<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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-12406
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 520,131,203
--------------------------------- -------------------------------
Class Outstanding at November 2, 2000
<PAGE>
IMMUNEX CORPORATION
QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION 3
Item 1. Financial Statements:
a) Consolidated Condensed Balance Sheets - 4
September 30, 2000 and December 31, 1999
b) Consolidated Condensed Statements of Income - 5
for the three-month periods ended September 30, 2000
and September 30, 1999
c) Consolidated Condensed Statements of Income - 6
for the nine-month periods ended September 30, 2000
and September 30, 1999
d) Consolidated Condensed Statements of Cash Flows - 7
for the nine-month periods ended September 30, 2000
and September 30, 1999
e) Notes to Consolidated Condensed Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial 12 - 28
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION 30
Item 1. Legal Proceedings 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
---------------------
Immunex Corporation has prepared the consolidated condensed financial
statements included herein without audit, according to the rules and regulations
of the Securities and Exchange Commission, or SEC. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted pursuant to such rules and regulations. The financial
statements reflect, in the opinion of management, all 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 our Annual Report on Form
10-K for the year ended December 31, 1999.
The results of operations for the nine-month period ended September 30,
2000, are not necessarily indicative of results to be expected for the entire
year ending December 31, 2000.
3
<PAGE>
Item 1. FINANCIAL STATEMENTS
--------------------
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ---------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 97,962 $ 260,770
Short term investments 719,723 449,066
Accounts receivable, net 86,394 61,781
Inventories 21,207 13,125
Prepaid expenses and other current assets 11,217 6,439
---------- ---------
Total current assets 936,503 791,181
Property, plant and equipment, net 185,724 110,445
Investments 59,015 10,704
Other assets 35,136 28,911
---------- ---------
$1,216,378 $ 941,241
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 81,549 $ 71,832
Accounts payable - AHP 107,072 37,088
Accrued compensation and related items 18,337 20,001
Current portion of long-term obligations 1,581 1,578
Interest payable - AHP 5,625 2,250
Other current liabilities 4,963 2,336
---------- ---------
Total current liabilities 219,127 135,085
Convertible subordinated note - AHP 450,000 450,000
Other long-term obligations 838 826
Shareholders' equity:
Common stock, $.01 par value 852,568 791,802
Unrealized gain on investments, net 27,840 2,719
Accumulated deficit (333,995) (439,191)
---------- ---------
Total shareholders' equity 546,413 355,330
---------- ---------
$1,216,378 $ 941,241
========== =========
</TABLE>
See accompanying notes.
4
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
--------------------
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Product sales $217,158 $139,446
Royalty and contract revenue 1,815 12,976
-------- --------
218,973 152,422
Operating expenses:
Cost of product sales 65,340 42,111
Research and development 44,173 31,070
Selling, general and administrative 88,816 56,936
-------- --------
198,329 130,117
-------- --------
Operating income
20,644 22,305
Other income (expense):
Interest income 13,758 9,093
Interest expense (2,991) (3,480)
Other income, net 562 78
-------- --------
11,329 5,691
-------- --------
Income before income taxes
31,973 27,996
Provision for income taxes 451 7,000
-------- --------
Net income $ 31,522 $ 20,996
======== ========
Net income per common share:
Basic $ 0.06 $ 0.04
======== ========
Diluted $ 0.06 $ 0.04
======== ========
Number of shares used for per share amounts:
Basic 503,052 491,247
======== ========
Diluted 544,490 532,671
======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
--------------------
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Product sales $580,052 $360,537
Royalty and contract revenue 31,109 18,536
-------- --------
611,161 379,073
Operating expenses:
Cost of product sales 170,172 108,998
Research and development 120,065 89,543
Selling, general and administrative 243,059 154,146
-------- --------
533,296 352,687
-------- --------
Operating income
77,865 26,386
Other income (expense):
Interest income 36,951 16,042
Interest expense (9,864) (5,177)
Other income, net 1,409 227
-------- --------
28,496 11,092
-------- --------
Income before income taxes 106,361 37,478
Provision for income taxes 1,165 9,370
-------- --------
Net income $105,196 $ 28,108
======== ========
Net income per common share:
Basic $ 0.21 $ 0.06
======== ========
Diluted $ 0.19 $ 0.05
======== ========
Number of shares used for per share amounts:
Basic 500,333 488,139
======== ========
Diluted 544,067 528,162
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
Item 1. FINANCIAL STATEMENTS (continued)
--------------------
IMMUNEX CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
2000 1999
----------- ---------
<S> <C> <C>
Operating Activities:
Net income $ 105,196 $ 28,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,486 14,824
Deferred income tax provision - 8,734
License fee received in the form of common stock - (990)
Cash flow impact of changes to:
Accounts receivable (24,613) (35,541)
Inventories (6,979) 5,734
Accounts payable, accrued liabilities and
other current liabilities 82,936 48,198
Other current assets (4,778) (2,038)
----------- ---------
Net cash provided by operating activities 168,248 67,029
----------- ---------
Investing Activities:
Purchases of property, plant and equipment (88,490) (22,410)
Purchases of investments (1,072,614) (384,119)
Proceeds from sales and maturities of
investments 778,767 86,820
Acquisition of rights to marketed products, net (9,500) (15,500)
Other - (40)
----------- ---------
Net cash used in investing activities (391,837) (335,249)
----------- ---------
Financing Activities:
Proceeds from common stock issued to employees 31,907 15,772
Proceeds from common stock issued to AHP 28,859 40,777
Proceeds from AHP convertible note, net - 449,000
Other 15 140
----------- ---------
Net cash provided by financing activities 60,781 505,689
----------- ---------
Net increase (decrease) in cash and cash equivalents (162,808) 237,469
Cash and cash equivalents, beginning of period 260,770 43,600
----------- ---------
Cash and cash equivalents, end of period $ 97,962 $ 281,069
=========== =========
</TABLE>
See accompanying notes.
7
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements
Note 1. Organization and Basis of Presentation
----------------------------------------------
We are a leading biopharmaceutical company dedicated to developing
immune system science to protect human health. Applying our scientific expertise
in the fields of immunology, cytokine biology, vascular biology, antibody-based
therapeutics and small molecule research, we work to discover new targets and
new therapeutics for treating rheumatoid arthritis, asthma and other
inflammatory diseases, as well as cancer and cardiovascular diseases.
We operate in a highly regulated and competitive environment. Our
business is regulated primarily by the U.S. Food and Drug Administration, or
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, generally takes many years and is very costly. Competition in
researching, developing and marketing biotechnology and 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 United States.
Our sales are primarily to pharmaceutical wholesalers. For the nine months ended
September 30, 2000, approximately 61% of our product sales were made to three of
these wholesalers.
The consolidated condensed financial statements are prepared in
conformity with accounting principles generally accepted in the United States.
In preparing the financial statements, management must make some estimates and
assumptions that affect reported amounts and disclosures.
American Home Products Corporation, or AHP, holds a majority interest in
Immunex. 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 at specific balance sheet dates
are as follows (in thousands):
September 30, December 31,
2000 1999
------------- ------------
Raw materials $ 1,832 $ 1,387
Work in process 13,391 5,310
Finished goods 5,984 6,428
------------- ------------
Totals $ 21,207 $ 13,125
============= ============
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 shorter. 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 and 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 contract manufacturing
agreements are recognized based upon performance under the terms of the
underlying agreements.
Recent accounting guidance
In December 1999, the SEC issued Staff Accounting Bulletin, or SAB, No.
101, Revenue Recognition in Financial Statements. This SAB provides guidance
related to revenue recognition based on interpretations and practices
recommended by the SEC. Within the biotechnology industry, the guidance provided
by SAB 101 is anticipated to have its largest impact on the timing of revenue
recognition for upfront fees and milestone payments. SAB 101 is effective for
the fourth quarter of 2000 and requires companies to report any changes in
revenue recognition as a cumulative change in accounting principle. The adoption
of SAB 101 will not have a significant impact on our financial position, cash
flows or results of operations.
During June 1999, the Financial Accounting Standards Board, or FASB,
issued SFAS 137, Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement 133. This Statement defers the
effective date of SFAS 133 to fiscal 2001. During June 2000, the FASB issued
SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities, which amends certain provisions of SFAS 133. We will adopt SFAS 138
concurrently with SFAS 133 on January 1, 2001. The impact of these statements
cannot be currently estimated and will be dependent upon the fair value, nature
and purpose of any derivative instruments held by us as of December 31, 2000.
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 as comprehensive income. The following table
sets forth the components of comprehensive income, (in thousands):
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------- ------- -------- -------
Net income $31,522 $20,996 $105,196 $28,108
Unrealized gain (loss) on investments (3,474) (392) 25,121 (2,696)
------- ------- -------- -------
Comprehensive income $28,048 $20,604 $130,317 $25,412
======= ======= ======== =======
9
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
Note 4. Income Taxes
--------------------
The provision for income taxes for the three and nine-month periods
ended September 30, 2000 is comprised of state income taxes. Related federal
income taxes have been offset by net operating loss, or NOL, carryforwards. The
benefits from use of a portion of the NOL carryforwards in the comparable
periods of 1999 were recorded as a reduction of goodwill and intangible product
rights, thereby resulting in a federal income tax provision for financial
reporting purposes.
Note 5. Net income per Common Share
-----------------------------------
Basic earnings per share is calculated by dividing net income 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 convertible subordinated note held
by AHP using the "if-converted" method.
The components for calculating net income per share are set forth in the
following table (in thousands, except per share data):
Three months ended Nine months ended
------------------ -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- -------- -------- --------
Net income $ 31,522 $ 20,996 $105,196 $ 28,108
======== ======== ======== ========
Weighted average common shares
outstanding, basic 503,052 491,247 500,333 488,139
Net effect of dilutive stock options 41,438 41,424 43,734 40,023
-------- -------- -------- --------
Weighted average common shares
outstanding, diluted 544,490 532,671 544,067 528,162
======== ======== ======== ========
Net income per common share,
basic $ 0.06 $ 0.04 $ 0.21 $ 0.06
======== ======== ======== ========
Net income per common share,
diluted $ 0.06 $ 0.04 $ 0.19 $ 0.05
======== ======== ======== ========
The 15,544,041 shares issuable upon the conversion of the AHP
convertible subordinated note are not included in the calculation of diluted
earnings per share because the effect, including the effect on adjusted net
income, would be anti-dilutive.
Note 6. Stock Split
-------------------
On March 20, 2000, we effected a three-for-one stock split. The record
date of the stock split was March 6, 2000. Stockholders were entitled to receive
the additional shares on March 20, 2000. All references to accumulated deficit,
common stock, average number of common shares outstanding and per share amounts
in the financial statements and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" prior to the record date of the
stock split have been restated to reflect the three-for-one stock split.
10
<PAGE>
IMMUNEX CORPORATION
Notes to Consolidated Condensed Financial Statements (continued)
Note 7. Subsequent Events
-------------------------
On August 30, 2000, our shelf registration statement for the sale of up
to 70 million shares of our common stock was declared effective by the SEC. On
October 19, 2000, we filed a preliminary prospectus supplement for the proposed
sale of 20 million shares of our common stock by us and 40 million shares of our
common stock by AHP, and an additional 9 million shares to cover over-
allotments, if any.
On October 31, 2000, AHP converted the principal amount of a $450.0
million note into 15,544,041 shares of our common stock. The $450.0 million 3%
convertible subordinated note due 2006 was converted into newly issued shares at
$28.95 a share. Following conversion, AHP's ownership interest in us increased
from approximately 53% to approximately 55%.
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 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, expected performance
of third-party manufacturers, expected completion dates for new manufacturing
and other facilities, expected progress in clinical trials, 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. Also note that we provide a cautionary discussion
of risks, uncertainties and possibly inaccurate assumptions relevant to our
business under the caption Risks within Item 2 of this report. These are risks
that we think could cause our actual results to differ materially from expected
and historical results.
RESULTS OF OPERATIONS
Overview
Net income totaled $31.5 million for the three months ended September 30,
2000, compared to net income of $21.0 million for the three months ended
September 30, 1999. Net income totaled $105.2 million for the nine months ended
September 30, 2000, compared to $28.1 million for the nine months ended
September 30, 1999. The improvement in operating results is due primarily to
U.S. sales of Enbrel(R) (etanercept), which was approved in November 1998 by the
FDA for treating moderately to severely active rheumatoid arthritis, or RA, in
patients who have had an inadequate response to one or more disease-modifying
antirheumatic drugs, or DMARDs. In May 1999, the FDA approved Enbrel for
treating moderately to severely active juvenile RA in patients who have had an
inadequate response to one or more DMARDs. In June 2000, the FDA approved Enbrel
for reducing signs and symptoms and delaying structural damage in patients with
moderately to severely active RA. This expanded June 2000 indication supersedes
the November 1998 indication of Enbrel in that RA patients are no longer
required to have an inadequate response to one or more DMARDs before treatment
with Enbrel is indicated.
Our operating results also reflect increased costs, primarily related to
manufacturing, selling and marketing expenses for Enbrel. In addition, we have
increased spending on products in our development pipeline and increased the
level of investment in discovery research. We expect to continue to increase
research and development spending to further develop our product pipeline.
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
Revenues
Total revenues increased to $219.0 million for the three months ended
September 30, 2000, compared to $152.4 million for the three months ended
September 30, 1999. Total revenues increased to $611.2 million for the nine
months ended September 30, 2000, compared to $379.0 million for the nine months
ended September 30, 1999. The following table summarized our sources of
revenues:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(in millions) (in millions)
------------- -------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Enbrel $172.1 $102.0 $458.3 $248.6
Specialty therapeutic products 44.8 36.0 119.9 108.5
Other product sales 0.3 1.4 1.9 3.4
------ ------ ------ ------
Total product sales 217.2 139.4 580.1 360.5
Royalty and contract revenue 1.8 13.0 31.1 18.6
------ ------ ------ ------
Total revenue $219.0 $152.4 $611.2 $379.1
====== ====== ====== ======
</TABLE>
Product sales increased to $217.2 million for the three months ended
September 30, 2000, compared to $139.4 million for the three months ended
September 30, 1999. Product sales increased to $580.1 million for the nine
months ended September 30, 2000, compared to $360.5 million for the nine months
ended September 30, 1999. The improvement during both 2000 periods is primarily
due to increased sales of Enbrel. Under an Enbrel promotion agreement with AHP,
Enbrel is being promoted in the United States by Wyeth-Ayerst Laboratories, or
Wyeth-Ayerst, the pharmaceutical division of AHP. AHP shares in the gross
profits from U.S. sales of Enbrel and we share the costs of selling, marketing
and distributing Enbrel in the United States with AHP. Our share of these
expenses and the amount of gross profits shared with AHP from sales of Enbrel
are included in selling, general and administrative expenses. If demand for
Enbrel continues to grow, limits on our current sources of supply of Enbrel will
constrain our sales growth unless and until additional manufacturing capacity
for Enbrel is approved. For a discussion of the factors affecting our supply of
Enbrel, see "Risks Related to our Business", below.
Sales of our specialty therapeutic products, which include Leukine(R)
(sargramostim, GM-CSF) and Novantrone(R) (mitoxantrone for injection
concentrate), totaled $44.8 million for the three months ended September 30,
2000, compared to $36.0 million for the three months ended September 30, 1999.
Sales of our specialty therapeutic products totaled $119.9 for the nine months
ended September 30, 2000, compared to $108.5 for the nine months ended September
30, 1999. Sales of Leukine totaled $24.0 million for the three months ended
September 30, 2000, compared to $17.5 million during the three months ended
September 30, 1999. Sales of Leukine totaled $59.0 million for the nine months
ended September 30, 2000, compared to $50.1 million during the nine months ended
September 30, 1999. In order to improve the profitability of Leukine, we
discontinued certain distributor price discounts during the first quarter of
2000. This contributed to a temporary decline in sales volume of Leukine in the
first quarter of 2000, as distributors reduced inventory levels before ordering
additional product. During the third quarter of 2000, sales of Leukine
increased, reflecting both an increase in demand levels and higher realized
prices. Sales of Novantrone totaled $14.5 million for the three months ended
September 30, 2000, compared to $11.2 million for the three months ended
September 30, 1999. Sales of Novantrone totaled $41.1 million for the nine
months ended September 30, 2000, compared to $33.1 million for the nine months
ended September 30, 1999. The improvement reflects higher realized selling
prices for Novantrone.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
Royalty and contract revenue totaled $1.8 million for the three months
ended September 30, 2000, compared to $13.0 million for the three months ended
September 30, 1999. Royalty and contract revenue totaled $31.1 million for the
nine months ended September 30, 2000, compared to $18.5 million for the
comparable 1999 period. In February 2000, we earned a one-time payment of $10.0
million from AHP under the Enbrel promotion agreement, when net sales of Enbrel
in the United States exceeded $400.0 million for the preceding 12-month period.
In June 2000, we earned $15.0 million from AHP under the terms of the Enbrel
promotion agreement when an expanded indication for Enbrel was approved by the
FDA for reducing signs and symptoms and delaying structural damage in patients
with moderately to severely active RA. These were the final scheduled payments
to be earned by us under the Enbrel promotion agreement with AHP. 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 the United States exceeded
$200.0 million for the preceding 12-month period. The remaining royalty and
contract revenue recognized in 2000 and the royalty and contract revenue
recognized during the three and nine-month periods ended September 30, 1999
reflects recurring amounts recognized under existing royalty and license
agreements.
Operating Expenses
Cost of product sales was 30.1% of product sales for the three months ended
September 30, 2000, compared to 30.2% of product sales for the three months
ended September 30, 1999. Cost of product sales was 29.3% of product sales for
the nine months ended September 30, 2000, compared to 30.2% of product sales for
the nine months ended September 30, 1999. The decrease in the cost of product
sales, as a percentage of product sales, during the current year periods was due
to:
. lower costs for Enbrel primarily due to a reduction in internal costs
and favorable exchange rates on purchases of Enbrel from Boehringer
Ingelheim Pharma KG, or BI Pharma, our contract manufacturer for
Enbrel, which is located in Germany;
. a favorable mix of sales of our other specialty therapeutic products;
and
. higher realized prices from sales of our specialty therapeutics
products.
Partially offsetting these items was increased sales of Enbrel. Like Leukine,
Enbrel is a biologic, and generally has a higher manufacturing cost than
traditional pharmaceutical products and is subject to multiple royalty
obligations. Cost of product sales as a percentage of product sales is expected
to increase to the extent sales of Enbrel become a greater percentage of product
sales. In addition, in June 2000, we, AHP and BI Pharma amended the BI Pharma
supply agreement to offer BI Pharma financial incentives to provide additional
near-term production capacity for Enbrel. As an incentive to BI Pharma, we will
pay more to BI Pharma on a per unit basis for any additional production runs,
which will result in an increase in our incremental production costs for these
additional runs.
Research and development expense was $44.2 million for the three months
ended September 30, 2000, compared to $31.1 million for the three months ended
September 30, 1999. Research and development expense was $120.1 million for the
nine months ended September 30, 2000, compared to $89.5 million for the nine
months ended September 30, 1999. The increase in research and development
expense was primarily due to the development of:
. Enbrel for treating chronic heart failure, RA, psoriatic arthritis and
other diseases;
. TRAIL/Apo2 for treating cancer, in collaboration with Genentech Inc.;
. Avrend (TM) (CD40 ligand) for treating renal cell cancer; and
. IL-1 receptor Type II for treating inflammation, osteoporosis and
other diseases.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
--------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
In addition, in July 2000, we entered into a joint development and
commercialization agreement with Abgenix, Inc. for ABX-EGF, a fully human
antibody created by Abgenix which is in a Phase I clinical trial for treating a
variety of tumors. We made an initial license fee payment of $5.0 million to
Abgenix, which is included in research and development expense, and are sharing
equally with Abgenix the development costs of ABX-EGF. We have also increased
staffing and laboratory space to support our discovery research activities and
incurred increased costs associated with funding collaborative research
activities.
Selling, general and administrative expense increased to $88.8 for the
three months ended September 30, 2000, compared to $56.9 million for the three
months ended September 30, 1999. Selling, general and administrative expense
increased to $243.1 million for the nine months ended September 30, 2000,
compared to $154.1 million for the nine months ended September 30, 1999. The
increase was primarily due to expenses associated with selling and marketing
Enbrel. Under the terms of the Enbrel promotion agreement, AHP assumed a
majority of these expenses in the United States in the year following launch of
Enbrel, and a decreasing majority of these expenses in the second year following
launch of Enbrel. Beginning in November 2000, we and AHP will share AHP's U.S.
marketing and selling expenses for Enbrel equally. AHP also shares in the gross
profits from U.S. sales and potential Canadian sales of Enbrel. Our share of
costs incurred under the Enbrel promotion agreement, including the obligation to
AHP for its share of the gross profits from U.S. sales of Enbrel totaled $57.4
million and $154.6 million for the three and nine months ended September 30,
2000, respectively, compared to $34.9 million and $87.3 million for the three
and nine months ended September 30, 1999, respectively. In addition to expenses
incurred under the Enbrel promotion agreement, selling, general and
administrative expense increased due to the following:
. increased staffing levels and other infrastructure costs;
. selling and marketing expenses for our specialty therapeutics line of
products; and
. preparing for FDA approval of Novantrone for treating worsening forms
of multiple sclerosis.
Selling, general and administrative expense will continue to increase to
the extent sales of Enbrel grow, reflecting the corresponding increase in the
share of gross profits due AHP under the Enbrel promotion agreement.
Other Income (Expense)
Interest income totaled $13.8 million for the three months ended September
30, 2000, compared to $9.1 million for the three months ended September 30,
1999. Interest income totaled $37.0 million for the nine months ended September
30, 2000, compared to $16.0 million for the nine months ended September 30,
1999. The issuance of a $450.0 million convertible subordinated note to AHP in
May 1999, sales of common stock to AHP and our employees and improved operating
cash flow resulted in a significant increase in funds available for investment
purposes and the interest income earned on these funds. The increase in interest
income was partially offset by an increase in interest expense incurred on the
$450.0 million convertible subordinated note. On October 31, 2000, AHP converted
the $450 million convertible subordinated note into issued shares of our common
stock. The note would have been due in 2000 and interest expense on the note
would have totaled $13.5 million annually. As a result of this conversion, we
made our last interest payment on the note during October 2000.
Provision for Income Taxes
The provision for income taxes was $0.5 million for the three months ended
September 30, 2000, compared to $7.0 million for the three months ended
September 30, 1999. The provision for income taxes was $1.2 million for the nine
months ended September 30, 2000, compared to $9.4 million for the nine months
ended September 30, 1999. The provision for income taxes during the first nine
months of 2000 consisted only of our tax obligation in the states in which we
sell our products. Our federal tax
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CONDITION AND RESULTS OF OPERATIONS (continued)
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expense in 2000, for financial reporting purposes, was offset by utilizing our
net operating loss, or NOL carryforwards. This is expected to continue for the
remainder of 2000. In the first nine months of 1999, the benefit of utilizing
our NOL carryforwards, for financial reporting purposes, was used to reduce
goodwill and intangible product rights related to the 1993 Cyanamid merger. As
of December 31, 1999, the goodwill and merger related intangible product rights
balances had been reduced to zero.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short term investments totaled $817.7 million at
September 30, 2000 and $709.8 million at December 31, 1999. These amounts are
held in a variety of interest-bearing instruments, including government and
corporate obligations and money market accounts.
Operating activities provided cash of $168.2 million during the nine months
ended September 30, 2000, reflecting income earned in operations and decreased
working capital requirements. Working capital used to fund the increase in
inventory and the increase in accounts receivable from increased sales of Enbrel
were more than offset by increased accounts payable and payables to AHP under
the Enbrel promotion agreement.
Cash used in investing activities totaled $391.8 million during the nine
months ended September 30, 2000. The majority of the cash used for investing
activities is due to the net $293.8 million in purchases of investment
securities. We also invested $88.5 million for property, plant and equipment
through September 30, 2000. Significant expenditures include construction of our
new process development facility in Bothell, Washington, which is expected to be
completed by the end of 2000. In addition, in September 2000, we purchased land
adjacent to the location of our planned research and technology center in
Seattle, Washington. This land will be held to accommodate our future growth.
Other capital expenditures include purchases of computer hardware and software,
lab equipment and leasehold improvements.
We are collaborating with AHP to expand the production capacity for Enbrel.
In September 1999, AHP completed the purchase of a large-scale biopharmaceutical
manufacturing facility in Rhode Island. Immunex and AHP are investing
substantial sums and working closely together to retrofit the Rhode Island
facility to accommodate the commercial production of Enbrel bulk drug. AHP has
agreed to sell the Rhode Island facility to us at a future date, anticipated to
be in the second half of 2002. We have agreed with AHP to fund 50% of the
retrofit and make-ready costs of the Rhode Island facility on a quarterly basis
as they are incurred. At the time ownership is transferred to us, we will
reimburse AHP for the remaining 50% of the retrofit and make-ready costs plus
AHP's cost to originally acquire the facility, which was $60 million. The total
cost of the project, which we will pay to AHP for retrofitting and purchasing
the Rhode Island facility, is expected to be approximately $400 million. We are
also evaluating other options to further expand our manufacturing facilities.
We are currently in the preliminary design phase of building a planned new
research and technology center in Seattle, Washington. The center will allow us
to expand our laboratory and office space and to consolidate facilities
currently spread among multiple separate locations in the Seattle area into a
single location. The total cost for the initial phase of this center is expected
to be approximately $750 million. AHP has agreed to provide financing guarantees
to third-party lenders of up to $550 million in connection with the construction
of this center, provided that these financing guarantees will be reduced to $450
million if the current offering of our common stock is completed. Under the
terms of our agreement with AHP, we will be required to collateralize up to $300
million of the third-party financing for this center. The financing of this
center may be subject, in part, to the financial position of AHP, including
related events of default under AHP credit facilities.
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Financing activities provided cash of $60.8 million during the nine months
ended September 30, 2000. We received $30.0 million from the exercise of
employee stock options for the purchase of 8,456,967 shares during the first
nine months of 2000. We received an additional $1.9 million from the purchase of
106,869 shares under our employee stock purchase plan. In addition, under the
terms of a governance agreement with AHP, AHP can purchase additional shares of
our common stock from us 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 $28.9 million from the
issuance of 1,042,995 additional shares of our common stock to AHP during the
first nine months of 2000.
On August 30, 2000, our shelf registration statement for the sale of up to
70 million shares of our common stock was declared effective by the SEC. On
October 19, 2000, we filed a preliminary prospectus supplement for the proposed
sale of 20 million shares of our common stock and 40 million shares of our
common stock by AHP, and an additional 9 million shares to cover over-
allotments, if any.
On October 31, 2000, AHP converted the $450 million convertible
subordinated note into issued shares of our common stock. The note would have
been due in 2006 and interest expense on the note would have totaled $13.5
million annually. As a result of this conversion, we made our last interest
payment on the note during October 2000.
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CONDITION AND RESULTS OF OPERATIONS (continued)
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Risks Related to our Business
We may be unable to sustain or increase profitability or raise sufficient
additional capital, which could result in a decline in our stock price.
Future operating performance is never certain, and if our operating results
fall below the expectations of securities analysts or investors, the trading
price of our common stock will likely decline. Until 1998, we had a history of
operating losses. Although we have been profitable for two years, we may be
unable to sustain or increase profitability on a quarterly or annual basis.
Moreover, we anticipate that our operating and capital expenditures will
increase significantly in 2000 and in future years primarily due to:
. additional spending to support the marketing and sales of Enbrel;
. working capital requirements for sales of Enbrel;
. growth in research and development expenses as we progress with the
development of our clinical and preclinical product candidates;
. construction of facilities and purchases of capital equipment,
including a new process development facility in Bothell, Washington;
. design and construction of our planned new research and technology
center in Seattle, Washington; and
. investment in additional manufacturing capacity for our existing
products and products in development, including our investment in
purchasing and retrofitting a Rhode Island manufacturing facility to
produce Enbrel.
Our ability to generate sufficient cash flow, or to raise sufficient
capital, to fund these operating and capital expenditures depends on our ability
to improve operating performance. This in turn depends, among other things, on
increasing sales of our existing products, especially Enbrel, and successfully
completing product development efforts and obtaining timely regulatory approvals
of our lead clinical products. We may not successfully develop and commercialize
these products.
If we are unable to increase sales of Enbrel, or if sales of Enbrel decline, our
revenues from Enbrel will be limited, which could result in a decline in our
stock price.
Because we depend, and expect to continue to depend, on sales of a single
product, Enbrel, for a substantial majority of our revenues, decreased or lower-
than-anticipated demand for Enbrel, or our inability to meet demand, could
materially adversely affect our operating results and harm our business. Because
we only began marketing Enbrel in 1998, its long-term effects are largely
unknown. Adverse developments regarding the long-term safety and efficacy of
Enbrel could adversely affect demand for the product, or restrict our ability to
market and sell it for its current or potential indications. Other factors that
would adversely affect sales of Enbrel include:
. competition from existing products for treating RA or development of
new, superior products;
. our ability to maintain adequate and uninterrupted sources of supply
to meet demand;
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CONDITION AND RESULTS OF OPERATIONS (continued)
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. events adversely affecting the ability of our manufacturing
collaborators to produce Enbrel;
. contamination of product lots or product recalls;
. our inability to gain regulatory approval to market Enbrel for
indications other than RA; and
. changes in private health insurer reimbursement rates or policies for
Enbrel.
For the year ended December 31, 1999, sales of Enbrel accounted for 71% of
our product sales, and for the nine months ended September 30, 2000, sales of
Enbrel accounted for 79% of our product sales. We expect revenue generated by
Enbrel to continue to account for a substantial majority of our product sales.
If market demand for Enbrel continues to grow, limits on our current sources of
supply for Enbrel will constrain our sales growth unless and until additional
manufacturing capacity for Enbrel is approved.
The market demand for Enbrel in the United States is growing and cannot be
predicted with certainty. If demand for Enbrel continues to grow, we expect that
within the next year our current source of supply of Enbrel will be unable to
support market demand. In addition, because of the periodic nature of the
production cycle described below, we may from time to time experience brief
supply interruptions. This risk of near-term shortfall and the risk of brief
supply interruptions will continue unless and until the Rhode Island
manufacturing facility is able to produce commercial quantities of Enbrel for
sale, which is not expected to occur until the first half of 2002. Our current
U.S. and Canadian supply of Enbrel from BI Pharma could potentially support
sales of up to a maximum of approximately $750 million annually, assuming some
additional production runs scheduled by BI Pharma in 2001, an anticipated price
increase and no significant improvement in production yields. Actual U.S. supply
of Enbrel could be lower since our U.S. supply is impacted by many manufacturing
and production variables, such as the timing of production runs, production
success rate, bulk drug yield and the timing and outcome of product quality
testing. Our sales of Enbrel will be adversely affected if we at any time are
unable to meet market demand. We are currently implementing a program in the
United States to identify existing and new patients prescribed Enbrel so that we
can best manage the overall number of patients using Enbrel in view of available
supply and to help ensure that the patients in the program receive an
uninterrupted supply of Enbrel. As a result of this program, our annual sales of
Enbrel may be lower than the annual supply that BI Pharma can produce.
We are working with AHP to substantially increase our supply of Enbrel for
sale in the United States and Canada. In our current plan, we anticipate that in
the near term Enbrel would be produced at two sites: BI Pharma, currently our
sole source supplier, and a Rhode Island manufacturing facility, which is being
retrofitted to produce Enbrel. It is difficult to predict our actual near-term
supply of Enbrel with certainty because of the many complex variables involved
in the supply equation. Factors that will affect our actual supply of Enbrel at
any time include, without limitation, the following:
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CONDITION AND RESULTS OF OPERATIONS (continued)
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. Variability in BI Pharma's production cycle. BI Pharma does not
produce Enbrel continuously; rather, it produces the drug through a
series of periodic campaigns throughout the year. The amount of
commercial inventory available to us at any time depends on a variety
of factors, including the timing of BI Pharma's production runs, level
of production yields and success rates, timing and outcome of product
quality testing and amount of vialing capacity. We are making
substantial investments in manufacturing process improvements for
Enbrel produced by BI Pharma that, assuming FDA approval of the
process improvements, we anticipate could result in a significant
increase in the level of production yields for Enbrel commencing in
the latter part of 2001.
. Ability of BI Pharma to provide additional capacity for Enbrel. In
June 2000, we, AHP and BI Pharma amended the BI Pharma supply
agreement to offer BI Pharma financial incentives to provide
additional near-term production capacity for Enbrel. While we have
indications from BI Pharma that some additional production runs have
been scheduled in 2001 for Enbrel, we do not currently know the extent
to which these scheduled additional production runs and the potential
for more production runs will become binding commitments from BI
Pharma. If BI Pharma elects to and is able to provide more production
capacity for Enbrel above and beyond the scheduled additional
production runs, our U.S. and Canadian supply of Enbrel from BI Pharma
could potentially increase by up to a maximum of approximately $100
million of sales annually, assuming an anticipated price increase and
depending on the manufacturing variables described above. As an
incentive to BI Pharma, we will pay more to BI Pharma on a per unit
basis for any of these additional production runs, which will result
in an increase in our incremental production costs for these runs. BI
Pharma's ability to provide additional production runs depends in part
on factors beyond its control, including contractual commitments to
other customers.
. Potential bottlenecks in the vialing process. BI Pharma schedules the
vialing production runs for Enbrel in advance, based on the expected
timing and yield of bulk drug production runs. Therefore, if BI Pharma
realizes production yields beyond expected levels, or provides
additional manufacturing capacity for Enbrel, it may not have
sufficient vialing capacity for all of the Enbrel bulk drug that it
produces. As a result, even if we are able to increase our supply of
Enbrel bulk drug, BI Pharma may not be able to vial the extra bulk
drug in time to prevent any supply interruptions. We and AHP are
working together with BI Pharma to increase BI Pharma's vialing
capacity and to qualify an additional contract manufacturer to vial
Enbrel bulk drug produced by BI Pharma and, if approved by the FDA,
the Rhode Island facility. We are not sure whether these arrangements
can be made or would be established in time to address any brief
supply interruptions.
. Timely completion and approval of the Rhode Island manufacturing
facility. We and AHP are investing substantial sums and working
closely together to retrofit a Rhode Island facility that AHP
purchased in 1999 to accommodate the commercial production of Enbrel
bulk drug. We and AHP have reached agreements regarding the allocation
of Enbrel produced at the BI Pharma facility and that may be produced
at the Rhode Island facility. As presently configured, we currently
estimate that, when completed, the retrofit of the Rhode Island
facility could, on an annual basis, double our current U.S. and
Canadian supply of Enbrel. We expect to file for FDA approval of the
Rhode Island facility in the second half of 2001, with estimated FDA
approval in mid-2002. We anticipate commencing production runs at the
Rhode Island facility and building inventory as early as the first
half of 2001. This inventory would not be available for
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CONDITION AND RESULTS OF OPERATIONS (continued)
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sale in the United States unless and until the Rhode Island facility
is approved by the FDA, which approval is not assured. We cannot
assure you that these estimated dates relating to the Rhode Island
facility will not be delayed.
If U.S. market demand for Enbrel continues to grow, we may face future
supply limitations even after the Rhode Island facility begins producing Enbrel.
To address these limitations, we are evaluating other options to further expand
our manufacturing capacity for Enbrel, including building additional capacity at
the Rhode Island facility. In addition, AHP plans to establish a new
manufacturing facility in Ireland by 2005, which could enhance the U.S. and
Canadian supply of Enbrel. We and AHP also have reached an agreement regarding
the allocation of Enbrel that may be produced at a potential expansion of the
Rhode Island facility and the Ireland facility. If additional manufacturing
capacity at the Rhode Island facility is not built or if the Ireland facility is
not completed, or if these facilities do not receive FDA approval before we
encounter supply constraints, our future U.S. sales growth would again be
restricted.
If third-party manufacturers or suppliers fail to perform, we will be unable to
meet demand for some of our products.
For all drug products that we market, we rely on unaffiliated third parties
and AHP to fill and label vials with our bulk drugs. We would be unable to
obtain these materials or products for an indeterminate period of time if AHP's
subsidiaries or third-party manufacturers or suppliers, including BI Pharma,
were to cease or interrupt production or otherwise fail to supply these
materials or products to us or AHP for any reason, including due to labor
shortages or disputes. This in turn could materially reduce our ability to
satisfy demand for these products, which could adversely affect our operating
results. AHP either manufactures through its subsidiaries or sources through
third-party manufacturers all finished dosage forms and bulk active raw
materials for our nonbiological oncology products, including Novantrone. AHP
depends on a single supplier for all of the essential raw material for Amicar(R)
(aminocaproic acid). In addition, two of the raw materials used to produce
Enbrel and our other recombinant protein products under development are
manufactured by single suppliers.
Our preclinical and clinical testing of potential products could be
unsuccessful, which could adversely affect our operating results.
Before obtaining regulatory approvals for the sale of any of our potential
products, we must subject these products to extensive preclinical and clinical
testing to demonstrate their safety and effectiveness in humans. If these tests
are unsuccessful, we will be unable to commercialize new products and, as a
result, we may be unable to sustain or increase profitability. Results of
initial preclinical and clinical testing are not necessarily indicative of
results to be obtained from later preclinical and clinical testing and, as a
result, we may suffer significant setbacks in advanced clinical trials. We may
not complete our clinical trials of products under development and the results
of the trials may fail to demonstrate the safety and effectiveness of new
products to the extent necessary to obtain regulatory approvals.
The rate of completion of clinical trials depends, in part, on the
enrollment of patients, which in turn depends on factors such as the size of the
patient population, the proximity of target patients to clinical sites, the
eligibility criteria for the trial and the existence of competitive clinical
trials. Any delay in planned patient enrollment in our current or future
clinical trials may result in increased costs, trial delays or both.
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Our products and product candidates are subject to extensive regulatory approval
processes and ongoing regulation, which can be costly and time-consuming and
subject us to unanticipated delays or lost sales.
The FDA imposes substantial requirements on our products before it permits
us to manufacture, market and sell them to the public. Compliance with these
requirements is costly and time-consuming, and could delay sales of new products
or sales of our existing products for new indications. To meet FDA requirements,
we must spend substantial resources on lengthy and detailed laboratory tests and
clinical trials. It typically takes many years to complete tests and trials for
a product. The actual length of time involved depends on the type, complexity
and novelty of the product. The FDA may not approve on a timely basis, if at
all, some or all of our future products or may not approve some or all of our
applications for additional indications for our previously approved products.
If we violate regulatory requirements at any stage, whether before or after
marketing approval is obtained, we may be fined or forced to remove a product
from the market or may experience other adverse consequences, including delay or
increased costs, which could materially harm our financial results.
Additionally, we may not be able to obtain approval for the labeling claims
necessary or desirable for promoting our products. Even if approval is obtained,
we may be required or may elect to undertake post-marketing trials.
We may be required to perform additional clinical trials or change the labeling
of our products if we or others identify side effects after our products are on
the market, which could adversely affect sales of the affected products.
If we or others identify side effects after any of our products are on the
market, or if manufacturing problems occur, regulatory approval may be withdrawn
and reformulation of our products, additional clinical trials, additional
changes in labeling of our products and changes to or re-approvals of our
manufacturing facilities may be required, any of which could have a material
adverse effect on sales of the affected products and on our business and results
of operations.
In October 2000, we revised the warning section of the U.S. package insert
for Enbrel and sent a healthcare professional notification, commonly referred to
as a Dear Doctor letter, to physicians in the United States advising them of
these changes to the package insert. We made these revisions, after consulting
with the FDA, in response to spontaneous adverse events reported to us in the
course of our post-marketing surveillance of patients with RA who have been
treated with Enbrel, and concurrently with a request initiated by the European
Medicines Evaluation Agency that AHP send a similar letter to physicians in
Europe. The causal relationship between these adverse events and therapy with
Enbrel remains unclear. These adverse event reports included rare cases of
pancytopenia, including aplastic anemia, some with a fatal outcome. Pancytopenia
and aplastic anemia are hematologic disorders characterized by a reduction in
red and white blood cells and of blood platelets. These adverse event reports
also included rare cases of central nervous system disorders, including
demyelinating disorders such as MS, myelitis and optic neuritis. AHP, after
consulting with the European Medicines Evaluation Agency, revised the European
package leaflet for Enbrel in response to spontaneous adverse event reports of
the hematologic disorders mentioned above and sent letters to physicians in
Europe advising them of the changes to the package leaflet. It is possible that
additional spontaneous adverse events will be reported to us as experience with
Enbrel continues or as a result of any Dear Doctor letter sent to physicians
advising them of changes to the package insert for Enbrel. If we or others
identify new adverse events for patients treated with Enbrel, additional
precautions, warnings or other changes in the label for Enbrel may be required.
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CONDITION AND RESULTS OF OPERATIONS (continued)
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Our ability to discover, develop or commercialize products could be adversely
affected if our research and marketing collaborations are terminated.
We have relationships with various collaborators who conduct research at
our request. Some of our collaborators also have shared marketing rights to
products subject to the collaboration. These collaborators are not our
employees. As a result, we have limited control over their activities and,
except as otherwise required by our collaboration agreements, can expect only
limited amounts of their time to be dedicated to our activities. Our ability to
discover, develop and commercialize products will depend in part on the
continuation of these collaborations. If any of these collaborations are
terminated, we may not be able to enter into other acceptable collaborations. In
addition, our existing collaborations may not be successful. Disputes may arise
between us and our collaborators as to a variety of matters, including financing
obligations under our agreements and ownership of intellectual property rights.
These disputes may be both costly and time-consuming and may result in delays in
the development and commercialization of products.
Competition and technological developments could render our products obsolete or
noncompetitive.
To succeed, we must maintain a competitive position with respect to
technological advances. We are engaged in fields characterized by extensive
research efforts and rapid technological development. New drug discoveries and
developments in the fields of genomics, rational drug design and other drug
discovery technologies are accelerating. Many companies and institutions, both
public and private, are developing synthetic pharmaceuticals and
biotechnological products for human therapeutic application, including the
applications we have targeted.
Several products are currently approved for treating RA. In particular, we
face competition for Enbrel, principally from the generic drug methotrexate and
from Johnson & Johnson's product Remicade(R) (infliximab). There are other
products in late-stage development that are targeting RA. Depending on the
market acceptance of these products or potential products, our sales of Enbrel
could be adversely affected.
A number of our competitors have substantially more capital, research and
development, regulatory, manufacturing, marketing, human and other resources and
experience than we have. Furthermore, large pharmaceutical companies recently
have been consolidating, which has increased their resources and concentrated
valuable intellectual property assets. As a result, our competitors may:
. develop products that are more effective or less costly than any of
our current or future products or that render our products obsolete;
. produce and market their products more successfully than we do;
. establish superior proprietary positions; or
. obtain FDA approval for labeling claims that are more favorable than
those for our products.
If we are unable to protect and enforce our patents and proprietary rights and
gain access to patent and proprietary rights of others, we may be unable to
compete effectively.
Our success depends in part on obtaining, maintaining and enforcing our
patents and other proprietary rights and on our ability to avoid infringing the
proprietary rights of others. Third parties have obtained or are seeking patents
which, if issued or granted, may have a material adverse effect on our ability
to successfully commercialize Enbrel in the United States. Although we have a
substantial intellectual property portfolio, which includes patents and patent
applications, we cannot be certain that
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we will be able to protect and enforce our rights. Patent law relating to the
scope of claims in the biotechnology field is still evolving and, consequently,
patent positions in our industry may not be as strong as in other more well-
established fields. Accordingly, the U.S. Patent and Trademark Office, or PTO,
may not issue patents from the patent applications owned by or licensed to us.
If issued, the patents may not give us an advantage over competitors with
similar technology.
The issuance of a patent is not conclusive as to its validity or
enforceability and it is uncertain how much protection, if any, will be given to
our patents if we attempt to enforce them or they are challenged in court or in
other proceedings. A third party may challenge the validity or enforceability of
a patent after it is issued by the PTO. It is possible that a competitor may
successfully challenge our patents or that a challenge will result in limiting
their coverage. Moreover, the cost of litigation to uphold the validity of
patents and to prevent infringement can be substantial. If the outcome of
litigation is adverse to us, third parties may be able to use our patented
invention without paying us. It is also possible that competitors may infringe
our patents or successfully avoid them through design innovation.
While we pursue patent protection for products and processes where
appropriate, we also rely on trade secrets, know-how and continuing
technological advancement to develop and maintain our competitive position.
Therefore, others may independently develop substantially equivalent information
or techniques, or otherwise gain access to or disclose our technology. We may
not be able to effectively protect our rights in unpatented technology, trade
secrets and confidential information.
Our policy is to have each employee enter into a confidentiality agreement
that contains provisions prohibiting the disclosure of confidential information
to anyone outside Immunex. The research and development contracts we enter into
with our scientific consultants generally contain confidentiality and
nondisclosure provisions. These confidentiality agreements may not be honored
and we may be unable to protect our rights to our unpatented trade secrets.
We may be required to obtain licenses to patents or other proprietary
rights from third parties to develop, manufacture and commercialize our
products, to label and sell our products for new indications or, in the event we
do not prevail in a dispute over the patent rights of others, in order to
continue our current activities. Licenses required under third-party patents or
proprietary rights may not be made available on terms acceptable to us, if at
all. If we do not obtain the required licenses, we could encounter delays in
product development while we attempt to redesign products or methods or we could
be unable to develop, manufacture or sell products requiring these licenses at
all.
Our customers may not get reimbursed from third parties, which could adversely
affect our sales.
The affordability of our products depends substantially on governmental
authorities, private health insurers and other organizations, such as health
maintenance organizations, reimbursing most of the costs of our products and
related treatments to our customers. Low reimbursement levels may reduce the
demand for, or the price of, our products, which could prevent us from
maintaining or achieving profitability on specific products. Since Medicare
currently will not reimburse patients for self-administered drugs, Medicare does
not cover prescriptions of Enbrel. Although we have been able to obtain
sufficient reimbursement for most of our other products, governmental
authorities or third parties, or both, may decrease their reimbursement rates or
change their reimbursement policies. In addition, we may be unable to obtain
sufficient reimbursement for our future products.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
Our selling practices for products reimbursed by Medicare or Medicaid may be
challenged in court, which could result in claims for substantial money damages
or changes in our pricing procedures.
The federal government and several state agencies have initiated
investigations into our pricing practices and could seek substantial money
damages or changes in the manner in which we price our products. If changes are
mandated, they could adversely affect the sales of those products. In the United
States, pharmaceutical companies frequently grant discounts from list price to
physicians and suppliers who purchase their products. Discounts on multiple-
source, or generic, pharmaceuticals may be substantial. Government reports have
noted that government programs that reimburse medical providers for drugs on the
basis of the average wholesale price or wholesale acquisition cost, such as
Medicare and Medicaid in many states, may provide significant margins to
providers who are able to obtain large discounts from pharmaceutical companies.
We have received a notice from the U.S. Department of Justice requesting us
to produce documents in connection with the Civil False Claims Act investigation
of the pricing of our products for sale and eventual reimbursement by Medicare
or state Medicaid programs. We also have received similar requests from the U.S.
Department of Health and Human Services and state agencies. According to press
reports, approximately 20 other pharmaceutical companies are under investigation
by the U.S. Department of Justice and/or state agencies related to the pricing
of their products. Several of our products are regularly sold at substantial
discounts from list price. We have consistently required in our contracts of
sale that the purchasers appropriately disclose to governmental agencies the
discounts that we give to them. We do not know what action, if any, the federal
government or any state agency will take as a result of their investigations.
We may be required to defend lawsuits or pay damages for product liability
claims.
Product liability is a major risk in testing and marketing biotechnology
and pharmaceutical products. We face substantial product liability exposure in
human clinical trials and for products that we sell after regulatory approval.
Product liability claims, regardless of their merits, could be costly and divert
management's attention, or adversely affect our reputation and the demand for
our products. We currently maintain product liability insurance coverage based
on our product portfolio, sales volumes and claims experienced to date. However,
this insurance may not provide us with adequate coverage against potential
liabilities either for clinical trials or commercial sales. In the future,
insurers may not offer us product liability insurance, may raise the price of
this insurance or may limit the coverage.
We may be required to pay damages for environmental accidents and to incur
significant costs for environmental compliance.
Our research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and radioactive compounds. In the event
of an environmental accident, we could be held liable for any resulting damages,
and any liability could materially affect our financial condition. We cannot
eliminate the risk of accidental contamination or injury from these materials.
In addition, we may be required to incur significant costs to comply with
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of these materials and some types of waste
products.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
If we are unable to attract and retain key employees and consultants, our
business could be harmed.
The success of our business depends, in large part, on our continued
ability to attract and retain highly qualified management, scientific,
manufacturing and sales and marketing personnel. Competition for personnel among
companies in the biotechnology and pharmaceutical industries is intense. We
cannot assure you that we will be able to attract or retain the personnel
necessary to support the growth of our business.
A deterioration in the financial condition of major pharmaceutical wholesalers
could result in substantial lost receivables.
In the first nine months of 2000, approximately 61% of our product sales
were made to three pharmaceutical wholesalers. Financial insolvency by one or
more of these wholesalers would require us to write off all or a portion of the
amounts due us. As of September 30, 2000, the amount due us from these three
wholesalers totaled $51.4 million.
Foreign currency exchange rate fluctuations could cause our profits to decline.
Adverse currency fluctuations between the U.S. dollar and the Euro could
cause our manufacturing costs to increase and our profitability to decline.
Under the terms of our supply agreement with BI Pharma for Enbrel, the price for
our product orders initially is set in Euros. We have the option, at the time of
any firm order, to pay the purchase price in Euros, or to fix the currency
exchange rate on the date of the order and pay the purchase price in U.S.
dollars. Accordingly, future currency exchange rate fluctuations could
substantially increase the manufacturing cost of our future product orders,
which typically are placed up to nine months in advance. In addition, if we
elect to pay the purchase price of any future orders in Euros, currency
fluctuations between the time of that order and the time of payment could
substantially increase our manufacturing costs for that order.
Future acquisitions of or investments in businesses, products or technologies
could harm our business, operating results and stock price.
We may acquire or invest in other businesses, products or technologies that
are intended to complement our existing business. From time to time, we have had
discussions and negotiations with companies regarding our acquiring or investing
in these companies' businesses, products or technologies, and we regularly
engage in these discussions and negotiations in the ordinary course of our
business. Our management has limited prior experience in assimilating acquired
companies. Any acquisitions or investments we complete will likely involve some
or all of the following risks:
. difficulty of assimilating the acquired operations and personnel,
products or technologies;
. commercial failure of acquired products;
. disruption of our ongoing business;
. diversion of resources;
. inability of management to maintain uniform standards, controls,
procedures and policies;
. difficulty of managing our growth and information systems;
. reduction in the overall growth rate of the combined organization;
. risks of entering markets in which we have little or no prior
experience; and
. impairment of relationships with employees or customers.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
In addition, future acquisitions or investments could result in potentially
dilutive issuances of equity securities, use of cash or incurrence of debt and
assumption of contingent liabilities, any of which could have an adverse effect
on our business and operating results or the price of our common stock.
Risks Related to our Share Price and Corporate Control
Our stock price is volatile and the value of your investment may be subject to
sudden decreases.
Our common stock price, like that of other biotechnology companies, is
volatile. As a result, you may not be able to resell your shares at or above the
price that you pay for them. Our common stock price may fluctuate due to factors
such as:
. actual or anticipated fluctuations in our quarterly and annual
operating results;
. actual or anticipated product supply constraints;
. adverse developments regarding the safety or efficacy of our products
or changes to the labels for our products;
. clinical trial results and other product-development announcements by
us or our competitors;
. loss of any of our key executives;
. regulatory announcements, proceedings or changes;
. announcements in the scientific and research community;
. competitive product developments;
. intellectual property and legal developments;
. changes in reimbursement policies or medical practices;
. mergers or strategic alliances in the biotechnology and pharmaceutical
industries;
. any financing transactions we may propose or complete; or
. broader industry and market trends unrelated to our performance.
During periods of stock market price volatility, share prices of many
biotechnology companies have often fluctuated in a manner not necessarily
related to the companies' operating performance. Accordingly, our common stock
may be subject to greater price volatility than the market as a whole.
AHP has a substantial degree of corporate control over many of our strategic
decisions, and the interests of AHP could conflict with those of the other
holders of our common stock.
The concentrated holdings of our common stock by AHP and its resulting
control over many of our strategic decisions may result in a delay or the
deterrence of possible changes in our control, which may reduce the market price
of our common stock. As of September 30, 2000, AHP beneficially owned
approximately 55% of the outstanding shares of our common stock. Upon completion
of the proposed stock offering, and assuming the sale of 40 million shares of
our common stock by AHP, AHP will own approximately 45% of the outstanding
shares of our common stock (or, if the over-allotment option is exercised in
full, approximately 43%). Under our governance agreement with AHP, unless and
until AHP's percentage ownership of the outstanding shares of our common stock
drops below 35%, AHP, through members of our board of directors designated by
AHP, will continue to exercise significant control over many of our strategic
and operational decisions. So long as AHP has the right to designate at least
two directors, which applies if AHP's beneficial ownership of our common stock
is at least 35%, many actions that we may wish to take will require the approval
of at least one director designated by AHP. These actions include, with
specified exceptions:
. any change in the composition of our board (other than directors
designated by us);
. consolidations, mergers or similar transactions above a specified
threshold;
. any change in our capital stock; and
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS (continued)
-----------------------------------------------
. any change in our governing documents, as well as specified operating
decisions, such as incurring incremental indebtedness above a
specified threshold.
The interests of AHP with regard to these matters may conflict with the
interests of other holders of our common stock.
Future sales of shares by AHP could affect our stock price.
Sales of substantial amounts of our common stock, or the perception that
these sales may occur, could adversely affect prevailing market prices for our
common stock. Under our governance agreement, AHP has demand and piggyback
registration rights with respect to its shares of our common stock. As a result,
AHP could cause a significant number of shares of our common stock to be
registered and sold in the public market, which could cause our stock price to
decline.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
We have financial instruments that are subject to interest rate risk
including both debt instruments and investment instruments. We invest our cash
reserves in marketable securities consisting primarily of U.S. government and
corporate obligations. If market interest rates changed relatively by as much as
10%, the net effect on our operating results would not be material.
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<PAGE>
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
-----------------
We are not a party to any material litigation. We have received a notice
from the U.S. Department of Justice requesting us to produce documents in
connection with the Civil False Claims Act investigation of the pricing of our
products for sale and eventual reimbursement by Medicare or state Medicaid
programs. We also have received similar requests from the U.S. Department of
Health and Human Services and state agencies. According to press reports,
approximately 20 other pharmaceutical companies are under investigation by the
U.S. Department of Justice and/or state agencies related to the pricing of their
products. Several of our products are regularly sold at substantial discounts
from list price. We have consistently required in our contracts of sale that the
purchasers appropriately disclose to governmental agencies the discounts that we
give to them. We do not know what action, if any, the federal government or any
state agency will take as a result of their investigations.
Item 5. OTHER INFORMATION
-----------------
On October 31, 2000, AHP converted the principal amount of a $450.0
million convertible note into 15,544,041 shares of our common stock. The $450.0
million 3% convertible subordinated note due 2006 was converted into newly
issued shares at $28.95 a share.
On October 28, 2000, Immunex director Robert I. Levy, M.D., passed away.
Dr. Levy had been a director since April 1998 and since March 1998 had been
Senior Vice President, Science and Technology at AHP.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
On August 10, 2000, we filed a Form 8-K under Item 5 announcing that
we had filed a Form S-3 shelf registration statement with the
Securities and Exchange Commission on August 9, 2000, for the sale
of up to 70 million shares of our common stock by us and AHP, our
principal shareholder.
On August 30, 2000, we filed a Form 8-K/A announcing several
agreements we had reached with AHP, some related to the proposed
public offering of our common stock.
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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 7, 2000 /s/ Edward V. Fritzky
------------------------ --------------------------------------
Edward V. Fritzky
Chief Executive Officer, President,
Chairman of the Board and Director
(Principal Executive Officer)
Date: November 7, 2000 /s/ David A. Mann
------------------------ --------------------------------------
David A. Mann
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
31
