<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-12406
IMMUNEX CORPORATION
(exact name of registrant as specified in its charter)
Washington 51-0346580
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
51 University Street, Seattle, WA 98101
(Address of principal executive offices)
Registrant's telephone number, including area code (206) 587-0430
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 164,264,816
- ---------------------------------- ------------------------------------
Class Outstanding at November 5, 1999
<PAGE>
IMMUNEX CORPORATION
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
a) Consolidated Condensed Balance Sheets - 4
September 30, 1999 and December 31, 1998
b) Consolidated Condensed Statements of Operations - 5
for the three-month periods ended September 30, 1999
and September 30, 1998
c) Consolidated Condensed Statements of Operations - 6
for the nine-month periods ended September 30, 1999
and September 30, 1998
d) Consolidated Condensed Statements of Cash Flows - 7
for the nine-month periods ended September 30, 1999 and
September 30, 1998
e) Notes to Consolidated Condensed Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial 12 - 17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
The consolidated condensed financial statements included herein have been
prepared by Immunex Corporation without audit, according to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The financial statements reflect, in the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results of
operations as of and for the periods indicated. The statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The results of operations for the nine-month period ended September 30, 1999,
are not necessarily indicative of results to be expected for the entire year
ending December 31, 1999.
3
<PAGE>
Item 1. FINANCIAL STATEMENTS
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 281,069 $ 43,600
Marketable securities 395,834 101,245
Accounts receivable, net 64,480 28,939
Inventories 20,206 23,475
Other current assets 6,764 4,726
--------------- ---------------
Total current assets 768,353 201,985
Property, plant and equipment, net 101,446 90,092
Other assets 38,290 33,248
--------------- ---------------
$ 908,089 $ 325,325
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 67,334 $ 39,256
Accounts payable - AHP 34,471 13,950
Accrued compensation and related items 11,637 13,756
Current portion of long-term obligations 3,478 3,477
Interest payable - AHP 4,913 -
Other current liabilities 4,345 5,074
--------------- ---------------
Total current liabilities 126,178 75,513
Convertible note - AHP 450,000 -
Other long-term obligations 2,488 2,349
Shareholders' equity:
Common stock, $.01 par value 782,965 725,597
Unrealized gain (loss) on investment, net (1,468) 1,228
Accumulated deficit (452,074) (479,362)
--------------- ---------------
Total shareholders' equity 329,423 247,463
--------------- ---------------
$ 908,089 $ 325,325
=============== ===============
</TABLE>
See accompanying notes.
4
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended ended
September 30, September 30,
1999 1998
------------------- -----------------
<S> <C> <C>
Revenues:
Product sales $ 139,446 $ 40,125
Royalty and contract revenue 12,976 9,051
------------------- -----------------
152,422 49,176
Operating expenses:
Cost of product sales 42,111 7,242
Research and development 31,070 26,894
Selling, general and administrative 56,936 21,593
------------------- -----------------
130,117 55,729
------------------- -----------------
Operating income (loss) 22,305 (6,553)
Other income (expense):
Interest income 9,093 1,772
Interest expense (3,480) (110)
Other income, net 78 70
------------------- -----------------
5,691 1,732
------------------- -----------------
Income (loss) before income taxes 27,996 (4,821)
Provision for income taxes 7,000 104
------------------- -----------------
Net income (loss) $ 20,996 $ (4,925)
=================== =================
Earnings (loss) per common share:
Basic $ 0.13 $ (0.03)
=================== =================
Diluted $ 0.12 $ (0.03)
=================== =================
Number of shares used for per share amounts:
Basic 163,749 159,592
=================== =================
Diluted 177,557 159,592
=================== =================
</TABLE>
See accompanying notes.
5
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
------------------- -----------------
<S> <C> <C>
Revenues:
Product sales $ 360,537 $ 118,902
Royalty and contract revenue 18,536 36,295
------------------- -----------------
379,073 155,197
Operating expenses:
Cost of product sales 108,998 22,024
Research and development 89,543 90,710
Selling, general and administrative 154,146 60,810
------------------- -----------------
352,687 173,544
------------------- -----------------
Operating income (loss) 26,386 (18,347)
Other income (expense):
Interest income 16,042 4,862
Interest expense (5,177) (331)
Other income, net 227 311
------------------- -----------------
11,092 4,842
------------------- -----------------
Income (loss) before income taxes 37,478 (13,505)
Provision for income taxes 9,370 250
------------------- -----------------
Net income (loss) $ 28,108 $ (13,755)
=================== =================
Earnings (loss) per common share:
Basic $ 0.17 $ (0.09)
=================== =================
Diluted $ 0.16 $ (0.09)
=================== =================
Number of shares used for per share amounts:
Basic 162,713 159,280
=================== =================
Diluted 176,054 159,280
=================== =================
</TABLE>
See accompanying notes.
6
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 30, September 30,
1999 1998
------------------- -------------------
<S> <C> <C>
Operating Activities:
Net income (loss) $ 28,108 $ (13,755)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 14,824 13,734
Deferred income tax provision 8,734 -
License fee received as common stock (990) -
Cash flow impact of changes to:
Accounts receivable (35,541) 205
Inventories 5,734 2,194
Accounts payable, accrued liabilities and
other current liabilities 48,198 4,849
Other current assets (2,038) (1,079)
------------------- -------------------
Net cash provided by operating activities 67,029 6,148
--------------------- -------------------
Investing Activities:
Purchases of property, plant and equipment (22,410) (25,866)
Purchases of marketable securities (384,119) (68,858)
Proceeds from sales and maturities of marketable
securities 86,820 30,906
Acquisition of product rights, net (15,500) (5,000)
Other (40) (233)
------------------- -------------------
Net cash used in investing activities (335,249) (69,051)
------------------- -------------------
Financing Activities:
Proceeds from the issuance of common stock to AHP 40,777 4,587
Proceeds from exercise of stock options 15,772 2,629
Proceeds from AHP convertible note, net 449,000 -
Guaranty payment received from AHP - 60,032
Other 140 893
------------------- -------------------
Net cash provided by financing activities 505,689 68,141
------------------- -------------------
Net increase in cash and cash equivalents 237,469 5,238
Cash and cash equivalents, beginning of period 43,600 66,176
------------------- -------------------
Cash and cash equivalents, end of period $ 281,069 $ 71,414
=================== ===================
</TABLE>
See accompanying notes.
7
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
Immunex Corporation (which may be referred to as IMMUNEX, WE, US or OUR) is a
biopharmaceutical company that discovers, develops, manufactures and markets
innovative therapeutic products for the treatment of human diseases, including
cancer, infectious diseases and immunological disorders such as rheumatoid
arthritis.
We operate in a highly regulated and competitive environment. Our business is
regulated primarily by the United States (U.S.) Food and Drug Administration
(FDA). The FDA regulates the products we sell, our manufacturing processes and
our promotional activities. Obtaining approval for a new therapeutic product is
never certain, may take several years and is very costly. Competition in
researching, developing and marketing pharmaceutical products is intense. Any of
the technologies covering our existing products or products under development
could become obsolete or diminished in value by discoveries and developments of
other organizations.
Our market for pharmaceutical products is primarily the U.S. Our sales are
primarily through wholesalers and specialty distributors.
The condensed consolidated financial statements are prepared in conformity with
generally accepted accounting principles. In preparing the financial statements,
management must make some estimates and assumptions that affect reported amounts
and disclosures.
American Home Products Corporation (AHP), holds a majority interest in Immunex,
totaling approximately 54%. All references to AHP include AHP and its various
affiliates, divisions and subsidiaries.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES
Inventories are stated at the lower of cost, using a weighted-average method, or
market. The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Raw materials $ 1,710 $ 807
Work in process 10,682 17,953
Finished goods 7,814 4,715
--------------------- ---------------------
Totals $ 20,206 $ 23,475
===================== =====================
</TABLE>
Work in process may include product that is essentially complete but is awaiting
packaging.
8
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
DEPRECIATION AND AMORTIZATION
The cost of buildings and equipment is depreciated evenly over the estimated
useful lives of the assets, which range from three to 31.5 years. Leasehold
improvements are amortized evenly over either their estimated useful lives, or
the term of the lease, whichever is lower. Intangible product rights and other
intangible assets are amortized evenly over their estimated useful lives,
ranging from five to 15 years.
REVENUES
Product sales are recognized when product is shipped. We perform ongoing credit
evaluations of our customers and we do not require collateral. Product sales are
recorded net of reserves for estimated chargebacks, returns, discounts, Medicaid
rebates and administrative fees. We maintain reserves at a level that we believe
is sufficient to cover estimated future requirements.
Revenues received under royalty, licensing and collaborative agreements are
recognized based on the terms of the underlying contractual agreements.
NOTE 3. REPORTING COMPREHENSIVE INCOME
Our investments are considered available-for-sale and are stated at fair value
on the balance sheet with the unrealized gains and losses included as a
component of shareholders' equity. During the third quarter of 1999 and 1998,
there were no material realized gains or losses. Immunex's investment guidelines
state that the maximum average life of any one security shall be five years with
the maximum weighted average life of the investment portfolio being three years.
The following table sets forth the components of comprehensive income (loss),
(in thousands):
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net income (loss) $ 20,996 $ (4,925) $ 28,108 $ (13,755)
Unrealized gain (loss) on investments (392) 237 (2,696) 3,266
---------------- ----------------- --------------- ----------------
Comprehensive income (loss) $ 20,604 $ (4,688) $ 25,412 $ (10,489)
================ ================= =============== ================
</TABLE>
9
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
NOTE 4. EARNINGS PER COMMON SHARE
Basic earnings per share is calculated by dividing net income or net loss by the
weighted average number of common shares outstanding. Diluted earnings per share
is calculated using the weighted average number of common shares outstanding
plus the dilutive effect of outstanding stock options using the "treasury stock"
method, and, if dilutive, the effect of the AHP convertible note using the
"if-converted" method.
The components of calculating earnings (loss) per share is set forth in the
following table (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 20,996 $ (4,925) $ 28,108 $ (13,755)
=============== ============== ============== ==============
Weighted average common shares
outstanding, basic 163,749 159,592 162,713 159,280
Net effect of dilutive stock options 13,808 - 13,341 -
--------------- -------------- -------------- --------------
Weighted average common shares
outstanding, diluted 177,557 159,592 176,054 159,280
=============== ============== ============== ==============
Earnings (loss) per common share,
Basic $ 0.13 $ (0.03) $ 0.17 $ (0.09)
=============== ============== ============== ==============
Earnings (loss) per common share,
Diluted $ 0.12 $ (0.03) $ 0.16 $ (0.09)
=============== ============== ============== ==============
</TABLE>
NOTE 5. STOCK SPLIT
Immunex declared two stock splits in the first nine months of 1999. The
two-for-one stock splits, effected in the form of 100% stock dividends, were
approved by the Board of Directors on February 23, 1999 and July 27, 1999,
respectively. The record dates of the stock splits were March 11, 1999, and
August 12, 1999, respectively. Stockholders were entitled to receive the
additional shares on March 25, 1999 and August 26, 1999, respectively. All
references to retained earnings, common stock, average number of common shares
outstanding and per share amounts in the financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations prior
to the record date of the stock splits have been restated to reflect the
two-for-one stock splits on a retroactive basis.
10
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
NOTE 6. AHP CONVERTIBLE NOTE
In May 1999, Immunex issued a seven-year, 3% coupon, convertible subordinated
note to AHP. The principal amount of the note, purchased in private placement,
totaled $450 million, resulting in related debt issuance costs of $1.0 million.
The note is convertible into Immunex common stock at a price of $86.84 per
share. After three years, Immunex can redeem, or call the note, provided that
its closing price for 20 consecutive days exceeds or equals $104.21 per share.
After four years, Immunex can call the note at any time if its closing price for
20 days exceeds or equals the conversion price. AHP may convert the note into
common stock of Immunex at any time.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements provide our current expectations or
forecasts of future events. In particular, these include statements relating to
future actions, prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses, the
outcome of contingencies such as legal proceedings, and financial results. From
time to time, we also may provide oral or written forward-looking statements in
other materials we release to the public. Any or all of our forward-looking
statements in this report and in any other public statements we make may turn
out to be wrong. Inaccurate assumptions we might make and known or unknown risks
and uncertainties can affect our forward-looking statements. Consequently, no
forward-looking statement can be guaranteed and our actual results may differ
materially.
We undertake no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures we make on related
subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
Annual Reports on Form 10-K. Factors that we think could cause our actual
results to differ materially from expected and historical results include, but
are not limited to, those discussed in the "Risk Factors" section described in
our latest Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
OVERVIEW
For the three months ended September 30, 1999, we generated net income
of $21.0 million, compared to a net loss of $4.9 million for the comparable 1998
period. For the nine-month periods ended September 30, 1999 and 1998, the
Company had net income of $28.1 million and a net loss of $13.8 million,
respectively. The improvement in operating results is due primarily to U.S.
sales of ENBREL-R- (etanercept), which we began selling in November 1998
following U.S. FDA approval of ENBREL for treatment of advanced rheumatoid
arthritis. ENBREL is being promoted by AHP in the U.S. through its Wyeth-Ayerst
sales and marketing organization. AHP shares in the gross profits from U.S.
sales of ENBREL and both companies share the selling, marketing, distribution
and other costs to support sales of ENBREL.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
<TABLE>
<CAPTION>
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------------ ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
ENBREL $ 102.0 $ - $ 248.6 $ -
LEUKINE-R-(sargramostim, GM-CSF) 17.5 17.0 50.1 48.3
NOVANTRONE-R-(mitoxantrone) 11.2 13.0 33.1 39.4
Other product sales 8.7 10.1 28.7 31.2
------------------ ---------------- --------------- -----------------
Total product sales 139.4 40.1 360.5 118.9
Royalty and contract revenue 13.0 9.1 18.5 36.3
------------------ ---------------- --------------- -----------------
Total revenue $ 152.4 $ 49.2 $ 379.0 $ 155.2
================== ================ =============== =================
</TABLE>
Product sales increased to $139.4 million from $40.1 million and to
$360.5 million from $118.9 million for the three and nine months ended September
30, 1999 and 1998, respectively. The improvement during both 1999 periods is due
to sales of ENBREL. In addition, sales of LEUKINE increased to $17.5 million
from $17.0 million and to $50.1 million from $48.3 million for the three and
nine months ended September 30, 1999 and 1998, respectively. These increases
were partially offset by decreased sales of certain other products, including
NOVANTRONE.
Royalty and contract revenue totaled $13.0 million and $9.1 million for
the quarters ended September 30, 1999 and 1998, respectively, and $18.5 million
and $36.3 million for the nine months ended September 30, 1999, and 1998. In
August 1999, we earned a one-time payment of $10.0 million from AHP under the
ENBREL Promotion Agreement, when net sales of ENBREL in North America exceeded
$200.0 million for the preceding 12-month period. The remaining revenue
recognized during the 1999 three and nine-month periods reflects recurring
amounts recognized under existing royalty and license agreements. In June 1998,
we earned $20.0 million from AHP under the terms of the ENBREL Promotion
Agreement, when our Biologics License Application for ENBREL for treatment of
advanced rheumatoid arthritis was accepted for review by the FDA. Additionally
in June 1998, we entered into an agreement for the sale of our Abbreviated New
Drug Application for paclitaxel injection, a generic form of TAXOL-R- to IVX
BioScience, Inc. The sale generated revenues of $6.0 million in the third
quarter of 1998 from license fees and sale of paclitaxel inventory.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Cost of product sales was 30.2% and 18.0% of product sales for the
quarters ended September 30, 1999 and 1998, respectively. For the nine months
ended September 30, 1999 and 1998, cost of product sales was 30.2% and 18.5% of
product sales, respectively. The increase in the cost of product sales
percentage during the current year period is due to the following:
- - Launch of ENBREL in November 1998 (ENBREL, like LEUKINE, is a
biologic. Biologics generally have a higher manufacturing cost
than traditional pharmaceutical products and, in the case of our
biologic products, are subject to multiple royalty obligations),
and
- - Unfavorable change in the mix of other products.
Cost of product sales as a percentage of product sales is expected to
increase moderately in the future if sales of ENBREL continue to grow.
Research and development expense was $31.1 million and $26.9 million
for the quarters ended September 30, 1999 and 1998, respectively, and $89.5
million and $90.7 million for the nine months ended September 30, 1999 and 1998.
In July 1998, we ended our oncology agreement with AHP. Expenses related to this
agreement totaled $8.3 million in 1998. Research and development expense in 1998
also included the acquisition of the rights outside North America to NUVANCE-TM-
(IL-4 receptor) and other receptor product candidates for $10.0 million.
Exclusive of these expenditures, research and development expense increased $4.2
million and $17.1 million during the three and nine-months ended September 30,
1999 versus the comparable 1998 periods. The increase is due primarily to the
following:
- - Ongoing costs of clinical studies for ENBREL in several
indications, including treatment of chronic heart failure and
European trials for treatment of rheumatoid arthritis,
- - Spending on NUVANCE, including a Phase II trial of NUVANCE to
treat asthma,
- - Costs incurred under an agreement with Genentech, Inc. to jointly
develop the TRAIL/Apo-2 ligand molecule,
- - Increased costs for other market opportunities and product
candidates, including NOVANTRONE for treatment of progressive
multiple sclerosis and AVREND-TM- (CD40 ligand) to treat renal
cell cancer, and
- - Increased spending on discovery research, patent costs and other
miscellaneous items.
Selling, general and administrative expense increased to $56.9 million
from $21.6 million and to $154.1 million from $60.8 million for the three and
nine-months periods ended September 30, 1999 and 1998, respectively. The
increase is due primarily to expenses associated with selling and marketing of
ENBREL. Under the terms of the ENBREL Promotion Agreement, AHP assumed a
majority of these expenses and will share in the gross profits from U.S. sales
of ENBREL. Selling, general and administrative expense includes our share of
these expenses and the amount of the gross profits shared with AHP from sales of
ENBREL. In addition, selling, general and administrative expense increased due
to the following:
- - Increased general and administrative expenses due to growth in
staffing and other infrastructure costs,
- - Pre-launch activities for NOVANTRONE for treatment of progressive
multiple sclerosis,
- - Higher product liability insurance premiums due to higher average
limits, and
- - Expenses associated with information systems.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE)
Interest income increased to $9.1 million from $1.8 million and to
$16.0 million from $4.9 million for the three and nine-months periods ended
September 30, 1999 and 1998, respectively. The issuance of $450.0 million of
convertible debt to AHP, additional equity issuances and improved cash flow from
operations resulted in a significant increase in funds available for investment
purposes and the interest earned on these funds. The increase in interest income
was partially offset by an increase in interest expense, incurred on the
convertible notes. Interest expense increased to $3.5 million and $5.2 million
for the three and nine months ended September 30, 1999 compared to $0.1 million
and $0.3 million for the same periods in 1998.
PROVISION FOR INCOME TAXES
The provision for income taxes was $7.0 million and $0.1 million for
the quarters ended September 30, 1999 and 1998, and $9.4 million and $0.3
million for the nine months ended September 30, 1999 and 1998, respectively. The
provision for income taxes during 1999 is primarily for federal income taxes.
This tax provision is a non-cash transaction because we will utilize our net
operating tax loss carryforwards to satisfy the federal tax liability.
For 1999 the first $34.0 million of income before taxes will result in
the reporting of a normal tax provision on our financial statements with a
corresponding reduction of goodwill and intangible product rights. To the extent
that income before taxes exceeds $34.0 million in the current year, the benefit
of our net operating tax loss carryforwards, for purposes of financial
reporting, will offset the corresponding tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities totaled $676.9 million
and $144.8 million at September 30, 1999 and December 31, 1998, respectively. In
May 1999, we received $450.0 million in proceeds from the issuance of a
convertible note to AHP (see below). The Company's cash reserves are held in a
variety of interest-bearing instruments including government and corporate
obligations and money market accounts.
Operating activities provided cash of $67.0 million during the first
nine months of 1999. Cash provided by operating activities reflects the
improvement in our operating results and, to a lesser extent, favorable changes
in our working capital requirements. The increase in accounts receivable from
sales of ENBREL was more than offset by increased accounts payable, payables to
AHP under the ENBREL Promotion Agreement and decreased inventory levels.
Cash used in investing activities totaled $335.2 million for the first
nine months of 1999. The majority of the cash used for investing activities is
due to $384.1 million in purchases of marketable securities, offset by $86.8
million in proceeds from the sales and maturities of marketable securities. In
addition, expenditures for capital equipment totaled $22.4 million, primarily
for purchases of computer hardware and software, lab equipment and expenditures
on construction of our new process development
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
facility. The process development facility will accelerate the development
of the manufacturing processes of materials for clinical trials and is
expected to be completed by the end of 2000. The $15.5 million acquisition
of product rights represents our share of payments to Ares-Serono
International S.A. and Genentech, Inc. under license agreements related to
ENBREL.
Financing activities provided cash of $505.7 million for the nine-month
period ended September 30, 1999. A majority of this increase can be attributed
to the $450.0 million in proceeds from the 3%, seven-year convertible note
issued to AHP. The proceeds from this note are expected to be used for the
following:
- - New product development,
- - Financing strategic acquisitions of products, product candidates,
technologies or other businesses,
- - Financing expansion for constructing new manufacturing, research and
office facilities, and,
- - Funding other general working capital requirements.
In addition, under the terms of a Governance Agreement with AHP, AHP can
purchase additional shares of our common stock in order to maintain its
percentage ownership. The purchase price is equal to the fair market value of
the shares, as determined in accordance with the Governance Agreement, on the
date of AHP's purchase. Under the terms of the Governance Agreement, we received
$40.8 million from the issuance of 1,166,242 additional shares of our common
stock to AHP during the first nine months of 1999. An additional $15.8 million
was received from the exercise of employee stock options during the same period.
YEAR 2000
The "Year 2000" issue is the result of computer programs being unable to
differentiate between the year 1900 and the year 2000 because they were written
using two digits rather than four to define the applicable year. This could
result in a system failure or miscalculations with respect to current programs.
We have established a Year 2000 Committee with representatives from all of the
functional areas at Immunex. The Year 2000 Committee has been engaged in a
comprehensive review of our computer systems and software applications
(INFORMATION TECHNOLOGY) and equipment that utilize date sensitive computer
chips (EMBEDDED CHIPS). Embedded Chips are utilized in our security systems and
certain manufacturing, laboratory and office equipment. Based on this review, we
determined that certain software, hardware and equipment had to be modified or
replaced so that they will properly utilize dates beyond December 31, 1999.
Furthermore, we have contacted key third-party suppliers, service providers,
distributors, wholesalers and other entities with which we have a business
relationship (BUSINESS PARTNERS) to determine their compliance with Year 2000
requirements.
16
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Our plan to resolve the Year 2000 issues is organized into three functional
areas: Information Technology, Embedded Chips and Business Partners. For each
functional area, there are three phases:
- - Phase I: Assessment
- - Phase II: Testing and Remediation
- - Phase III: Implementation and Contingency Planning
As of September 30, 1999, all assessment, testing and remediation
activities have been completed. Furthermore, those software applications that
were identified as not Year 2000 compliant have been replaced. The contingency
planning process is well under way and it is expected that all contingency plans
will be finalized prior to December 31, 1999. These contingency plans involve,
among other actions, adjusting production schedules, increasing inventories, and
developing manual workarounds.
We are continuing to monitor the progress of Business Partners which have
not completed their Year 2000 compliance programs. Contingency planning for key
Business Partners has been completed and those processes have been implemented.
Our total cost for the Year 2000 project is approximately $6.4 million
($1.1 million of expense and $5.3 million capital, which includes the
implementation of our new E.R.P. system). These amounts do not include any
internal costs. All of these amounts have been incurred as of September 30, 1999
and we do not expect to incur significant additional expenses to complete the
contingency planning process.
We believe that the most reasonably likely worst case scenario concerning
the Year 2000 issue involves potential business interruption of our Business
Partners who may not be fully Year 2000 compliant. In order to address this
possibility, we have formulated contingency plans intended to mitigate the
impact on Immunex and our critical business processes. Such plans involve, but
are not limited to, increasing raw materials and packaging inventory, and
identifying and securing, where appropriate, alternate sources of raw materials,
packaging inventory, utilities, transportation and other services.
The Year 2000 disclosures discussed above are based on numerous
expectations which are subject to uncertainties. Certain risk factors which
could have a material adverse effect on our results of operations and financial
condition include but are not limited to: failure to identify critical systems
which will experience failures, errors in the remediation efforts, unexpected
failures by key Business Partners, inability to obtain new replacements for
non-compliant systems or equipment, failures by governmental agencies causing
delays in approval of new products or sales of approved products, general
economic downturn relating to Year 2000 failures in the U.S. and in other
countries, failures in global banking systems and capital markets, or extended
failures by public and private utility companies or common carriers supplying
services to us.
17
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have financial instruments that are subject to interest rate risk.
We invest our cash reserves in marketable securities consisting primarily of
U.S. government and corporate obligations. If market interest rates increased
relatively by 10%, the net effect on our operating results would not be
material. We have a seven-year, 3% coupon, convertible subordinated note to AHP
totaling $450 million. AHP may convert the note into common stock of Immunex at
a price of $86.84 per share at any time, but may not call the note prior to
maturity.
We also own common stock in two biotechnology companies with a cost of
$4.0 million.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The description of legal proceedings is incorporated by reference to
Item 3 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 3.1 Restated Articles of Incorporation of Immunex
Corporation, as filed with the Secretary of State
of Washington on August 3, 1999.
Exhibit 27 Financial Data Schedule
19
<PAGE>
SIGNATURES
Pursuant to 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.
IMMUNEX CORPORATION
Date: November 9, 1999 /s/ Edward V. Fritzky
------------------------ --------------------------------------------
Edward V. Fritzky
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 1999 /s/ David A. Mann
------------------------ --------------------------------------------
David A. Mann
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
IMMUNEX CORPORATION
Pursuant to RCW 23B.10.070, the following constitutes Restated Articles of
Incorporation of the undersigned, a Washington corporation.
ARTICLE 1. NAME
The name of this corporation is Immunex Corporation.
ARTICLE 2. SHARES
2.1 AUTHORIZED CAPITAL
The total number of shares which the corporation is authorized to issue is
410,000,000, consisting of 400,000,000 shares of Common Stock having a par value
of $.01 per share and 10,000,000 shares of Preferred Stock having a par value of
$.01 per share. The Common Stock is subject to the rights and preferences of the
Preferred Stock as hereinafter set forth.
2.2 ISSUANCE OF PREFERRED STOCK IN SERIES
The Preferred Stock may be issued from time to time in one or more series in any
manner permitted by law and the provisions of these Articles of Incorporation of
the corporation, as determined from time to time by the Board of Directors and
stated in the resolution or resolutions providing for the issuance thereof,
prior to the issuance of any shares thereof. The Board of Directors shall have
the authority to fix and determine and to amend, subject to the provisions
hereof, the designation, preferences, limitations and relative rights of the
shares of any series that is wholly unissued or to be established. Unless
otherwise specifically provided in the resolution establishing any series, the
Board of Directors shall further have the authority, after the issuance of
shares of a series whose number it has designated, to amend the resolution
establishing such series to decrease the number of shares of that series, but
not below the number of shares of such series then outstanding.
2.3 DIVIDENDS
The holders of shares of the Preferred Stock shall be entitled to
receive dividends, out of the funds of the corporation legally available
therefor, at the rate and at the time or times, whether cumulative or
noncumulative, as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. If such dividends on the Preferred Stock
shall be cumulative, then if dividends shall not have been paid, the deficiency
shall be fully paid or the dividends declared and set apart for payment at such
rate, but without interest on cumulative dividends, before any dividends on the
Common Stock shall be paid or declared and set apart for payment. The holders of
the Preferred Stock shall not be entitled to receive any dividends thereon other
than the dividends referred to in this section.
2.4 REDEMPTION
The Preferred Stock may be redeemable at such price, in such amount, and at such
time or times as may be provided by the Board of Directors in designating a
particular series of Preferred Stock. In any event, such Preferred Stock may be
repurchased by the corporation to the extent legally permissible.
2.5 LIQUIDATION
In the event of any liquidation, dissolution, or winding up of the affairs of
the corporation, whether voluntary or involuntary, then, before any distribution
shall be made to the holders of the Common Stock, the holders of the Preferred
Stock at the time outstanding shall be entitled to be paid the preferential
amount or amounts per share as may be provided by the Board of Directors in
designating a particular series of Preferred Stock and dividends accrued thereon
to the date of such payment. The holders of the Preferred Stock shall not be
entitled to receive any distributive amounts upon the liquidation, dissolution,
or winding up of the affairs of the corporation other than the distributive
amounts referred to in this section, unless otherwise provided by the Board of
Directors in designating a particular series of Preferred Stock.
<PAGE>
2.6 CONVERSION
Shares of Preferred Stock may be convertible into Common Stock of the
corporation upon such terms and conditions, at such rate and subject to such
adjustments as may be provided by the Board of Directors in designating a
particular series of Preferred Stock.
2.7 VOTING RIGHTS
Holders of Preferred Stock shall have such voting rights as may be provided by
the Board of Directors in designating a particular series of Preferred Stock.
ARTICLE 3. REGISTERED OFFICE AND AGENT
The name of the initial registered agent of this corporation and the address of
its initial registered office are as follows:
Scott G. Hallquist
51 University Street
Seattle, WA 98101
ARTICLE 4. PREEMPTIVE RIGHTS
No preemptive rights shall exist with respect to shares of stock or securities
convertible into shares of stock of this corporation.
ARTICLE 5. CUMULATIVE VOTING
The right to cumulate votes in the election of Directors shall not exist with
respect to shares of stock of this corporation.
ARTICLE 6. DIRECTORS
6.1 NUMBER AND TERM OF DIRECTORS
The number of Directors of this corporation shall be determined in the manner
provided by the Bylaws and may be increased or decreased from time to time in
the manner provided therein, PROVIDED, HOWEVER, that the number of directors
shall not be reduced so as to shorten the term of any director at the time in
office. Directors need not be shareholders. Unless a director dies, resigns, or
is removed, he shall hold office until the next annual meeting of shareholders
or until his successor is elected and qualified, whichever is later.
6.2 REMOVAL OF DIRECTORS
Subject to the terms of the Amended and Restated Governance Agreement, dated as
of December 15, 1992, among Immunex Corporation, Lederle Oncology Corporation
and American Cyanamid Company ("Cyanamid"), as it may be amended or restated
from time to time (the "Governance Agreement"), one or more members of the Board
of Directors (including the entire Board) may be removed, with or without cause,
by the written consent of the holders of record of a majority of the outstanding
shares of stock entitled to vote generally in the election of directors, voting
together as a single class (the "Voting Stock").
6.3 VACANCIES
Any vacancy occurring on the Board of Directors may be filled, subject to the
terms of the Governance Agreement, by the affirmative vote of a majority of the
remaining directors, though less than a quorum. A director elected to fill a
vacancy shall be elected for the unexpired term of his or her predecessor in
office. Any directorship to be filled by
<PAGE>
reason of an increase in the number of directors may be filled by the Board,
subject to the Governance Agreement, for a term of office continuing only
until the next election of directors by the shareholders.
ARTICLE 7. BYLAWS
All of the powers of this corporation, insofar as the same may be lawfully
vested by these Articles of Incorporation in the Board of Directors, are hereby
conferred upon the Board of Directors of this corporation. In furtherance and
not in limitation of that power, the Board of Directors, subject to the
Governance Agreement, shall have the power to adopt, amend or repeal the Bylaws
of this corporation, subject to the power of the shareholders to amend or repeal
such Bylaws. The shareholders shall also have the power to amend or repeal the
Bylaws of this corporation and to adopt new Bylaws. No action may be taken or
effected by written consent of shareholders in lieu of a meeting.
ARTICLE 8. SPECIAL SHAREHOLDER MEETINGS
Special meetings of the shareholders of the corporation for any purpose or
purposes may be called at any time by the Board of Directors, the Chairman of
the Board of Directors, or the President of the corporation. Further, a special
meeting of the shareholders shall be held if the holders of not less than 40% of
all the votes entitled to be cast on any issue proposed to be considered at such
special meeting have dated, signed and delivered to the Secretary one or more
written demands for such meeting, describing the purpose or purposes for which
it is to be held.
ARTICLE 9. MERGERS, SHARE EXCHANGES, AND OTHER TRANSACTIONS
Subject to the Governance Agreement, a merger, share exchange, sale of
substantially all of the corporation's assets, or dissolution must be approved
by the affirmative vote of a majority of the corporation's outstanding shares
entitled to vote, or if separate voting by voting groups is required then by not
less than a majority of all the votes entitled to be cast by that voting group.
ARTICLE 10. AMENDMENTS TO ARTICLES OF INCORPORATION
Subject to the Governance Agreement and except as otherwise provided herein,
this corporation reserves the right to amend or repeal by the affirmative vote
of the holders of a majority of the outstanding Voting Stock, any of the
provisions contained in these Articles of Incorporation in any manner now or
hereafter permitted by law, and the rights of the shareholders of this
corporation are granted subject to this reservation.
ARTICLE 11. LIMITATION OF DIRECTOR LIABILITY
To the full extent that the Washington Business Corporation Act (the "Act"), as
it exists on the date hereof or may hereafter be amended, permits the limitation
or elimination of the liability of Directors, a Director of this corporation
shall not be liable to this corporation or its shareholders for monetary damages
for conduct as a Director. Any amendments to or repeal of this Article 11 shall
not adversely affect any right or protection of a Director of this corporation
for or with respect to any acts or omissions of such Director occurring prior to
such amendment or repeal. Notwithstanding any other provisions of law, these
Articles of Incorporation (except as hereinafter provided) or the Bylaws of this
corporation, the affirmative vote of the holders of not less than 80% of the
Voting Stock shall be required to alter, amend or repeal, or to adopt any
provisions inconsistent with, this Article 11 or any provision hereof.
ARTICLE 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
This corporation shall indemnify its Directors and Officers to the full
extent not prohibited by applicable law now or hereafter in force against
liability arising out of a proceeding to which such individual was made a
party because the individual is or was a Director or an Officer. However,
such indemnity shall not apply on account of:
(a) acts or omissions of a Director or Officer finally adjudged
to be intentional misconduct or a knowing violation of law;
<PAGE>
(b) conduct of a Director or Officer finally adjudged to be in
violation of Section 23B.08.310 of the Act relating to
distributions by this corporation; or
(c) any transaction with respect to which it was finally adjudged
that such Director or Officer personally received a benefit in
money, property, or services to which the Director or Officer
was not legally entitled.
Subject to the foregoing, it is specifically intended that proceedings covered
by indemnification shall include proceedings brought by this corporation
(including derivative actions), proceedings by government entities and
governmental officials or other third party actions.
ARTICLE 13. RESOLUTION OF CONFLICTING TERMS
Notwithstanding any other provision of these Articles of Incorporation, any
conflict between (a) any action taken by this corporation or the Board of
Directors, or any provision of these Articles of Incorporation or the Bylaws of
this corporation, as each may be amended and/or restated from time to time, on
the one hand, and (b) the terms of the Governance Agreement on the other, shall
be resolved in favor of the terms of the Governance Agreement unless otherwise
agreed to in writing by Cyanamid. Any amendment or repeal of this Article 13
shall require the affirmative vote of the holders of more than 70% of the Common
Stock on a fully diluted basis.
ARTICLE 14. ELECTION TO NOT BE COVERED BY STATUTE
This corporation elects not to be covered by the provisions of Section
23B.17.020 of the Act.
ARTICLE 15. INCORPORATOR
The name and address of the incorporator are as follows:
Stephen M. Graham
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
Dated: July 30, 1999.
IMMUNEX CORPORATION
-----------------------------------------
Name: Barry G. Pea
Its: Vice President, Deputy General
Counsel and Assistant Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> JAN-01-1999
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