<PAGE>
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 JUNE 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 0-16614
NEORX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON 91-1261311
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
410 West Harrison Street, Seattle, Washington 98119
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (206) 281-7001
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
------- ------
Applicable only to corporate issuers:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of July 21, 2000 there were outstanding 23,573,579 shares of the Company's
Common Stock, $.02 par value.
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TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements:
Balance Sheets as of June 30, 2000
and December 31, 1999 3
Statements of Operations for the
three and six months ended June 30,
2000 and 1999 4
Statements of Cash Flows for the
six months ended June 30,
2000 and 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
Item 6. Exhibits 25
Signature 26
</TABLE>
2
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NEORX CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ----------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,798 $ 3,752
Investment securities 27,174 15,289
Prepaid expenses and other current assets 660 566
--------- ---------
Total current assets 31,632 19,607
--------- ---------
FACILITIES AND EQUIPMENT, at cost:
Leasehold improvements 3,283 3,283
Equipment and furniture 5,198 5,040
--------- ---------
8,481 8,323
Less: accumulated depreciation and amortization (7,576) (7,405)
--------- ---------
Facilities and equipment, net 905 918
--------- ---------
OTHER ASSETS, net 420 240
--------- ---------
Total Assets $ 32,957 $ 20,765
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 936 $ 819
Accrued liabilities 669 929
Current portion of convertible subordinated debentures - 1,195
--------- ---------
Total current liabilities 1,605 2,943
--------- ---------
SHAREHOLDERS' EQUITY
Series preferred stock, $.02 par value, 3,000,00 shares authorized:
Convertible exchangeable preferred stock, Series 1, 206,240 and 208,240
shares issued and outstanding at June 30, 2000 and December 31, 1999,
respectively (entitled in liquidation to $5,198 and $5,248, respectively) 4 4
Common stock, $.02 par value, 60,000,000 shares authorized, 23,566,990 and
21,073,235 shares issued and outstanding, at June 30, 2000 and
December 31, 1999, respectively 471 421
Additional paid-in capital 184,516 164,151
Accumulated deficit (153,571) (147,096)
Accumulated other comprehensive income (loss) - unrealized
gain (loss) on investment securities (68) 342
--------- ---------
Total shareholders' equity 31,352 17,822
--------- ---------
Total liabilities and shareholders' equity $ 32,957 $ 20,765
========= =========
</TABLE>
See accompanying notes to the financial statements.
3
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NEORX CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUE $ 727 $ 47 $ 904 $ 460
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 3,496 2,744 8,050 5,240
General and administrative 1,566 977 3,103 1,827
--------- --------- --------- ---------
Total operating expenses 5,062 3,721 11,153 7,067
--------- --------- --------- ---------
Loss from operations (4,335) (3,674) (10,249) (6,607)
OTHER INCOME (EXPENSE):
Interest income 505 246 772 501
Realized gain on sale of securities (8) - 3,302 -
Interest expense (17) (29) (46) (59)
--------- --------- --------- ---------
Net loss $ (3,855) $ (3,457) $ (6,221) $ (6,165)
========= ========= ========= =========
Preferred stock dividends (127) (127) (254) (254)
--------- --------- --------- ---------
Net loss applicable to common shares $ (3,982) $ (3,584) $ (6,475) $ (6,419)
========= ========= ========= =========
Net loss per common share - basic and diluted
$ (.17) $ (.17) $ (.29) $ (.31)
========= ========= ========= =========
Weighted average common shares outstanding - basic
and diluted 23,287 21,007 22,325 21,007
========= ========= ========= =========
</TABLE>
See accompanying notes to the financial statements.
4
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NEORX CORPORATION
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-------------------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,221) $ (6,165)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 171 181
Gain on sale of securities (3,302) -
Common stock issued for services 81 -
Stock warrants issued for services 206 -
Decrease in prepaid expenses
and other assets 26 356
Increase in accounts payable 117 6
Decrease in accrued liabilities (260) (316)
Decrease in deferred revenue - (250)
--------- ----------
Net cash used in operating activities (9,182) (6,188)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities 15,276 20,675
Purchases of investment securities (24,269) (14,705)
Facilities and equipment purchases (158) (37)
--------- ---------
Net cash provided by (used in) investing activities (9,151) 5,933
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of capital lease obligations - (4)
Retirement of convertible subordinated debentures (1,172) -
Proceeds from common stock issued 17,979 -
Proceeds from stock options exercised 1,826 -
Preferred stock dividends (254) (254)
--------- ---------
Net cash provided by (used in) financing activities 18,379 (258)
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46 (513)
CASH AND CASH EQUIVALENTS:
Beginning of period 3,752 1,910
--------- ---------
End of period $ 3,798 $ 1,397
========= =========
</TABLE>
See accompanying notes to the financial statements.
5
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The interim financial statements contained herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included
in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to those rules and regulations, although the Company believes that
the disclosures made are adequate to make the information presented
not misleading. These financial statements should be read in
conjunction with the Company's annual report on Form 10-K for the
year ended December 31, 1999.
In the opinion of management, the interim financial statements reflect
all adjustments, consisting only of normal recurring accruals necessary
to present fairly the Company's financial position as of June 30, 2000
and the results of its operations and cash flows for the periods ended
June 30, 2000 and 1999.
The results of operations for the period ended June 30, 2000 are not
necessarily indicative of the expected operating results for the full
year.
Note 2. Shareholders' Equity
Changes in shareholders' equity from December 31, 1999 to June 30, 2000
are as follows (in thousands):
<TABLE>
<S> <C>
Balance, December 31, 1999 $ 17,822
Proceeds from common stock issued 17,979
Proceeds from stock options exercised 1,826
Common stock issued for services 81
Stock warrants issued for services 506
Conversion of subordinated debentures 23
Preferred stock dividends (254)
Net loss (6,221)
Accumulated other comprehensive
loss -unrealized loss on investment securities
(410)
---------
Balance, June 30, 2000 $ 31,352
=========
</TABLE>
6
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NEORX CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 3. Loss per share
The following is a reconciliation of the numerator and denominator of the basic
and diluted loss per share computations for the three and six months ended June
30, 2000 and 1999 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months Six Months
ended June 30, ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss $ (3,855) $ (3,457) $ (6,221) $ (6,165)
Less: Preferred stock dividends (127) (127) (254) (254)
-------- -------- -------- --------
Net loss applicable
to common shares $ (3,982) $ (3,584) $ (6,475) $ (6,419)
======== ======== ======== ========
Weighted average common shares outstanding -
basic and diluted 23,287 21,007 22,325 21,007
-------- -------- -------- --------
Net loss per common share - basic and diluted $ (.17) $ (.17) $ (.29) $ (.31)
======== ======== ======== ========
</TABLE>
The numerator and denominator of the basic and diluted loss per share
calculations for the quarters and six month periods ended June 30, 2000 and 1999
were the same, as including the effect of options to purchase additional shares
of common stock would have been antidilutive. Excluded for the quarters and six
month periods ended June 30, 2000 and 1999 were 3,404,103 and 3,680,140 shares
of common stock issuable under stock options, respectively.
In addition, 235,114 and 237,394 shares of common stock issuable upon conversion
of Series 1 Preferred Stock were not included in the calculation of diluted loss
per share for the quarters and six month periods ended June 30, 2000 and 1999,
respectively, because the effect of including such shares would have been
antidilutive. For the same reason, outstanding warrants to purchase 305,000
shares of common stock and 46,318 shares of common stock issuable upon
conversion of the Company's convertible subordinated debentures for the quarter
and six-month period ended June 30, 1999 were excluded from the calculation.
NOTES TO FINANCIAL STATEMENTS (continued)
Note 4. Comprehensive Loss
The Company's total comprehensive loss for the quarters ended June 30, 2000 and
1999 was $3,871,000 and $3,547,000, respectively. The
7
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NEORX CORPORATION
comprehensive loss for the quarters ended June 30, 2000 and 1999 consisted of
net loss of $3,855,000 and $3,457,000 and unrealized loss on investment
securities of $16,000 and $90,000, respectively. The Company's total
comprehensive loss for the six months ended June 30, 2000 and 1999 was
$6,631,000 and $6,269,000, respectively. The comprehensive loss for the six
months ended June 30, 2000 consisted of net loss of $6,221,000 and unrealized
loss on investment securities of $410,000. The comprehensive loss for the six
months ended June 30, 1999 consisted of net loss of $6,165,000 and unrealized
loss on investment securities of $104,000.
Note 5. Private Placement
In April 2000, the Company sold 1,727,045 shares of common stock in a private
placement and received net proceeds of $17,979,000. The Company intends to
use the net proceeds from the private placement to advance its research and
development programs including its proprietary Skeletal Targeting
Radiotherapy ("STR") and PRETARGET-Registered Trademark- candidates, as well
as for other general corporate purposes. The Company has filed a Registration
Statement on Form S-3 to register the shares.
Note 6. Convertible Subordinated Debentures
At the option of the holders of the debentures, $23,000 of debentures were
converted into 890 common shares during the six months ended June 30, 2000. In
June 2000, the Company retired the remaining balance of $1,172,000 of the
outstanding convertible subordinated debentures.
8
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
This discussion on Form 10-Q contains forward-looking statements. These
statements relate to future events or future financial performance. In some
cases, you can identify forward-looking statements by terminology such as "may,
will, should, expect, plan, intend, anticipate, believe, estimate, predict,
potential or continue," the negative of such terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. Many factors could affect the Company's actual results. In
evaluating these statements, you should specifically consider various factors,
including those factors described under "Additional factors that may affect
results" below. These factors may cause our actual results to differ materially
from any forward-looking statement.
Although we believe the expectations reflected in the forward-looking statements
are reasonable, we cannot guarantee future results, levels of activity,
performance or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of the forward-looking
statements after the date of this report to conform such statements to actual
results or to changes in our expectations.
QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO QUARTER AND SIX MONTHS
ENDED JUNE 30, 1999.
Revenues for the quarter ended June 30, 2000 were $727,000 compared to $47,000
for the quarter ended June 30, 1999. Revenues for the six months ended June 30,
2000 were $904,000 compared to $460,000 for the six months ended June 30, 1999.
Revenues in 2000 consisted primarily of a $500,000 milestone payment for the
filing of regulatory documents to initiate clinical studies of a
paclitaxel-coated stent, $197,000 from federal government grants and licensing
revenue from non-strategic patent technologies. Revenues in 1999 consisted
primarily of licensing revenue from non-strategic patent technologies.
Total operating expenses for the quarter ended June 30, 2000 increased 36% to
$5,062,000 from $3,721,000 in the quarter ended June 30, 1999, and for the six
month period ended June 30 increased 58% to $11,153,000 from $7,067,000.
Research and development expenses for the quarter ended June 30, 2000 increased
27% to $3,496,000 from $2,744,000 for the same time period in 1999. Research and
development expenses for the six months ended June 30, 2000 increased 54% to
$8,050,000 from $5,240,000 for the comparable 1999 period. The increases in
research and development expenses are primarily the result of start-up expenses
for the design and construction of the manufacturing process and clinical trial
costs for NeoRx's Skeletal Targeted Radiotherapy ("STR") project.
9
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
2000 increased 54% to 8,050,000 from $5,240,000 for the comparable 1999
period. The increases in research and development expensee are primarily the
result of start-up expenses for the design and construction of the
manufacturing process and clinical trial costs for NeoRx's Skeletal Targeted
Radiotherapy ("STR") project.
General and administrative expenses for the quarter ended June 30, 2000
increased 60% to $1,566,000 from $977,000 for the quarter ended June 30,
1999. General and administrative expenses for the six months ended June 30,
2000 increased 70% to $3,103,000 from $1,827,000. General and administrative
expenses for the quarter and the six months ended June 30, 2000 increased
primarily due to increased expenses for personnel, corporate communications
and recruiting.
Other income for the six months ended June 30, 2000 includes $3,302,000 of
realized gains on the sale of the Company's shares of Angiotech
Pharmaceuticals, Inc.
Interest income for the quarter ended June 30, 2000 increased to $505,000
from $246,000 for the same time period in 1999, and increased to $772,000
from $501,000 for the six months ended June 30, 2000 and 1999, respectively.
The increase is due to a higher balance of investment securities and higher
rates of return on the Company's investments.
LIQUIDITY AND CAPITAL RESOURCES.
Cash and investment securities as of June 30, 2000 were $30,972,000 compared to
$19,041,000 at December 31, 1999. Cash increased in the second quarter of
2000 from the private sale of 1,727,045 newly issued NeoRx common shares that
generated $17,979,000 in net proceeds.
The Company has established a line of credit with PPD, Inc., of up to
$5,000,000 to assist in funding its phase III trial of its STR product in
development.
The Company expects that its capital resources and interest income will be
sufficient to finance its currently anticipated working capital and capital
requirements at least through the third quarter of 2001.
10
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The Company's working capital and capital requirements will depend upon
numerous factors, including results of research and development activities,
clinical trials, establishment of manufacturing capacity and expenses
associated with the expanding the Company's technological developments. The
Company will need to raise substantial additional funds to conduct research
and development activities, preclinical studies and clinical trials necessary
to bring its potential products to market, and to establish marketing and
manufacturing capabilities. The Company intends to seek additional funding
through arrangements such as public or private equity financing, corporate
collaborations, out-licensing certain technologies, or other sources. Adequate
funds may not be available when needed or on terms acceptable to the Company.
NEW ACCOUNTING PRONOUNCEMENTS.
In December 1999, the United States Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements", which must be applied in the Company's fourth fiscal
quarter of 2000. SAB 101 provides guidance on revenue recognition and the SEC
staff's views on the application of accounting principles to selected revenue
recognition issues. The interpretation of SAB 101 is currently uncertain as it
relates to biotechnology companies and, consequently, the impact on the
Company's financial statements is unknown. The Company is in the process of
determining the potential impact on its financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions involving Stock Compensation".
Interpretation No. 44 clarifies the application of Accounting Principles Board
Opinion No. 25 ("APB 25") and is effective July 1, 2000. Interpretation No. 44
clarifies the definition of "employee" for purposes of applying APB 25, the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. The Company does not expect the
adoption of Interpretation No. 44 to have a material impact on its financial
statements.
11
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
ADDITIONAL FACTORS THAT MAY AFFECT RESULTS.
In addition to the other information contained in this report, the following
factors could affect our actual results and could cause our actual results to
differ materially from those achieved in the past or expressed in our forward
looking statements.
WE EXPECT TO CONTINUE TO OPERATE AT A LOSS, AND WE MAY NEVER BECOME PROFITABLE
We have not been profitable since our inception in 1984, and we cannot be
certain that we will ever achieve and sustain profitability. To date, we have
been engaged in research and development activities and have not generated any
revenues from product sales. The process of developing our products will require
significant research and development, preclinical testing and clinical trials,
as well as regulatory approvals. We expect these activities, together with our
general and administrative expenses, to result in operating losses for the
foreseeable future. Our ability to achieve profitability will depend, in part,
on our ability to successfully complete development of our proposed products and
on our ability to successfully obtain required regulatory approvals and
manufacture and market our products. We do not expect that any proposed product
which is currently in research and development will be commercially available
for at least several years, if ever.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MAY NOT BE AVAILABLE
Based on our current operating plan, we believe that our working capital will be
sufficient to satisfy our capital requirements through at least the third
quarter of 2001. This belief is based on certain assumptions which may prove to
be incorrect. Substantial additional capital will be required for our
operations. We intend to seek additional financing, which may take the form of
public or private financings, including equity financings, which would be
dilutive to existing shareholders, and through other arrangements, including
relationships with corporate partners for the development of certain of our
products. We may not be able to obtain such additional capital or enter into
relationships with corporate partners on a timely basis, on favorable terms, or
at all. If adequate funds are not available, we may be required to delay, reduce
or eliminate expenditures for certain of our programs or products or to enter
into relationships with corporate partners to develop or commercialize products
or technologies that we would otherwise seek to develop or commercialize
independently.
OUR POTENTIAL PRODUCTS MUST UNDERGO RIGOROUS CLINICAL TESTING AND
12
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
REGULATORY APPROVALS, WHICH COULD SUBSTANTIALLY DELAY OR PREVENT US FROM
MARKETING ANY PRODUCTS
Before obtaining regulatory approvals for the commercial sale of any of our
proposed products, the products will be subjected to extensive preclinical and
clinical testing to demonstrate their safety and efficacy in humans. Results of
initial preclinical and clinical testing of products under development are not
necessarily indicative of results that will be obtained from subsequent or more
extensive preclinical and clinical testing. Furthermore, we cannot be certain
that clinical trials of products under development will be completed or will
demonstrate the safety and efficacy of such products at all, or to the extent
necessary to obtain regulatory approvals. Companies in the biotechnology
industry have suffered significant setbacks in advanced clinical trials, even
after achieving promising results in earlier trials. The failure to adequately
demonstrate the safety and efficacy of a therapeutic product under development
could delay or prevent regulatory approval of such product.
The rate of completion of clinical trials depends on, among other factors, the
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Difficulty attaining planned patient enrollment in
our current clinical trials or future clinical trials may result in increased
costs, program delays or both.
WE MAY NOT BE ABLE TO OBTAIN GOVERNMENT APPROVAL IN A TIMELY MANNER TO MARKET
AND SELL OUR POTENTIAL PRODUCTS OR APPROVAL MAY BE WITHDRAWN
The manufacture and marketing of our proposed products and our research and
development activities are subject to regulation for safety, efficacy and
quality by numerous government authorities in the United States and other
countries. Clinical trials, manufacturing, and marketing are subject to the
rigorous testing and approval processes of the U.S. Food and Drug
Administration, commonly referred to as the FDA, and equivalent foreign
regulatory authorities. Clinical trials and regulatory approvals can take a
number of years to accomplish and require the expenditure of substantial
resources. It may not be possible to start or successfully complete clinical
trials within any specified time period. Delays in obtaining approvals can occur
for a number of reasons, including our failure to obtain necessary supplies of
finished products, monoclonal antibodies or other materials or to the failure
attract a sufficient number of available patients to support the claims
necessary for regulatory approvals.
13
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The FDA approval process is typically lengthy and expensive, and approval is
never certain. Because of the risks and uncertainties in biochemical
development, our potential products could take a significantly longer time to
gain regulatory approvals than we expect or may never gain FDA approval. If we
do not receive these necessary approvals from the FDA, we will not be able to
generate substantial revenues and will not become profitable. We may encounter
significant delays or excessive costs in our efforts to secure regulatory
approvals. FDA approvals may not be obtained on a timely basis, if at all, and
any approvals granted may cover less than all of the clinical indications for
which we sought approval or may contain significant limitations in the form of
warnings, precautions or contraindications with respect to conditions of use.
Delays in obtaining, or the imposition of limitations upon, FDA approvals would
adversely affect or prevent the marketing of products developed by us and our
ability to receive royalty or other product revenues. The manufacture and
marketing of our products would, after approval, be subject to continuing FDA
review, and later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions, including potential
withdrawal of the product from the market. In addition, U.S. federal and state
agencies and congressional committees have expressed interest in further
regulation of biotechnology. We are unable to estimate the extent and impact of
regulation in the biotechnology field resulting from any future federal, state
or local legislation or administrative action.
For clinical investigation and marketing outside the United States, we and our
potential collaborative partners also are subject to foreign regulatory
requirements. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely among countries and can involve
additional testing. The time required to obtain approval may differ from that
required to obtain FDA approvals. The foreign regulatory approval processes
include all of the risks associated with obtaining FDA approvals set forth
above, and approval by the FDA does not ensure approval by the health
authorities of any other country.
WE ARE DEPENDENT ON SUPPLIERS FOR THE TIMELY DELIVERY OF MATERIALS AND SERVICES
AND WE HAVE EXPERIENCED, AND MAY EXPERIENCE IN THE FUTURE, INTERRUPTIONS IN
SUPPLY
We depend on the timely delivery from suppliers of certain materials and
services. In connection with our research, preclinical studies and clinical
trials, we periodically have experienced interruption in the supply of
Holmium-166, Ho-D0TMP and monoclonal antibodies. Interruptions in these and
other supplies
14
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
could occur in the future. We, together with our potential partners, will
need to develop sources for commercial quantities of Holmium-166 and
Yttrium-90, the bone seeking agent used in our STR product, for the
radionuclides used in our proposed cancer therapeutic products, and for the
antibody, streptavidin and clearing agent used in our PRETARGET-Registered
Trademark- products. We or our potential partners may be unable to develop
and maintain reliable sources of these supplies and services. This could
materially adversely affect our business and results of operations.
IF WE FAIL TO NEGOTIATE AND MAINTAIN COLLABORATIVE ARRANGEMENTS WITH THIRD
PARTIES, OUR MANUFACTURING, SALES AND MARKETING ACTIVITIES MAY BE DELAYED OR
REDUCED
We have no experience in commercial manufacturing, sales, marketing or
distribution. In most cases, our strategy for commercialization of our potential
products requires entering into various arrangements with corporate
collaborators, licensors, licensees and others to manufacture, distribute and
market such products; we will depend on the successful performance of third
parties. Although we believe that parties to our existing and any future
arrangements will have an economic incentive to perform their contractual
responsibilities successfully, these activities will not be within our control.
In February 2000, we engaged International Isotopes, Inc. to build a
manufacturing facility for our Skeletal Targeted Radiatherapy project, which we
refer to as STR, for Phase III clinical trials. International Isotopes will be
responsible for all aspects of the manufacture of STR, including process
qualification, quality control, packaging and shipping, from its Denton, Texas
radiopharmaceutical facility. International Isotopes' failure to perform its
contractual responsibilities effectively could have an adverse effect on our
business. We currently have an arrangement with the University of Missouri
research reactor facility group (MURR) and ABC Labs to produce Holmium-166, a
critical element utilized in our STR project for Phase III clinical trials.
MURR currently is responsible for the manufacture of Holmium-166, including
process qualification, quality control, packaging and shipping, from its
Columbia, Missouri reactor facility. MURR's failure to perform these
responsibilities effectively could have a material adverse effect on our
business. We intend to move forward to negotiate a long-term supply contract
with MURR. If we are unable to negotiate a long-term contract in a timely
fashion upon satisfactory terms, or if MURR is unable or unwilling to perform
its services under such contract in a satisfactory manner, our business
likewise could be materially adversely affected.
We cannot assure you that we will be successful in maintaining our existing
relationships or that we will be able to negotiate additional collaborative
arrangements in the future. The absence, suspension or termination of current or
future relationships with collaborative partners could have a material adverse
effect on the development of our products and could result in the loss of
material revenues to us, either of which could have a material adverse effect on
our business, financial condition and results of operations. In the
biotechnology industry, termination of
15
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
relationships, for any reason, has been known to cause material adverse impacts
on a company's share price.
UNCERTAINTIES REGARDING HUMAN IMMUNE RESPONSE TO FOREIGN PROTEINS MAY LIMIT THE
EFFECTIVENESS OF OUR PROPOSED CANCER THERAPY PRODUCTS
We plan to use monoclonal antibodies coupled to streptavidin (a protein of
bacterial origin) in our PRETARGET-Registered Trademark- cancer therapy
products. These molecules appear as foreign proteins to the human immune
system, which develops its own antibody in response. We plan to use humanized
antibodies, where needed, to minimize the "human anti-mouse antibody" (HAMA)
response which otherwise might restrict the number of doses that can be
safely or effectively administered, thus limiting the product's efficacy. The
"human anti-streptavidin antibody" (HASA) response may also limit the number
of doses. We believe that modifying streptavidin may reduce HASA. Although we
may utilize humanized antibodies and are modifying streptavidin, we cannot be
certain that either would reduce the extent to which HASA and HAMA may limit
the effectiveness of our cancer therapy products.
WE FACE SUBSTANTIAL COMPETITION IN THE DEVELOPMENT OF CANCER THERAPIES AND
MAY NOT BE ABLE TO SUCCESSFULLY COMPETE AND OUR POTENTIAL PRODUCTS MAY BE
RENDERED OBSOLETE BY RAPID TECHNOLOGICAL CHANGE
The competition for development of cancer therapies is intense. There are
numerous competitors developing products to treat each of the diseases for
which we are seeking to develop products. Some competitors have adopted
product development strategies targeting cancer cells with monoclonal
antibodies. Many emerging companies, including but not limited to IDEC
Pharmaceuticals, Cytogen Corp. and Coulter Pharmaceuticals, have corporate
partnership arrangements with large, established companies to support
research, development and commercialization efforts of products that may be
competitive with those which we are developing. In addition, a number of
established pharmaceutical companies, including, but not limited to
SmithKline Beecham, Nycomed Amersham, Mallinkrodt, Inc. and Bristol-Myers
Squibb, are developing proprietary technologies or have enhanced their
capabilities by entering into arrangements with, or acquiring, companies with
proprietary monoclonal antibody-based technology or other technologies
applicable to the treatment of cancer. Many of our existing or potential
competitors have or have access to substantially greater financial, research
and development, marketing and production resources than we do and may be
better equipped than us to develop, manufacture and market competing
products. Our competitors may have, or may develop and introduce, new
products that would render our technology and products under development less
competitive, uneconomical or obsolete.
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
We also expect to face increasing competition from universities and other
non-profit research organizations. These instructions carry out a significant
amount of research and development in the field of antibody-based technology.
These institutions are becoming increasingly more aware of the commercial value
of their findings and more active in seeking patent and other proprietary
rights, as well as licensing revenues.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO EFFECTIVELY PROTECT OUR PATENTS AND
PROPRIETARY RIGHTS, WHICH WE MAY NOT BE ABLE TO DO
The patent position of biotechnology firms is generally highly uncertain and
involves complex legal and factual questions. Currently, no consistent policy
has emerged regarding the breadth of claims allowed in biotechnology patents.
Products and processes important to us are subject to this uncertainty.
Accordingly, we cannot be certain that our patent applications will result in
additional patents being issued or that, if issued, patents will afford
protection against competitors with similar technology. We cannot be certain
that any patents issued to us will not be infringed by or designed around by
others or that others will not obtain patents that we would need to license or
design around. Moreover, the technology applicable to our products is developing
rapidly. Research institutes, universities and biotechnology companies,
including our competitors, have filed applications for, or have been issued,
numerous patents and may obtain additional patents and proprietary rights
relating to products or processes competitive with or relating to ours. The
scope and validity of such patents, the extent to which we may be required to
obtain licenses thereunder or under other proprietary rights and the cost and
availability of licenses, are unknown. To the extent licenses are required, they
may not be available on commercially reasonable terms, if at all. We also rely
on unpatented proprietary technology. Others may independently develop
substantially equivalent proprietary information and techniques or gain access
to our proprietary technology or disclose such technology. We may not be able to
meaningfully protect our rights in such unpatented proprietary technology.
PRODUCT LIABILITY CLAIMS IN EXCESS OF THE AMOUNT OF OUR INSURANCE WOULD
ADVERSELY AFFECT OUR FINANCIAL CONDITION
The testing, manufacturing, marketing and sale of the human healthcare products
which we have under development entail an inherent risk that product liability
claims will be asserted against us. Although we are insured against such risks
up to a $10 million annual aggregate limit in connection with clinical trials
17
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NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
and commercial sales of our products under development, we cannot be certain
that our present product liability insurance is adequate. A product liability
claim in excess of our insurance coverage could have a material adverse effect
on us and may prevent us from obtaining product liability insurance in the
future on affordable terms. In addition, we cannot be certain that product
liability coverage will continue to be available in sufficient amounts or at an
acceptable cost.
OUR USE OF RADIOACTIVE AND OTHER HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF
MATERIAL ENVIRONMENTAL LIABILITIES, AND WE MAY INCUR SIGNIFICANT ADDITIONAL
COSTS TO COMPLY WITH ENVIRONMENTAL LAWS IN THE FUTURE
Our research and development and clinical manufacturing processes involve the
controlled use of small amounts of hazardous and radioactive materials. As a
result, we are subject to foreign, federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain materials and
wastes in connection with our research and development activities and our
manufacturing of clinical trial materials. Although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, we may be required to incur
significant costs to comply with environmental and health and safety regulations
in the future. Further, the risk of accidental contamination or injury from
hazardous and radioactive materials cannot be completely eliminated. In the
event of such an accident, we could be held liable for any resulting damages,
and any such liability could exceed our resources.
EVEN IF WE BRING PRODUCTS TO MARKET, CHANGES IN HEALTH CARE REIMBURSEMENT COULD
ADVERSELY AFFECT OUR ABILITY TO EFFECTIVELY PRICE OUR PRODUCTS OR OBTAIN
ADEQUATE REIMBURSEMENT FOR SALES OF OUR PRODUCTS
The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of government and third-party payors to
contain or reduce the costs of healthcare through various means. For example, in
certain foreign markets pricing or profitability of prescription pharmaceuticals
is subject to governmental control. In the United States, there have been, and
we expect that there will continue to be, a number of federal and state
proposals to implement similar governmental controls. It is uncertain what
legislative proposals will be adopted or what actions federal, state or private
payors for healthcare goods and services may take in response to any healthcare
reform proposals or
18
<PAGE>
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
legislation. Even in the absence of statutory change, market forces are changing
the healthcare sector. We cannot predict the effect healthcare reforms may have
on our business, and we cannot be certain that any such reforms will not have a
material adverse effect on us. Further, to the extent that such proposals or
reforms have a material adverse effect on the business, financial condition and
profitability of other pharmaceutical companies that are prospective
collaborators for certain of our potential products, our ability to
commercialize our products under development may be adversely affected. In
addition, both in the United States and elsewhere, sales of prescription
pharmaceuticals depend in part on the availability of reimbursement to the
consumer from third-party payors, such as governmental and private insurance
plans. Third-party payors are increasingly challenging the prices charged for
medical products and services. If we succeed in bringing one or more products to
market, we cannot be certain that these products will be considered
cost-effective and that reimbursement to the consumer will be available or will
be sufficient to allow us to sell our products on a competitive or profitable
basis.
THE LOSS OF KEY EMPLOYEES COULD ADVERSELY AFFECT OUR OPERATIONS
Our success will depend in part on the efforts of certain key scientists and
management personnel. Because of the specialized nature of our business, our
ability to maintain our competitive position will depend in part on our ability
to attract and retain qualified personnel. Competition for such personnel is
intense. We cannot be certain that we will be able to hire sufficient qualified
personnel on a timely basis or retain such personnel. The loss of key management
or scientific personnel could have a material adverse effect on our business. We
do not maintain key person insurance on any of our scientists or management
personnel.
OUR STOCK PRICE IS VOLATILE AND, AS A RESULT, YOU COULD LOSE SOME OR ALL OF YOUR
INVESTMENT
There has been a history of significant volatility in the market prices of
securities of pharmaceutical and biotechnology companies, including our common
stock, and it is likely that the market price of our common stock will continue
to be highly volatile. Announcements by us or our competitors concerning
acquisitions, technological innovations or new commercial products, results of
clinical trials, developments concerning patents, proprietary rights and
potential infringement, and the expense and time associated with obtaining
government approvals for marketing of our products may have a significant effect
on our business and on the relative market price of our common stock. In
addition, public concern about the safety of the products we develop, comments
by
19
<PAGE>
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
securities analysts, and general market conditions may have a significant effect
on the market price of our common stock. The realization of any of these risks
could have a material adverse impact on the market price of our common stock and
may result in a loss of some, or even all of your investment.
In the past, securities class action litigation has often been brought against
companies following periods of volatility in their stock prices. We may in the
future be the target of similar litigation. Securities litigation could result
in substantial costs and divert our management's time and resources, which could
cause our business to suffer.
CERTAIN PROVISIONS IN OUR RESTATED ARTICLES OF INCORPORATION AND WASHINGTON
STATE LAW COULD DISCOURAGE A CHANGE OF CONTROL OF NEORX
Our restated articles of incorporation authorize our board of directors to issue
up to 3,000,000 shares of preferred stock and to determine the price, rights,
preference, privileges and restrictions, including voting rights, of those
shares without any further vote or action by our shareholders. The issuance of
preferred stock could have the effect or delaying, deferring or preventing a
change of control of NeoRx, even if this change would benefit our shareholders.
In addition, the issuance of preferred stock may adversely affect the market
price of the common stock and the voting and other rights of the holders of
common stock.
We have adopted a Shareholder' Rights Plan intended to protect the rights of
shareholders by deterring coercive or unfair takeover tactics. The board of
directors declared a dividend to holders of our common stock of one preferred
share purchase right for each outstanding share of the common stock. The right
is exercisable 10 days following the offer to purchase or acquisition of
beneficial ownership of 20% of the outstanding common stock by a person or group
of affiliated persons. Each right entitles the registered holder, other than the
acquiring person or group, to purchase from NeoRx one-hundredth of one share of
Series A Junior Participating Preferred Stock at the price of $40, subject to
adjustment. The rights expire April 10, 2006. In lieu of exercising the right by
purchasing one one-hundredth of one share of Series A Preferred Stock, the
holder of the right, other than the acquiring person or group, may purchase for
$40 that number of shares of our common stock having a market value of twice
that price.
Washington law imposes restrictions on some transactions between a corporation
and significant shareholders. Chapter 23B.19 of the Washington Business
Corporation Act prohibits a target corporation, with some exceptions, from
engaging in particular significant business transactions with an acquiring
person, which is defined as
20
<PAGE>
NEORX CORPORATION
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
a person or group of persons that beneficially owns 10% or more of the voting
securities of the target corporation, for a period of five years after the
acquisition, unless the transaction or acquisition of shares is approved by a
majority of the members of the target corporation's board of directors prior to
the acquisition. Prohibited transactions include, among other things:
- a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from the acquiring person;
- termination of 5% or more of the employees of the target corporation; or
- receipt by the acquiring person of any disproportionate benefit as a
shareholder.
A corporation may not opt out of this statute. This provision may have the
effect of delaying, deterring or preventing a change in control of NeoRx.
PROBLEMS RELATED TO THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR BUSINESS
Prior to January 1, 2000, we devoted substantial resources in an effort to
ensure that our proprietary software, the third-party software on which we rely,
and the underlying systems and protocols did not contain errors or defects
associated with Year 2000 date functions. Since January 1, 2000, we have not
experienced any disruption to our business as a result of any Year 2000 problems
or otherwise. If problems do arise, they could adversely affect our business.
21
<PAGE>
NEORX CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to the impact of interest rate changes and changes in the
market values of its investments.
INTEREST RATE AND INVESTMENT RISK
The Company's exposure to market rate risk for changes in interest rates relates
primarily to the Company's debt securities included in its investment portfolio.
The Company does not have any derivative financial instruments. The Company
invests in debt instruments of the U.S. Government and its agencies and
high-quality corporate issuers. Investments in both fixed rate and floating rate
interest earning instruments carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, the Company's
future investment income may fall short of expectations due to changes in
interest rates or the Company may suffer losses in principal if forced to sell
securities which have declined in market value due to changes in interest rates.
At June 30, 2000, the Company owned government debt instruments in the amount of
$16.1 million, corporate debt securities in the amount of $10.1 million and
equity securities in the amount of $1.0 million. The Company's exposure to
losses as a result of interest rate changes is managed through investing
primarily in securities with maturities of one year or less.
22
<PAGE>
NEORX CORPORATION
Item 6. Exhibits
<TABLE>
<CAPTION>
Sequentially
(a) Exhibit Number Exhibit Numbered Page
<S> <C> <C>
27 Financial Data Schedule 27
(b) Currents Reports on Form 8-k
None.
</TABLE>
23
<PAGE>
NEORX CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NeoRx Corporation
(Registrant)
Date: July 25, 2000 By: /s/ Richard L. Anderson
--------------------------------
Richard L. Anderson
President, Chief Operating Officer,
Secretary
(Principal Financial and
Accounting Officer)
24
