
condition and results of operations.
60
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS OF ABGENIX, INC. AND IMMGENICS (CONTINUED)
1. BASIS OF PRO FORMA PRESENTATION (CONTINUED)
The value assigned to each acquired in-process research and development
project as of the date of this proxy statement-prospectus were as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Death inducing antibodies................................... $3,036
Agonist antibodies.......................................... 1,782
------
Total acquired in-process research and development.......... $4,818
======
</TABLE>
2. PRO FORMA ADJUSTMENTS
The Unaudited Pro Forma Condensed Combined Statement of Operations give
effect to the allocation of the total purchase cost to the assets and
liabilities of ImmGenics based on their respective fair values and to
amortization over the respective useful lives of amounts allocated to intangible
assets. The pro forma adjustments on the Unaudited Pro Forma Condensed Combined
Balance Sheet reflect:
- the use of cash associated with the estimated direct costs of the
acquisition,
- the assumed conversion of ImmGenics debt and preferred stock to common
stock,
- deferred compensation arising from the intrisic value of ImmGenics
employee stock options assumed in the acquisition, and
- expense associated with the estimated acquired in-process research and
development charge.
The pro forma combined provision for income taxes does not reflect the
amounts that would have resulted had the Company and ImmGenics filed
consolidated income tax returns during the periods presented.
3. PRO FORMA NET LOSS PER SHARE
The pro forma basic and dilutive net loss per share are based on the
weighted average number of shares of the Company's common stock outstanding
during each period adjusted to give effect to shares assumed to be issued had
the acquisition taken place at the beginning of the period presented. Dilutive
securities including the replacement ImmGenics options are not included in the
computation of pro forma diluted net loss per share as their effect would be
anti-dilutive.
61
<PAGE>
PRIVATE PLACEMENT OF 3,300,000 SHARES OF OUR COMMON STOCK
On November 1, 2000, we issued a press release announcing the definitive
purchase agreements we entered into for the sale of approximately 3,300,000
shares of newly-issued common stock to selected accredited investors for
approximately $230 million of gross proceeds. This private placement
financing was consummated on November 6, 2000. The purchase price is $70.00
per share. In addition to newly issued common stock sold by us, approximately
750,000 shares of our common stock were sold by a selling stockholder, Cell
Genesys, Inc. in the private placement. The shares of common stock sold in
the private placement have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration, or an applicable exemption from registration. In connection
with this private placement, we have undertaken to file a registration
statement to cover the shares sold in the private placement. We intend to use
net proceeds from the private placement for product development, equity
investments in contract parties, acquisition of technologies and businesses,
expansion of laboratories and manufacturing facilities and for working
capital and general corporate purposes.
The foregoing descriptions of the private placement are qualified in their
entirety to the texts of the stock purchase agreements we entered into in
connection with the private placement, a form of which is attached hereto as
an exhibit.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
62
<PAGE>
Exhibit No. Caption
----------- -------
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
99.1 Acquisition Agreement dated as of September 25,
2000 among Abgenix, Inc., Abgenix Canada Corporation
and ImmGenics Pharmaceuticals Inc.
99.2 Plan of Arrangement under Section 252 of the
Company Act (British Columbia), including provisions
attaching to the ImmGenics special shares, approved
by the Supreme Court of British Columbia.
99.3 Voting, Exchange and Cash Put Trust Agreement
dated as of November 3, 2000 among Abgenix, Inc.,
ImmGenics Pharmaceuticals Inc. and CIBC Mellon Trust
Company.
99.4 Support Agreement dated as of November 3, 2000
among Abgenix, Inc., Abgenix Canada Corporation and
ImmGenics Pharmaceuticals Inc.
99.5 Form of Stock Purchase Agreement between Abgenix,
Inc. and the purchasers in the private placement in
November 2000.
------------
(b) Reports on Form 8-K
- On August 28, 2000 a Form 8-K was filed relating to the vote
by our stockholders to approve and adopt an amendment to the
Abgenix, Inc. Amended and Restated Certificate of
Incorporation to increase the total number of authorized
shares of the Corporation's common stock, par value $0.0001
per share ("Common Stock"), from One Hundred Million
(100,000,000) to Two Hundred Twenty Million (220,000,000). On
August 25, 2000, a Certificate of Amendment was filed with the
Delaware Secretary of State to effect the increase.
- On October 26, 2000 a Form 8-K was filed relating to the press
release announcing a definitive agreement whereby Abgenix,
Inc. will acquire ImmGenics Pharmaceuticals Inc. for an
aggregate consideration of approximately $77.5 million payable
in shares of common stock of Abgenix, Inc.
63
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 2000
ABGENIX, INC.
(Registrant)
/s/ R. Scott Greer
--------------------------------------------
R. Scott Greer
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Kurt Leutzinger
--------------------------------------------
Kurt Leutzinger
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
64
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule
99.1 Acquisition Agreement dated as of September 25,
2000 among Abgenix, Inc., Abgenix Canada Corporation
and ImmGenics Pharmaceuticals Inc.
99.2 Plan of Arrangement under Section 252 of the
Company Act (British Columbia), including provisions
attaching to the ImmGenics special shares, approved
by the Supreme Court of British Columbia.
99.3 Voting, Exchange and Cash Put Trust Agreement
dated as of November 3, 2000 among Abgenix, Inc.,
ImmGenics Pharmaceuticals Inc. and CIBC Mellon Trust
Company.
99.4 Support Agreement dated as of November 3, 2000
among Abgenix, Inc., Abgenix Canada Corporation and
ImmGenics Pharmaceuticals Inc.
99.5 Form of Stock Purchase Agreement between Abgenix,
Inc. and the purchasers in the private placement in
November 2000.
65
