<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1996
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 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0255679
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(Zip Code)
TELEPHONE (619) 431-7080
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
As of August 6, 1996, 17,353,000 shares of common stock were outstanding.
<PAGE> 2
THE IMMUNE RESPONSE CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 9
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
1996 December 31,
(unaudited) 1995
----------- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,295,163 $ 1,462,676
Short-term investments 33,020,842 43,147,633
Other current assets 617,732 963,762
------------- -------------
Total current assets 37,933,737 45,574,071
Property and equipment, net 4,915,420 4,806,075
Deposits 49,016 49,016
------------- -------------
$ 42,898,173 $ 50,429,162
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,828,134 $ 1,158,194
Other accrued expenses 517,480 386,311
Deferred rent obligation 428,877 443,853
------------- -------------
Total current liabilities 2,774,491 1,988,358
Stockholders' equity:
Common stock, $.0025 par value, 40,000,000 shares
authorized, 17,301,891 and 16,788,704 shares
issued and outstanding at June 30, 1996 and
December 31, 1995, respectively (Note 3) 43,255 41,972
Additional paid-in capital 152,279,854 146,770,428
Unrealized gain (loss) on available-for-sale securities (50,573) 544,830
Accumulated deficit (112,148,854) (98,916,426)
------------- -------------
Total stockholders' equity 40,123,682 48,440,804
------------- -------------
$ 42,898,173 $ 50,429,162
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Contract research revenue $ -- $ 166,100 $ -- $ 1,477,414
Expenses:
Research and development 7,292,218 4,333,827 12,769,285 8,527,038
General and administrative 1,018,313 994,981 1,786,542 1,986,182
------------ ------------ ------------ ------------
8,310,531 5,328,808 14,555,827 10,513,220
Other revenue and expense:
Investment income 579,067 811,052 1,323,399 1,466,870
Equity in operations of joint venture -- -- -- (1,284,020)
------------ ------------ ------------ ------------
579,067 811,052 1,323,399 182,850
------------ ------------ ------------ ------------
Net loss $ (7,731,464) $ (4,351,656) $(13,232,428) $ (8,852,956)
============ ============ ============ ============
Net loss per share (Note 2) $ (0.45) $ (0.26) $ (0.78) $ (0.53)
============ ============ ============ ============
Weighted average number of shares
outstanding (Note 2) 17,125,990 16,744,916 16,963,239 16,742,616
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------
1996 1995
------------- ------------
<S> <C> <C>
Operating activities:
Net loss $(13,232,428) $(8,852,956)
Adjustments to reconcile net loss to net cash provided from
(used by) operating activities:
Depreciation and amortization 407,727 550,059
Equity in operations of joint venture -- 1,284,020
Deferred rent expense (14,976) (543)
Changes in operating assets and liabilities:
Research contract receivable and investment in joint
venture -- (1,199,390)
Other current assets 346,030 566,107
Accounts payable 669,940 522,873
Other accrued expenses 131,169 58,997
------------ -----------
Net cash used by operating activities (11,692,538) (7,070,833)
Investing activities:
Liquidation of short-term investments, net 9,531,388 6,151,857
Purchase of property and equipment (517,072) (158,879)
Net proceeds from sale of equipment -- 1,948,305
Deposits and other assets -- 4,200
------------ -----------
Net cash provided from investing activities 9,014,316 7,945,483
Financing activities:
Proceeds from sale of common stock (Note 3) 5,000,000 --
Net proceeds from exercise of stock options 510,709 4,345
Payments on debt and capital lease obligations -- (75,880)
------------ -----------
Net cash provided from (used by) financing activities 5,510,709 (71,535)
------------ -----------
Net increase in cash and cash equivalents 2,832,487 803,115
Cash and cash equivalents at beginning of period 1,462,676 1,792,082
------------ -----------
Cash and cash equivalents at end of period $ 4,295,163 $ 2,595,197
============ ===========
Supplemental disclosure of noncash investing and financing
activities:
Distribution of equipment from liquidation of joint
venture $ -- $ 2,008,562
============ ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Immune Response
Corporation (the "Company") for the three and six month periods ended
June 30, 1996 and 1995 are unaudited. These financial statements reflect
all adjustments, consisting of only normal recurring adjustments which,
in the opinion of management, are necessary to fairly present the
consolidated financial position as of June 30, 1996, and the consolidated
results of operations for the three and six month periods ended June 30,
1996 and 1995. The results of operations for the six months ended June
30, 1996 are not necessarily indicative of the results to be expected for
the year ended December 31, 1996. For more complete financial
information, these financial statements, and the notes thereto, should be
read in conjunction with the consolidated audited financial statements
for the year ended December 31, 1995 included in the Company's Form 10-K
filed with the Securities and Exchange Commission.
2. NET LOSS PER SHARE
Net loss per share for the three and six month periods ended June 30,
1996 and 1995 is computed using the weighted average number of common
shares outstanding during the period.
3. STOCK TRANSACTION
In April 1996, the Company received $5 million from Trinity Medical Group
Co., Ltd. ("Trinity") of Bangkok, Thailand for the purchase of the
Company's Common Stock at $15 per share. Trinity has also agreed to make
additional equity investments of up to $10 million based on the
achievement of certain regulatory and commercial milestones and
governmental approvals.
4. SUBSEQUENT EVENT
In July 1996, Immune Response entered into an agreement with Bayer
Corporation ("Bayer"), the United States affiliate of Bayer AG of
Leverkusen, Germany, to develop gene therapy products for the treatment
of hemophilia A, a hereditary blood clotting disorder. Bayer is a market
leader in the treatment of this disorder. Bayer made an initial license
payment of $6 million upon signing this agreement. Bayer has also
indicated that it may purchase $4 million of Immune Response Common Stock
in the Company's next public offering. In addition, during the term of
the agreement, the Company will also receive research funding from Bayer
for Immune Response's hemophilia A program and may receive milestone
payments and royalties on future sales, if a product is developed and
commercialized. Under the agreement, Bayer is responsible for all medical
and regulatory activities associated with developing any potential
hemophilia A products, and will also be responsible for commercial-scale
manufacturing and commercialization of any such product developed. The
agreement provides Bayer with a worldwide license to the Company's
GeneDrug(TM) technology for the delivery of the Factor VIII gene and the
option to enter into negotiations with the Company to use this technology
to treat other blood coagulation disorders.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
OVERVIEW
The Immune Response Corporation (the "Company") is a biopharmaceutical company
engaged in the development of proprietary products in the areas of HIV
infection, autoimmune disease, gene therapy and cancer.
This discussion contains forward-looking statements concerning the Company's
operating results and timing of anticipated expenditures. Such statements are
subject to risks and uncertainties which could cause actual results to differ
materially from those projected. For a further description of potential risks
and uncertainties involved related to the Company, this document should be read
in conjunction with the Company's Form 10-K filed with the Securities and
Exchange Commission. These forward-looking statements speak only as of the date
hereof. The Company undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
The Company has not been profitable since inception and had an accumulated
deficit of $112 million as of June 30, 1996. To date, the Company has not
recorded any revenues from the sale of products. Revenues recorded through June
30, 1996 were earned in connection with contract research, a licensing agreement
and investment income. The Company expects its operating losses to continue to
increase during the second half of 1996 and beyond, as well as to have
quarter-to-quarter fluctuations, some of which could be significant, due to
expanded research, development and clinical trial activities.
RESULTS OF OPERATIONS
Contract research revenue for the three and six months ended June 30, 1995, was
$166,000 and $1.5 million respectively. The Company had no contract research
revenue during the first six months of 1996. The contract research revenue in
1995 primarily included reimbursement for research and development and certain
administrative expenses from the former joint venture with Rhone-Poulenc Rorer
Inc. ("Joint Venture"). In March 1995, the Company acquired Rhone-Poulenc
Rorer's rights in the Joint Venture. From March 1995 through June 30, 1996, the
Company had no agreements that resulted in significant contract revenue. The
Company has not received any revenue from the commercial sale of products and
does not expect to derive revenue from the sale of products for the for the next
several years, if at all.
Investment income decreased to $579,000 for the quarter ended June 30, 1996,
from $811,000 during the same period in 1995. During the six months ended June
30, 1996, investment income decreased to $1.3 million from $1.5 million for the
same period during 1995. The decrease in investment income in 1996 compared to
1995, was the result of the decrease in cash available for investment during the
first half of 1996 compared to the first half of 1995.
Research and development expenditures of $7.3 million during the second quarter
of 1996 exceeded such expenditures during the same period in 1995 of $4.3
million. Research and development expenditures for the six months ended June 30,
1996 were $12.8 million compared to $8.5 million for the same period in 1995.
These additional expenditures in the second quarter of 1996, and during the six
months ended June 30, 1996, over the amounts expended during the same period in
1995, were due primarily to the expansion of clinical testing and regulatory
management of REMUNE, expansion of the Company's autoimmune disease research
programs, including Phase II clinical trials for a rheumatoid arthritis and a
psoriasis treatment, as well as increased staffing levels and purchases of
laboratory materials and supplies related to the assumption of the manufacturing
of REMUNE from the Joint Venture. In addition, research and development
expenditures increased related to research using gene therapy and cancer
treatments. Research and development expenses are expected to continue to rise
in the foreseeable future due to expanding preclinical and clinical testing of
the proposed autoimmune disease, gene therapy and cancer treatments. Research
and development expenses are also expected to increase due to the Company
beginning a large scale Phase III clinical trial with REMUNE in March 1996.
7
<PAGE> 8
General and administrative expenses for the second quarter of 1996 and 1995 were
$1.0 million. General and administrative expenses for the six months ended June
30, 1996 were $1.8 million as compared to $2.0 million for the same period in
1995. The decrease in these expenses during the six months ended June 30, 1996
compared to the expenses incurred during the same period of 1995, was due
primarily to the additional costs incurred in 1995 related to the Company's
acquisition of Rhone-Poulenc Rorer's interest in the Joint Venture. General and
administrative expenses for the remainder of 1996 necessary to support the
Company's expanded research and development activities are expected to remain
consistent with the first and second quarters of 1996.
For the quarter ended June 30, 1996, the Company's net loss was $7.7 million, or
$.45 per share, as compared to a net loss of $4.4 million, or $.26 per share,
for the same period in 1995. For the six months ended June 30, 1996, the
Company's net loss was $13.2 million, or $.78 per share, as compared to net loss
of $8.9 million, or $.53 per share for the same period in 1995. The major
factors causing the net loss to increase during the first six months of 1996 was
the increase in the Company's clinical trial activities, in particular the
large-scale Phase III clinical trial for HIV infection using REMUNE, the Phase
II clinical trials for a rheumatoid arthritis and a psoriasis treatment, and the
assumption of the manufacturing responsibilities of REMUNE.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had working capital of $35.2 million, including
$37.3 million of cash, cash equivalents and short-term investments. This
compares with working capital as of December 31, 1995 of $43.6 million,
including $44.6 million of cash, cash equivalents and short-term investments.
The decrease in working capital was due to the costs of operating the business.
In April 1996, the Company received $5 million from Trinity Medical Group Co.,
Ltd. ("Trinity") of Bangkok, Thailand, for the purchase of the Company's Common
Stock at $15 per share. Trinity has also agreed to make additional equity
investments of up to $10 million based on the achievement of certain regulatory
and commercial milestones and governmental approvals related to the development
of REMUNE in Thailand. There can be no assurance than any such milestones or
approvals will be achieved or obtained. In addition, during July 1996, the
Company received a $6 million license fee and a $1 million research payment from
Bayer Corporation ("Bayer"), the United States affiliate of Bayer AG of
Leverkusen, Germany, to develop gene therapy products for the treatment of
hemophilia A, a hereditary blood clotting disorder. The Company will also
receive additional funding from Bayer for the Company's hemophilia A research
program during the term of the agreement. Regardless of whether such additional
funds are received from Trinity, and despite the funding to be received from
Bayer, the Company may need to raise additional funds for expanding research and
development activities in gene therapy and cancer, conducting the Phase III
clinical trial for REMUNE initiated in March 1996, and enhancing the
manufacturing facility to enable production of commercial quantities of the
Company's products. In particular, the Company anticipates that the Phase III
REMUNE clinical trial costs will be approximately $10 million per year, with an
additional $10 million cost per year for manufacturing, research and all other
costs associated with the product for up to three years. The anticipated costs
with respect to REMUNE will depend on many factors, including the successful
enrollment of the Phase III clinical trial, the availability of third party
reimbursement based on gaining "treatment" investigational new drug status for
expanded access protocols for REMUNE, the potential for accelerated approval and
certain other factors which will influence the Company's determination of the
appropriate continued investment of the Company's financial resources in this
program. To obtain such funding, the Company may consider collaborative
arrangements and public or private financings. There can be no assurance that
such arrangements or funds will be available. The Company believes that its
current capital resources will meet its anticipated requirements through 1997.
The Company has filed a Registration Statement on Form S-3 with the Securities
and Exchange Commission for a proposed public offering of 2.9 million shares of
its Common Stock. Bayer has indicated that it may purchase $4 million of the
Company's Common Stock in this offering. There can be no assurance that such
public offering will be completed or that Bayer will purchase shares in such
offering.
8
<PAGE> 9
PART II. OTHER INFORMATION
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 1996 the Company held its Annual Meeting of Stockholders. The
following actions were taken at the annual meeting.
1. The following Class I Directors were elected:
a. James B. Glavin. 14,760,346 shares voted in favor of the nominee,
581,105 shares withheld their vote, and 1,468,142 shares were not
voted;
b. Philip M. Young. 14,760,471 shares voted in favor of the nominee,
580,980 shares withheld their vote, and 1,468,142 shares were not
voted;
c. The following directors continue in office for their existing terms:
Dennis J. Carlo
Kevin B. Kimberlin
Gilbert S. Omenn
Melvin Perelman
John Simon
William M. Sullivan
2. A proposal to amend and restate the 1989 Stock Plan of The Immune Response
Corporation to, among other things, increase the aggregate number of
shares of Common Stock authorized for issuance thereunder by 500,000
shares. 12,764,393 shares were voted in favor of the proposal, 1,808,898
shares were voted against the proposal, 255,874 shares abstained and
1,980,429 shares were not voted (includes broker non-votes); and
3. The selection of Ernst & Young LLP as the Company's independent auditors
was ratified. 15,272,267 shares were voted in favor of the proposal,
29,049 shares were voted against the proposal, 40,135 shares abstained,
and 1,468,142 shares were not voted.
9
<PAGE> 10
ITEM 5. -- OTHER INFORMATION
On July 9, 1996, the Company entered into a Collaboration Agreement (the
"Agreement") with Bayer Corporation ("Bayer"), the United States affiliate of
Bayer AG of Leverkusen, Germany, to develop gene therapy products for the
treatment of hemophilia A, a hereditary blood clotting disorder. Bayer made an
initial license payment to the Company of $6 million upon signing the Agreement.
In addition, during the term of the research program, until three years from the
date of entering into the Agreement and any extensions thereto (the "Research
Term"), the Company will receive research funding from Bayer for the Company's
hemophilia A program and may receive milestone payments and royalties on future
sales, if a product is developed and commercialized. Under the Agreement, Bayer
is responsible for all medical and regulatory activities associated with
developing any potential hemophilia A products, and will also be responsible for
commercial-scale manufacturing and commercialization of any such product
developed. The Agreement provides Bayer with a worldwide exclusive license to
the Company's GeneDrug(TM) technology for the delivery of the Factor VIII gene
and the option to enter into negotiations with the Company to use this
technology to treat other blood coagulation disorders.
In connection with the Agreement, Bayer expressed an indication of interest in
purchasing Common Stock of the Company if the Company makes an underwritten
public offering of its Common Stock (the "Offering"). The Agreement provides
that in the event that (i) the Offering is consummated within the Research Term,
(ii) the Offering generates aggregate gross proceeds of at least $15 million,
not including proceeds attributable to purchases made by Bayer, (iii) the
Company is not in default under any material provision of the Agreement, (iv)
Bayer is given an opportunity, in its sole discretion, to purchase $4 million of
the Common Stock in the Offering, at a purchase price per share equal to the
offering price in the Offering, and (v) elects not to make such purchase, then
the Company shall have the right to terminate the Agreement and all licenses
granted thereunder within 30 days of consummation of the Offering.
The Company has filed a Registration Statement on Form S-3 with the Securities
and Exchange Commission for an offering of its Common Stock, which if
consummated may qualify as an Offering. There can be no assurance that the
Company's proposed offering will be consummated during the Research Term, will
be declared effective, that if consummated such Offering will generate aggregate
gross proceeds of at least $15 million or that Bayer will purchase any Common
Stock in such Offering.
10
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ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
11
<PAGE> 12
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.
THE IMMUNE RESPONSE CORPORATION
Date: August 13, 1996 /s/ CHARLES J. CASHION
----------------------------------
Charles J. Cashion
Vice President, Finance
Secretary and Treasurer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH 10-Q.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,295,163
<SECURITIES> 33,020,842
<RECEIVABLES> 617,732
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,933,737
<PP&E> 4,915,420
<DEPRECIATION> 49,016
<TOTAL-ASSETS> 42,898,173
<CURRENT-LIABILITIES> 2,774,491
<BONDS> 0
0
0
<COMMON> 43,255
<OTHER-SE> 40,080,427
<TOTAL-LIABILITY-AND-EQUITY> 42,898,173
<SALES> 0
<TOTAL-REVENUES> 579,067
<CGS> 0
<TOTAL-COSTS> 8,310,531
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,731,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,731,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,731,464)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> 0
</TABLE>
