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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 SEPTEMBER 30, 1998
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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
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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 (760) 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 October 31, 1998, 23,479,412 shares of common stock were outstanding.
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THE IMMUNE RESPONSE CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
<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 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(unaudited) 1997
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<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 5,860 $ 4,872
Marketable securities-available-for-sale 24,418 25,567
Other current assets 1,895 773
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Total current assets 32,173 31,212
Property and equipment, net 6,305 5,810
Deposits and other assets 956 353
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$ 39,434 $ 37,375
---------- -----------
---------- -----------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,408 $ 1,356
Other accrued expenses 1,277 917
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Total current liabilities 4,685 2,273
Convertible Preferred Stock 9,277 ---
Stockholders' equity:
Preferred stock, 5,000,000 shares
authorized; none issued --- ---
Common stock, $.0025 par value,
40,000,000 shares authorized,
23,265,470 and 22,815,054 shares
issued and outstanding at
September 30, 1998 and
December 31, 1997, respectively 58 57
Warrants 2,144 2,144
Additional paid-in capital 188,496 186,374
Cumulative comprehensive income 168 27
Accumulated deficit (165,394) (153,500)
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Total stockholders' equity 25,472 35,102
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$ 39,434 $ 37,375
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</TABLE>
See accompanying notes.
3
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Contract research revenue $ 1,488 $ 1,000 $ 2,488 $ 2,000
Licensed research revenue 1,000 --- 11,667 ---
----------- ----------- ----------- -----------
2,488 1,000 14,155 2,000
Expenses:
Research and development 7,420 7,507 24,109 25,655
General and administrative 1,073 951 3,177 2,997
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8,493 8,458 27,286 28,652
Other revenue:
Investment income 524 591 1,237 1,869
----------- ----------- ----------- -----------
Net loss $ (5,481) $ (6,867) $ (11,894) $ (24,783)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share - basic and diluted $ (0.24) $ (0.31) $ (0.52) $ (1.15)
----------- ----------- ----------- -----------
Weighted averge number of shares
outstanding 23,207,942 22,473,136 22,984,853 21,584,162
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
4
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<TABLE>
<CAPTION>
THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $ (11,894) $ (24,783)
Adjustments to reconcile net loss to net cash provided from
(used by) operating activities:
Depreciation and amortization 1,112 900
Deferred rent expense (67) (45)
Changes in operating assets and liabilities:
Other current assets (1,122) (945)
Accounts payable 2,052 340
Accrued expenses 427 42
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Net cash used by operating activities (9,492) (24,491)
Investing activities:
Purchase/sale of marketable securities, net 1,290 20,372
Purchase of property and equipment (1,607) (2,330)
Sale of land --- 1,020
Deposits and other assets (603) (250)
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Net cash provided from investing activities (920) 18,812
Financing activities:
Net proceeds from sale of common stock and warrants 1,333 15,640
Net proceeds from sale of converible preferred stock 9,160 ---
Net proceeds from exercise of stock options 907 1,357
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Net cash provided from financing activities 11,400 16,997
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Net increase in cash and cash equivalents 988 11,319
Cash and cash equivalents at beginning of period 4,872 3,785
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Cash and cash equivalents at end of period $ 5,860 $ 15,104
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Supplemental disclosure of noncash investing and financing activities:
Accretion of preferred stock $ 117 $ ---
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</TABLE>
See accompanying notes
5
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THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Immune Response
Corporation (the "Company") for the three and nine month periods ended
September 30, 1998 and 1997 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 September 30, 1998, and the
consolidated results of operations for the three and nine month periods
ended September 30, 1998 and 1997. The results of operations for the nine
months ended September 30, 1998 are not necessarily indicative of the
results to be expected for the year ended December 31, 1998. 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, 1997 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 nine months ended September 30, 1998
and 1997 is computed using the weighted average number of common shares
outstanding during the period. Outstanding stock options and warrants are
not included in the calculation of earnings per share because as their
effect would be antidilutive. Therefore, there is no difference between
basic and diluted net loss per share.
3. COMPREHENSIVE INCOME
In January 1998, the Company adopted Statement of Financial Accounting
Standards ("FAS") No. 130, "Reporting Comprehensive Income." The
components of comprehensive income are as follows:
<TABLE>
<CAPTION>
(in thousands) Three Months Ended Sept 30 Nine Months Ended Sept 30
-------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (5,481) $ (6,867) $(11,894) $(24,783)
Net unrealized gain (loss)
on marketable securities 191 38 140 (177)
--------- --------- --------- ---------
Comprehensive loss $ (5,290) $ (6,829) $(11,754) $(24,960)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
All prior periods have been restated to reflect the adoption of this
statement.
4. EQUITY TRANSACTION
During the second quarter of 1998, the Company sold 200 shares of its
Series F Convertible Preferred Stock ("Series F Stock") in return for
gross proceeds of $10 million. The Series F Stock is convertible into
common stock initially at a conversion price of $14.07 per share of
common stock. If the Company's common stock does not trade at prices
higher than $14.07 per share over a period of time, the conversion price
will be adjusted downward on April 24, 1999 (or sooner if the Company
issues common stock at less than $14.07 per share) and quarterly
thereafter. The Series F Stock bears a dividend of 7.5% per annum. In
general, the dividend is payable in shares of common stock. The Company
has filed a registration statement with the Securities and Exchange
Commission covering the resale of the common stock issuable upon
conversion of the Series F Stock. Further, the Company has the option for
one year to sell up to $10 million more of the Series F Stock if certain
conditions are met.
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5. COLLABORATION WITH AGOURON PHARMACEUTICALS, INC.
During June 1998, the Company and Agouron Pharmaceuticals, Inc.
("Agouron") entered into a binding agreement under which the Company
agreed to exclusively license REMUNE-TM-, its immune-based therapy
under development for the treatment of HIV infection, to Agouron. Under
the terms of the agreement, the Company will manufacture commercial
supplies of REMUNE and Agouron will have exclusive rights to market
REMUNE in North America, Europe and certain other countries, if
regulatory approvals are received. The agreement provides that the
Company may receive as much as $77 million over the next two years,
including license and milestone payments of $45 million, payments to
support research and development of $18 million and $14 million to
purchase the Company's common stock, priced at a premium to the market,
subject to certain rights of termination by Agouron. In addition, the
two companies will share all profits from the commercialization of REMUNE
on a 50/50 basis, if REMUNE is successfully developed and receives the
necessary regulatory approvals.
In June 1998, the Company received a $10 million license fee and Agouron
purchased 118,256 shares of newly issued common stock of the Company,
priced at a premium to market, for $2 million. In October 1998, the
Company received a $5 million payment from Agouron consisting of a $3
million payment for research and development and a $2 million payment for
the purchase of 126,758 shares of unregistered common stock priced at a
premium to the market. The October 1998 payment is the first in a series
of quarterly payments that the Company expects Agouron to make to fund
research and development and to purchase unregistered common stock.
7
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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 developing immune-based therapies to induce specific T cell responses
for the treatment of HIV, autoimmune diseases and cancer. The Company is
conducting clinical trials for its immune-based therapies for HIV, rheumatoid
arthritis, psoriasis, multiple sclerosis, colon cancer and brain cancer and
preclinical studies for prostate cancer. In addition, the Company is
developing a targeted delivery technology for gene therapy that is designed
to enable the intravenous injection of genes for delivery directly to the
liver. The Company's gene therapy program is currently focused on diseases of
the liver and is in preclinical studies for the treatment of hemophilia and
hepatitis.
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 that could cause actual results to differ
materially from those projected. For a further description of potential risks
and uncertainties related to the Company, this document should be read in
conjunction with the Company's 1997 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 that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
In July 1998, the Company entered into a research collaboration and option
agreement with Schering-Plough Corporation ("Schering-Plough") to develop
gene therapy products for the treatment of hepatitis B and C, and other
diseases. Under terms of the initial preclinical research agreement, the
Company could receive approximately $5 million in initial fees, reimbursement
expenses and technical milestone payments related to the delivery of the
interferon alpha-2b gene for the treatment of hepatitis B and C. As part of
the agreement, Schering-Plough has the option to license Immune Response's
gene delivery system for additional proprietary Schering-Plough genes. The
agreement also provides for Schering-Plough to pay royalties on future
product sales.
The Company has not been profitable since inception and had an accumulated
deficit of $165.4 million as of September 30, 1998. The Company has not
recorded any revenues from the sale of products. Revenues recorded through
September 30, 1998 were earned in connection with contract research,
licensing technology and investment income. The Company expects its operating
losses to continue over the next several years, as well as to have
quarter-to-quarter fluctuations, some of which could be significant, due to
expanded research, development and clinical trial activities. The Company may
not be able to generate sufficient product revenue to become profitable at
all or on a sustained basis.
RESULTS OF OPERATIONS
The contract research revenue received in the first nine months of 1998 was
received from Bayer Corporation related to a research collaboration for a
potential therapy for hemophilia which began in July 1996 and from
Schering-Plough related to a research collaboration for a potential therapy
for hepatitis which began in July 1998. The licensed research revenue
received in July 1998 was received from Schering-Plough. 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 foreseeable future.
Investment income decreased to $524,000 for the quarter ended September 30,
1998, from $591,000 during the same period in 1997. During the nine months
ended September 30, 1998 and 1997, investment income was $1.2 million and
$1.9 million, respectively.
Research and development expenditures decreased to $7.4 million during the
third quarter of 1998 compared to such expenditures during the same period in
1997 of $7.5 million. Research and development expenditures for the nine
months ended September 30, 1998 were $24.1 million compared to $25.7 million
for the same period in 1997. The decrease in research and development costs
from 1997 was due primarily to the initial costs incurred in the first half
of 1997 to enroll the
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final clinical trial sites related to the Phase III clinical endpoint trial
for HIV infection using REMUNE-TM-. Also, following the full recruitment of
the Phase III clinical trial in May 1997, each participating clinical site
was converted to a semi-annual payment schedule rather than payments based
upon patient enrollment. As a result, payments that would otherwise have been
made during the third quarter of 1997 were paid late in the second quarter of
1997. The Company expects research and development expenditures to rise as it
continues its Phase IIb rheumatoid arthritis clinical trial, expected to be
completed by year-end 1998. Research and development expenditures should also
continue to rise in the foreseeable future due to expanding preclinical and
clinical testing of the Company's proposed gene therapy and cancer
treatments. Research and development expenses related to advancing REMUNE are
also expected to increase due to the continuance of the Company's ongoing
Phase III clinical endpoint trial with REMUNE and to increased expenditures
related to scaling up of the manufacturing process for REMUNE as the Company
approaches possible commercialization of REMUNE.
General and administrative expenses for the third quarter of 1998 and 1997
were $1.1 million and $951,000, respectively. General and administrative
expenses for the nine months ended September 30, 1998 were $3.2 million as
compared to $3.0 million for the same period in 1997. General and
administrative expenses for the remainder of 1998 necessary to support the
Company's expanded research and development activities are expected to remain
consistent with the first three quarters of 1998.
For the quarter ended September 30, 1998, the Company's net loss was $5.5
million, or $.24 per share, as compared to a net loss of $6.9 million, or
$.31 per share, for the same period in 1997. For the nine months ended
September 30, 1998, the Company's net loss was $11.9 million, or $.52 per
share, as compared to a net loss of $24.8 million, or $1.15 per share for the
same period in 1997. The primary factor causing the change in 1998 from 1997
was the payments received from Agouron Pharmaceuticals, Inc. ("Agouron") in
June 1998 and Schering-Plough in July 1998.
LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company had
working capital of $27.5 million, including $30.3 million of cash, cash
equivalents and marketable securities. This compares with working capital as
of December 31, 1997 of $28.9 million, including $30.4 million of cash, cash
equivalents, marketable securities and short-term investments. Cash, cash
equivalents and marketable securities are approximately the same at September
30, 1998 as it was at December 31, 1997, despite the Company incurring
operating expenses of $27.3 million through September 30, 1998, primarily due
to the $10 million private placement of Series F Convertible Preferred Stock
and the $12 million payment received from Agouron, both of which occurred in
the second quarter of 1998, as well as due to the $2.5 million received from
Schering-Plough and Bayer Corporation in July 1998 to fund gene therapy
research.
During June 1998, the Company and Agouron entered into a binding agreement
under which the Company agreed to exclusively license REMUNE, its
immune-based therapy under development for the treatment of HIV infection, to
Agouron. Under the terms of the agreement, the Company will manufacture
commercial supplies of REMUNE and Agouron will have exclusive rights to
market REMUNE in North America, Europe and certain other countries, if
regulatory approvals are received. The agreement provides that the Company
may receive as much as $77 million over the next two years, including license
and milestone payments of $45 million, payments to support research and
development of $18 million and $14 million to purchase the Company's common
stock, priced at a premium to the market, subject to certain rights of
termination by Agouron. In addition, the two companies will share all profits
from the commercialization of REMUNE on a 50/50 basis, if REMUNE is
successfully developed and receives the necessary regulatory approvals.
In June 1998, the Company received a $10 million license fee and Agouron
purchased 118,256 shares of newly issued common stock of the Company, priced
at a premium to market, for $2 million. In October 1998, the Company received
a $5 million payment from Agouron consisting of a $3 million payment for
research and development and a $2 million payment for the purchase of 126,758
shares of unregistered common stock priced at a premium to the market. The
October 1998 payment is the
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first in a series of quarterly payments that the Company expects Agouron to
make to fund research and development and to purchase unregistered common
stock.
The Company will need to raise additional funds to conduct research and
development, preclinical studies and clinical trials necessary to bring its
potential products to market and establish manufacturing and marketing
capabilities. The Company anticipates that in the remainder of 1998 and in
1999, the REMUNE clinical trials will continue to represent a significant
portion of the Company's overall expenditures. The Company also anticipates
that costs related to the development of REMUNE will continue to increase as
the Company approaches possible commercialization. In particular, the Company
anticipates additional capital improvements of approximately $3 million to be
made over the next nine months related to increasing the capacity of its
manufacturing facility, some of which the Company anticipates it will lease.
Other anticipated costs with respect to REMUNE will depend on many factors,
including the results of interim analyses of the data from the Phase III
clinical endpoint trial, the potential for accelerated approval, the
continuation of the Company's collaboration with Agouron 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.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of preclinical studies and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the cost of manufacturing scale-up,
effective commercialization activities and arrangements and other factors not
within the Company's control. The Company intends to seek additional funding
through public or private financings, arrangements with corporate
collaborators or other sources. If funds are acquired through additional
collaborations, the Company will likely be required to relinquish some or all
rights to products that the Company may have otherwise developed itself.
Adequate funds may not be available when needed or on terms acceptable to the
Company. Insufficient funds may require the Company to scale back or
eliminate some or all of its research and development programs or license to
third parties products or technologies that the Company would otherwise seek
to develop itself. The Company believes that its existing resources,
including the funds received from the sale of Series F Convertible Preferred
Stock and the funds received from Agouron, including interest thereon, will
enable the Company to maintain its current and planned operations through the
first half of 1999.
YEAR 2000
The Company has performed a review of its computer applications and equipment
related to their continuing functionality for the year 2000 and beyond. The
Company does not believe that it has material exposure with respect to the
year 2000 issue concerning its computer applications and equipment. The
Company is communicating with third parties with whom it has a material
relationship to assess its risk with respect to year 2000 issues. This
assessment is not complete, in particular, because the Company has not
completed inquiries of such outside third parties. However, the Company is
not aware, at this time, of any material year 2000 issues with respect to its
dealings with such third parties. The Company anticipates that its assessment
will be completed by June 30, 1999. In the event that year 2000 issues were
to disrupt the Company, such disruption may have a material impact on the
Company and its results of operations. Since no significant issues have
arisen, the Company does not have a contingency plan to address any material
year 2000 issues. Such contingency plan, if required, will be developed
immediately upon completion of the Company's assessment.
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CERTAIN RISK FACTORS (For a discussion of additional Risk Factors applicable
to the Company, see the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.)
UNCERTAINTY OF PRODUCT DEVELOPMENT AND CLINICAL TESTING. The Company has not
completed the development of any products and there can be no assurance any
products will be successfully developed. The Company has been in existence
since 1986, and to date only six of its product candidates have entered
clinical trials. The Company's potential immune-based therapies for HIV,
autoimmune disease, cancer and gene therapy products currently under
development will require significant additional research and development
efforts and regulatory approvals prior to potential commercialization. To
achieve profitable operations, the Company must successfully develop,
manufacture, introduce and market products. The Company's potential products
may not prove to be safe and effective in clinical trials, United States Food
and Drug Administration ("FDA") or other regulatory approvals may not be
obtained and such products may not achieve market acceptance.
The Company's potential HIV immune-based therapy, REMUNE, is in a Phase III
clinical endpoint trial designed to provide evidence of efficacy based on
clinical endpoints. The results of this clinical trial may not demonstrate
that REMUNE is safe and efficacious and, even if the results of the clinical
trial are considered successful by the Company, the FDA may require the
Company to conduct additional large scale clinical trials with REMUNE before
the FDA will consider approving REMUNE for commercial sale. Failure to
successfully complete the Phase III clinical endpoint trial in a timely
fashion and a failure to obtain FDA approval of REMUNE will materially and
adversely affect the Company.
The results of the Phase III trial may not be consistent with Phase II
results. Even if the results of the Phase III trial are consistent with the
results of the Phase II trial, the FDA may not approve REMUNE for marketing.
In addition, REMUNE is being tested in a Phase II clinical trial in Thailand,
in a pediatric Phase I clinical trial in the United States and in combination
trials with approved HIV therapies in the United States, Spain, Switzerland
and the United Kingdom. Failure of these trials to demonstrate the safety and
effectiveness of REMUNE could have a material adverse effect on the
regulatory approval process for this potential product.
The Company's other potential immune-based therapies and gene therapy
technologies are at a much earlier stage of development than REMUNE. The
Company's gene therapy technology and certain of its technologies for the
treatment of cancer have not yet been tested in humans and human testing of
potential products based on such technologies may not be permitted by
regulatory authorities and, even if human testing is permitted, products
based on such technologies may not be developed and shown to be safe or
efficacious. Potential immune-based therapies based on certain of the
Company's autoimmune technologies, which are in various stages of clinical
testing, and certain of its cancer technologies, which are at an early stage
of clinical testing, may not be shown to be safe, efficacious or receive
regulatory approval.
The results of the Company's preclinical studies and clinical trials may not
be indicative of future clinical trial results. A commitment of substantial
resources to conduct time-consuming research, preclinical studies and
clinical trials, including the REMUNE Phase III clinical endpoint trial will
be required if the Company is to develop any products. Delays in planned
patient enrollment in the Company's current clinical trials or future
clinical trials may result in increased costs, program delays or both. None
of the Company's potential products may prove to be safe and effective in
clinical trials, FDA or other regulatory approvals may not be obtained or
such products may not achieve market acceptance. Any products resulting from
these programs are not expected to be successfully developed or commercially
available for a number of years, if at all.
Unacceptable toxicities or side effects may occur at any time in the course
of human clinical trials and, if any products are successfully developed and
approved for marketing, during commercial use of the Company's products. The
appearance of any such unacceptable toxicities or side effects could
interrupt, limit, delay or abort the development of any of the Company's
products or, if previously approved, necessitate their withdrawal from the
market. Furthermore, disease resistance may limit the efficacy of the
Company's potential products.
11
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ADDITIONAL FINANCING REQUIREMENTS AND ACCESS TO CAPITAL. The Company will
need to raise additional funds to conduct research and development,
preclinical studies and clinical trials necessary to bring its potential
products to market and establish manufacturing and marketing capabilities.
The Company anticipates that in 1998 and 1999, the REMUNE clinical trials
will continue to represent a significant portion of the Company's overall
expenditures. The Company also anticipates that costs related to the
development of REMUNE will continue to increase as the Company approaches
possible commercialization. The anticipated costs with respect to REMUNE will
depend on many factors, including the results of interim analyses of the data
from the Phase III clinical endpoint trial, the potential for accelerated
approval, the continuation of the Company's collaboration with Agouron 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.
The Company's future capital requirements will depend on many factors,
including continued scientific progress in its research and development
programs, the scope and results of preclinical studies and clinical trials,
the time and costs involved in obtaining regulatory approvals, the costs
involved in filing, prosecuting and enforcing patent claims, competing
technological and market developments, the cost of manufacturing scale-up,
effective commercialization activities and arrangements and other factors not
within the Company's control. The Company intends to seek additional funding
through public or private financings, arrangements with corporate
collaborators or other sources. If funds are acquired through additional
collaborations, the Company will likely be required to relinquish some or all
rights to products that the Company may have otherwise developed itself.
Adequate funds may not be available when needed or on terms acceptable to the
Company. Insufficient funds may require the Company to scale back or
eliminate some or all of its research and development programs or license to
third parties products or technologies that the Company would otherwise seek
to develop itself. The Company believes that its existing resources,
including the funds received from the sale of Series F Convertible Preferred
Stock and the funds received from Agouron, including interest thereon, will
enable the Company to maintain its current and planned operations through the
first half of 1999.
PATENTS AND PROPRIETARY TECHNOLOGY. The Company has filed, or participated as
licensee, in the filing of a number of patent applications in the United
States and many international countries. The Company files applications as
appropriate for patents covering its products and processes. The Company has
been issued patents, or has licensed patents, covering certain aspects of its
proposed immune-based therapies for HIV, autoimmune disease, cancer and gene
therapy technologies. The Company's success may depend in part on its ability
to obtain patent protection for its products and processes. The Company is
aware that a group working with Connetics Corporation has received a United
States patent related to autoimmune disease research that covers technology
similar to that used by the Company.
The Company may not be able to negotiate any necessary cross licenses, and
failure to do so could have a negative impact on the Company. The Company's
patent applications may not issue as patents and its issued patents, or any
patent that may be issued in the future, may not provide the Company with
adequate protection for the covered products, processes or technology.
The patent positions of biotechnology and pharmaceutical companies can be
highly uncertain, and involve complex legal and factual questions. Therefore,
the breadth of claims allowed in biotechnology and pharmaceutical patents
cannot be predicted. The Company also relies upon unpatented trade secrets
and know how, and others may independently develop substantially equivalent
trade secrets or know how. In addition, whether or not the Company's patents
are issued, or issued with limited coverage, others may receive patents that
contain claims applicable to the Company's product. Any of the Company's
patents, or any patents issued to the Company in the future, may not afford
meaningful protection against competitors. Defending any such patent could be
costly to the Company, and the patent may not be held valid by a court of
competent jurisdiction.
The Company also relies on protecting its proprietary technology in part
through confidentiality agreements with its corporate collaborators,
employees, consultants and certain contractors. These agreements may be
breached, the Company may not have adequate remedies for any breach and the
Company's trade secrets may otherwise become known or independently
discovered by its competitors.
12
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It is possible that the Company's products or processes will infringe, or
will be found to infringe, patents not owned or controlled by the Company,
such as the patent owned by Connetics Corporation. If any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or
would be required to obtain licenses or redesign its products or processes to
avoid infringement. Such licenses may not be available at all or on terms
commercially reasonable to the Company and the Company may not be able to
redesign its products or processes to avoid infringement. Litigation may be
necessary to defend against claims of infringement, to enforce patents issued
to the Company or to protect trade secrets. Such litigation could result in
substantial costs and diversion of management efforts regardless of the
results of such litigation and an adverse result could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed or require the Company to cease using such technology.
HISTORY OF OPERATING LOSSES. As of September 30, 1998, the Company had an
accumulated deficit of $165.4 million. The Company has not generated revenues
from the commercialization of any products and expects to incur substantial
net operating losses over the next several years. The Company may not be able
to generate sufficient product revenue to become profitable at all or on a
sustained basis. The Company expects to have quarter-to-quarter fluctuations
in expenses, some of which could be significant, due to expanded research,
development and clinical trial activities.
LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS. Clinical testing, manufacture, promotion and sale of the
Company's drug products are subject to extensive regulation by numerous
governmental authorities in the United States, principally the FDA, and
corresponding state and foreign regulatory agencies. The Company believes
that REMUNE and most of its other potential immune-based therapies will be
regulated by the FDA as biological drug products under current regulations of
the FDA. Biological products must be shown to be safe, pure and potent (i.e.,
effective) and are subject to the same regulatory requirements as
nonbiological products under the FDC Act, as amended by the FDA Modernization
Act, except that a biological product licensed under the Public Health
Services Act ("PHS Act") is not required to have an approved NDA under the
Federal Food, Drug and Cosmetic Act ("FDC Act"). The FDA Modernization Act
directed the FDA to take measures to minimize the differences in the review
and approval of marketing applications for biological and nonbiological
products. The FDA Modernization Act also made significant revisions to the
statutory requirements with regard to the approval of new biological and
nonbiological products. Among other things, the FDA Modernization Act
established a new statutory program for the approval of fast track drugs,
streamlined clinical research, and revised the content of product approval
applications and the FDA review process. The FDA is required to issue
regulations and guidelines in order to implement certain of these new
requirements. Until the FDA implements these regulations and guidelines, it
is impossible to predict the impact of the FDA Modernization Act on the
review and approval of any marketing applications that the Company may submit
to the FDA. The FDC Act, the PHS Act and other federal and state statutes and
regulations govern or influence the testing, manufacture, safety,
effectiveness, labeling, storage, recordkeeping, approval, advertising,
distribution and promotion of biological prescription drug products.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, seizure of products, total or partial suspension of
product marketing, failure of the government to grant premarket approval,
withdrawal of marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the
required preclinical studies and clinical testing, is lengthy and expensive
and there can be no assurance that necessary FDA clearances will be obtained
in a timely manner, if at all. The length of the clinical trial period and
the number of patients the FDA will require to be enrolled in the clinical
trials in order to establish the safety and efficacy of the Company's
products are uncertain. The Company may encounter significant delays or
excessive costs in its efforts to secure necessary approvals, and regulatory
requirements are evolving and uncertain. Future United States or foreign
legislative or administrative acts could also prevent or delay regulatory
approval of the Company's products. The Company may not be able to obtain the
necessary approvals for clinical trials, manufacturing or marketing of any of
its products under development. Even if commercial regulatory approvals are
obtained, they may include significant limitations on the indicated uses for
which a product may be marketed. In addition, a marketed product is subject
to continual FDA review. Later discovery of previously unknown problems or
failure to comply with the applicable
13
<PAGE>
regulatory requirements may result in restrictions on the marketing of a
product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions.
The steps required before a biological drug product may be marketed in the
United States generally include preclinical studies and the filing of an IND
application with the FDA. Reports of results of preclinical studies and
clinical trials for biological drug products are submitted to the FDA in the
form of a Biologics Licensing Application ("BLA") for approval for marketing
and commercial shipment. Submission of a BLA does not assure FDA approval for
marketing. The BLA review process may take a number of years to complete,
although reviews of applications for treatments of AIDS, cancer and other
life-threatening diseases may be accelerated or expedited. Failure of the
Company to receive FDA marketing approval for REMUNE or any of its other
products under development on a timely basis could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition to obtaining approval for each biological drug
product, an Establishment LIcense Application usually must be filed and
approved by the FDA.
Among the other requirements for BLA approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices
("GMP") requirements specifically for biological drugs, as well as for other
drugs. In complying with the FDA's GMP requirements, manufacturers must
continue to expend time, money and effort in production, recordkeeping and
quality control to assure that the product meets applicable specifications
and other requirements. Failure to comply with the FDA's drug GMP
requirements subjects the manufacturer to possible FDA regulatory action. The
Company or its contract manufacturers, if any, may not be able to maintain
compliance with the FDA's drug GMP requirements on a continuing basis.
Failure to maintain such compliance could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company believes its proprietary GeneDrug and cancer treatment therapies
will likely be regulated as biological products. As with the Company's other
potential products, the gene therapy and cancer products will be subject to
extensive FDA regulation throughout the product development process, and any
of these products may not be approved for marketing by the FDA on a timely
basis, if at all.
The FDA Modernization Act also amended the FDC Act to permit expanded access
to individuals and larger groups to unapproved new therapeutic and diagnostic
products. Although the new law largely codifies existing FDA regulations in
this area, it expands access to all investigational therapies under certain
conditions. Although the FDA has granted expanded access to REMUNE for those
patients who are ineligible to enroll in the Phase III clinical endpoint
trial, the FDA has to date not designated expanded access protocols for
REMUNE as "treatment" protocols. Either expanded access or a treatment
protocol designation might permit third party reimbursement of some of the
costs associated with making REMUNE available to patients in such an expanded
access context. The FDA may not determine that REMUNE meets all of the FDA's
criteria for use of an investigational drug for treatment use and, even if
the product is allowed for treatment use, third party payers may not provide
reimbursement for the costs of treatment with REMUNE.
The FDA also has issued regulations to accelerate the approval of or to
expedite the review of new biological drug products for serious or
life-threatening illnesses that provide meaningful therapeutic benefit to
patients over existing treatments. Under the accelerated approval program,
the FDA may grant marketing approval for a biological or nonbiological drug
product earlier than would normally be the case. In addition to the
accelerated approval process, the FDA has established procedures designed to
expedite the development, evaluation and marketing of new therapies intended
to treat persons with life-threatening and severely debilitating illnesses,
especially when no satisfactory alternative therapy exists. In addition, the
FDA Modernization Act established a new statutory program for the approval of
fast track drugs, including biological products. The FDA may not consider
REMUNE or any other of the Company's products under development to be an
appropriate candidate for accelerated approval, expedited review or fast
track designation.
To market any drug products outside the United States, the Company is also
subject to numerous and varying foreign regulatory requirements, implemented
by foreign health authorities, governing the design and conduct of human
clinical trials and marketing approval. The approval procedure varies among
14
<PAGE>
countries and can involve additional testing, and the time required to obtain
approval may differ from that required to obtain FDA approval. The foreign
regulatory approval process includes all of the risks associated with
obtaining FDA approval set forth above, and approval by the FDA does not
ensure approval by the health authorities of any other country.
TECHNOLOGICAL CHANGE AND COMPETITION. The biotechnology industry continues to
undergo rapid change and competition is intense in the fields of HIV,
autoimmune disease, cancer and gene therapy, and such competition is expected
to increase. The Company will compete with fully integrated pharmaceutical
companies, small biotechnology companies, universities and research
organizations. Competitors may succeed in developing technologies and
products that are more effective than any which have been or are being
developed by the Company or which would render the Company's technology and
products obsolete and noncompetitive. Many of the Company's competitors have
substantially greater experience, financial and technical resources and
production, marketing and development capabilities than the Company.
Accordingly, certain of the Company's competitors may succeed in obtaining
regulatory approval for products more rapidly or effectively than the
Company. If the Company commences commercial sales of its products, it will
also be competing with respect to manufacturing efficiency and sales and
marketing capabilities, areas in which it currently has no experience.
Competitors may develop and commercialize more effective or affordable
products.
DEPENDENCE ON THIRD PARTIES. The Company's strategy for the research,
development and commercialization of its products requires entering into
various arrangements with corporate collaborators, licensers, licensees and
others, and the Company's commercial success is dependent upon these outside
parties performing their respective contractual responsibilities, including
the analysis of the data generated in the Company's clinical trials. The
amount and timing of resources such third parties will devote to these
activities may not be within the control of the Company. There can be no
assurance that such parties will perform their obligations as expected and
the failure of third parties to perform their obligations would have a
material adverse effect on the Company. Although the Company has
collaborative agreements with several universities and research institutions,
the Company's agreements with Bayer and Schering-Plough, and its binding
Letter of Intent with Agouron, are the only collaborative agreements that
provide the Company with revenue. These collaborations may not result in the
development of any commercial products. Immune Response intends to seek
additional collaborative arrangements to develop and commercialize certain of
its products. The Company may not be able to negotiate collaborative
arrangements on favorable terms, or at all, in the future and its current or
future collaborative arrangements may not be successful.
LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE. The Company has a
manufacturing facility for REMUNE located in King of Prussia, Pennsylvania,
and a pilot manufacturing facility in Carlsbad, California for its other
products. The Company has not yet manufactured its product candidates in
commercial quantities. The Company may not be able to make the transition
from manufacturing clinical trial quantities to commercial production
quantities successfully or be able to arrange for contract manufacturing. The
Company believes it will be able to manufacture REMUNE for initial
commercialization, if the product obtains FDA approval, but it has not yet
demonstrated the capability to manufacture REMUNE in commercial quantities,
or its autoimmune disease, cancer and gene therapy treatments in large-scale
clinical or commercial quantities. The Company has no experience in the
sales, marketing and distribution of pharmaceutical products. The Company may
not be able to establish sales, marketing and distribution capabilities or
make arrangements with its collaborators, licensees or others to perform such
activities and such efforts may not be successful. The Company's products may
not be successfully commercialized even, if they are developed and approved
for commercialization.
The manufacture of the Company's products involves a number of steps and
requires compliance with stringent quality control specifications imposed by
the Company itself and by the FDA. Moreover, the Company's products can only
be manufactured in a facility that has undergone a satisfactory inspection by
the FDA. For these reasons, the Company would not be able quickly to replace
its manufacturing capacity if it were unable to use its manufacturing
facilities as a result of a fire, natural disaster (including an earthquake),
equipment failure or other difficulty, or if such facilities are deemed not
in compliance with the FDA's drug GMP requirements and the non-compliance
could not be rapidly rectified. The
15
<PAGE>
Company's inability or reduced capacity to manufacture its products would
have a material adverse effect on the Company's business and results of
operations.
The Company may enter into arrangements with contract manufacturing companies
to expand its own production capacity in order to meet requirements for its
products, or to attempt to improve manufacturing efficiency. If the Company
chooses to contract for manufacturing services and encounters delays or
difficulties in establishing relationships with manufacturers to produce,
package and distribute its finished products, clinical trials, market
introduction and subsequent sales of such products would be adversely
affected. Further, contract manufacturers must also operate in compliance
with the FDA's drug GMP requirements; failure to do so could result in, among
other things, the disruption of product supplies. Until recently, biologic
product licenses could not be held by any company unless it performed
significant manufacturing operations. The FDA recently amended its
regulations in this regard, and the Company believes that under these new
regulations it can now hold licenses for its biological products without
performing significant manufacturing steps. Nonetheless, the Company's
potential dependence upon third parties for the manufacture of its products
may adversely affect the Company's profit margins and its ability to develop
and deliver such products on a timely and competitive basis.
UNCERTAINTY OF PRODUCT PRICING, REIMBURSEMENT AND RELATED MATTERS. The
Company's ability to earn sufficient returns on its products will depend in
part on the extent to which reimbursement for the costs of such products and
related treatments will be available from government health administration
authorities, private health coverage insurers, managed care organizations and
other organizations. Third party payers are increasingly challenging the
price of medical products and services. If purchasers or users of the
Company's products are not able to obtain adequate reimbursement for the cost
of using such products, they may forego or reduce such use. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, and adequate third party coverage may not be available.
Failure to obtain appropriate reimbursement would have a material adverse
effect on the Company.
SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK. The Company's Common Stock
is expressly subordinate to the Company's Series F Convertible Preferred
Stock in the event of the liquidation, dissolution or winding up of the
Company. If the Company were to cease operations and liquidate its assets,
there may not be any remaining value available for distribution to the
holders of Common Stock after providing for the Series F Convertible
Preferred Stock liquidation preference.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS. The market price of
Immune Response's common stock, like that of the common stock of many other
biopharmaceutical companies, has been and is likely to be highly volatile.
Factors such as the results of preclinical studies and clinical trials by the
Company, its collaborators or its competitors, other evidence of the safety
or efficacy of products of the Company or its competitors, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory actions, changes or announcements in reimbursement
policies, developments with the Company's collaborators, developments
concerning patent or other proprietary rights of the Company or its
competitors (including litigation), concern as to the safety of the Company's
products, period-to-period fluctuations in the Company's operating results,
changes in estimates of the Company's performance by securities analysts,
market conditions for biopharmaceutical stocks in general and other factors
not within the control of the Company could have a significant adverse impact
on the market price of the common stock. The Company has never paid cash
dividends on its common stock and does not anticipate paying any cash
dividends in the foreseeable future.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
If a stockholder wishes to have a stockholder proposal considered at the
Company's next annual meeting, the stockholder must have given timely notice of
the proposal in writing to the Secretary of the Company. To be timely, a
stockholder's notice of the proposal must be delivered to, or mailed and
received at the executive offices of the Company, not less that 50 days nor more
than 75 days prior to the date of the annual meeting; provided, however, that if
less than 65 days notice or prior public disclosure of the date of the annual
meeting is given or made to stockholders, notice of the proposal to be timely
must be received no later than the 15th day following the day on which such
notice of the date of the annual meeting was mailed or public disclosure of the
meeting date was given.
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Report on Form 8-K
A report on Form 8-K dated June 11, 1998, was filed by The Immune
Response Corporation reporting under Item 5 that the Company had entered into a
binding Letter of Intent with Agouron Pharmaceuticals, Inc. under which the
Company exclusively licensed REMUNE to Agouron in return for license fees,
research and development funding and stock purchases.
17
<PAGE>
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: November 4, 1998 s/Charles J. Cashion
--------------------------------------------
Charles J. Cashion
Sr. Vice President, Finance & Administration
Secretary and Treasurer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ITEM 1 OF
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,860
<SECURITIES> 24,418
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,173
<PP&E> 12,618
<DEPRECIATION> 6,313
<TOTAL-ASSETS> 39,434
<CURRENT-LIABILITIES> 4,685
<BONDS> 0
9,277
0
<COMMON> 58
<OTHER-SE> 25,414
<TOTAL-LIABILITY-AND-EQUITY> 25,472
<SALES> 0
<TOTAL-REVENUES> 15,392
<CGS> 0
<TOTAL-COSTS> 27,286
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,894)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
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