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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 MARCH 31, 1999
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934.
For the transition period from to
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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
Incorporation or Organization) Identification Number)
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 May 4, 1999, 24,513,357 shares of common stock were outstanding.
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THE IMMUNE RESPONSE CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
PAGE
<S> <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
Signature 19
</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>
March 31,
1999 December 31,
(unaudited) 1998
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<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 418 $ 1,519
Marketable securities-available-for-sale 27,008 23,343
Other current assets 320 1,983
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Total current assets 27,746 26,845
Property and equipment, net 9,050 7,825
Deposits and other assets 2,126 956
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$ 38,922 $ 35,626
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Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 4,164 $ 2,755
Other accrued expenses 2,038 1,464
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Total current liabilities 6,202 4,219
Convertible preferred stock 9,417 9,347
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized; none issued --- ---
Common stock, $.0025 par value, 40,000,000 shares authorized,
24,513,357 and 23,795,292 shares issued and outstanding
at March 31, 1999 and December 31, 1998, respectively 61 59
Warrants 2,144 2,144
Additional paid-in capital 193,926 191,317
Unrealized gain on marketable securities 61 102
Accumulated deficit (172,889) (171,562)
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Total stockholders' equity 23,303 22,060
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$ 38,922 $ 35,626
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</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
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1999 1998
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<S> <C> <C>
Revenues:
Contract research revenue $ 9,206 $ 1,000
Expenses:
Research and development 9,550 8,261
General and administrative 1,363 999
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10,913 9,260
Other revenue and expense:
Investment income 380 311
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Net loss $ (1,327) $ (7,949)
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Net loss per share - basic and diluted $ (0.05) $ (0.35)
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Weighted average number of shares
outstanding 24,138 22,824
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</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------
1999 1998
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<S> <C> <C>
Operating activities:
Net loss $ (1,327) $ (7,949)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 389 371
Deferred rent expense (30) (22)
Changes in operating assets and liabilities:
Other current assets 1,662 287
Accounts payable 1,409 1,016
Other accrued expenses 604 (44)
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Net cash used in operating activities 2,707 (6,341)
Investing activities:
Sale (purchase) of marketable securities, net (1,983) 4,645
Purchase of property and equipment (1,614) (89)
Other assets (1,169) (601)
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Net cash provided by (used in) investing activities (4,766) 3,955
Financing activities:
Proceeds from other sales of common stock 1,539 ---
Net proceeds from exercise of stock options 1,142 67
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Net cash provided by financing activities 2,681 67
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Net increase (decrease) in cash and cash equivalents 622 (2,319)
Cash and cash equivalents at beginning of year 1,519 4,872
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Cash and cash equivalents at end of year $ 2,141 $ 2,553
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Supplemental disclosure of noncash investing and financing activities:
Accretion of preferred stock $ 70
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</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Immune Response
Corporation (the "Company") for the three months ended March 31, 1999 and
1998 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 March 31, 1999, and the consolidated results of operations
for the three months ended March 31, 1999 and 1998. The results of
operations for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the year ended December 31,
1999. 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, 1998 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 months ended March 31, 1999 and 1998 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
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March 31, March 31,
1999 1998
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<S> <C> <C>
Net loss $ (1,327) $ (7,949)
Net unrealized gain (loss) on
marketable securities 61 10
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Comprehensive loss $ (1,266) $ (7,939)
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</TABLE>
All prior periods have been restated to reflect the adoption of this
statement.
4. EQUITY TRANSACTION
In February 1999 the initial conversion price of the Series F Convertible
Preferred Stock of $14.07 per share of common stock was adjusted downward
to $9.77 per share of common stock. The conversion price may be further
adjusted downward, but not below a price of $5.00 per share, at the end
of May and at the end of each subsequent three month periods if the
Company's common stock does not trade at prices higher than the
conversion price over a period of time during the applicable three month
period. The Series F Stock bears a dividend of 7.5% per annum. The
dividend is payable in shares of common stock or cash at the Company's
option. Further, The Company's option has expired to sell up to $10
million more of the Series F Stock.
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5. COLLABORATIONS
In January 1999, the Company received a $5 million payment from Agouron
Pharmaceuticals, Inc. ("Agouron") consisting of a $3 million payment for
research and development and a $2 million payment for the purchase of
149,911 shares of unregistered common stock priced at a premium to the
market. This was the second in a series of six quarterly payments that
the Company expects Agouron to make to fund research and development and
to purchase unregistered common stock under an agreement entered into in
June 1998. Also in conjunction with this agreement, the Company received
a $5 million milestone payment in February 1999. Under the agreement, 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. Through March 31, 1999, the Company
has received a total of $27 million from Agouron from licenses fees,
milestone and research and development payments, and stock purchases.
In March 1999, the Company received a $988,000 payment from
Schering-Plough Corporation ("Schering-Plough") to fund research under a
research collaboration and option agreement entered into in July 1998.
Under the research collaboration and option agreement the Company agreed
to develop gene therapy products for the treatment of hepatitis B and C
and as part of the agreement, Schering-Plough has the option to license
the Company's gene delivery system for additional proprietary genes for
other diseases for a royalty on future product sales, if any. Through
March 1999, the Company has received approximately $3 million in payments
from Schering-Plough.
6. SUBSEQUENT EVENT
In April 1999, 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 189,350 shares of unregistered common
stock priced at a premium to the market. This was the third in a series
of six quarterly payments that the Company expects Agouron to make to
fund research and development and to purchase unregistered common stock
under the June 1998 agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
SUMMARY
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 and melanoma cancer. In addition,
the Company is developing a targeted delivery technology for gene therapy
which is designed to enable the intravenous injection of genes for delivery
directly to the liver. The Company's gene therapy program is currently 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. Factors that could cause or
contribute to such differences include those discussed under "Risk Factors".
The following should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-Q.
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 January 1999, the Company received a $5 million payment from Agouron
Pharmaceuticals, Inc. ("Agouron") consisting of a $3 million payment for
research and development and a $2 million payment for the purchase of 149,911
shares of unregistered common stock priced at a premium to the market. This
was the second in a series of six quarterly payments that the Company expects
Agouron to make to fund research and development and to purchase unregistered
common stock under an agreement entered into in June 1998. Also in
conjunction with this agreement, the Company received a $5 million milestone
payment in February 1999. Under the agreement, 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. Through
March 31, 1999, the Company had received a total of $27 million from Agouron
from licenses fees, milestone and research and development payments, and
stock purchases.
In March 1999, the Company received a $988,000 payment from Schering-Plough
Corporation ("Schering-Plough") to fund research under a research
collaboration and option agreement entered into in July 1998. Under the
research collaboration and option agreement the Company agreed to develop
gene therapy products for the treatment of hepatitis B and C and as part of
the agreement, Schering-Plough has the option to license the Company's gene
delivery system for additional proprietary genes for other diseases for a
royalty on future product sales, if any. Through March 1999, the Company has
received approximately $3 million in payments from Schering-Plough.
In April 1999, 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 189,350 shares of unregistered common
stock priced at a premium to the market. This was the third in a series of
six quarterly payments that the Company expects Agouron to make to fund
research and development and to purchase unregistered common stock under the
June 1998 agreement.
The Company has not been profitable since inception and had an accumulated
deficit of $173 million as of March 31, 1999. To date, the Company has not
recorded any revenues from the sale of products. Revenues recorded through
March 31,1999 were earned in connection with contract research, licensing of
technology, milestone achievement and investment income. The Company expects
its operating losses to continue, as well as to
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have quarter-to-quarter fluctuations, some of which could be significant, due
to expanded research, development and clinical trial activities. There can
be no assurance that the Company will be able to generate sufficient product
revenue to become profitable at all or on a sustained basis.
RESULTS OF OPERATIONS
Contract research revenue for quarter ended March 31, 1999 was $9.2 million
as compared to $1.0 million for the same period in 1998. The increase in
contract revenue was primarily attributable to a $5.0 milestone payment and
$3.0 million in research and development funding received from Agouron in
conjunction with the collaboration to complete the clinical development and
scale up of the manufacturing process for REMUNE. 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.
The Company incurred research and development expenses of $9.6 million and $8.3
million for the three months ending March 31, 1999 and March 31, 1998,
respectively. The increased spending in research and development during the
first quarter of 1999 resulted from expenses associated with clinical trials and
scale up of the manufacturing process for REMUNE. The Company expects research
and development expenditures to rise in the foreseeable future as it continues
its rheumatoid arthritis clinical trial and expands preclinical and clinical
testing of proposed gene therapy and cancer treatments.
General and administrative expenses for the first quarter of 1999 were $1.4
million as compared to $999,000 for the same period in 1998. The increase in
spending was attributable to higher support costs associated with its research
and development activities. General and administrative expenses for the
remainder of 1999 are expected to remain consistent with first quarter levels.
Investment income increased to $380,000 for the quarter ended March 31, 1999, up
from $311,000 during the same period in 1998. The increase in investment income
in 1999 compared to 1998, was due primarily to an increase in the Company's cash
position in the first quarter of 1999 compared to the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had working capital of $21.5 million,
including $27.4 million of cash, cash equivalents and marketable securities.
This compares with working capital at December 31, 1998, of $22.6 million,
including $24.9 million of cash, cash equivalents and marketable securities.
Working capital decreased despite the $10.0 million received from Agouron and
the $988,000 received from Schering-Plough, as the result of costs of
operations, in particular, due to the cost of the HIV clinical trials with
REMUNE and the capital improvements incurred to increase the capacity of the
manufacturing facility producing REMUNE. The increase in cash, cash equivalents
and marketable securities was due primarily to the sale of common stock to
Agouron and prepayment of research and development by Schering-Plough.
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 1999, the REMUNE clinical trials
and manufacturing costs 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. In particular, the
Company anticipates additional capital improvements of approximately $3.0
million to be made during the remainder of 1999 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, including investment
in inventory, will depend on many factors, including the results of interim
analyses of the data from the Phase 3 clinical endpoint trial, the continuation
of the Company's collaboration with Agouron and 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
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and enforcing patent claims, competing technological and market developments,
the cost of manufacturing scale-up and inventories, effective
commercialization activities and arrangements and other factors not within
the Company's control. The Company intends to seek additional funding
through additional research and development agreements with suitable
corporate collaborators, extensions of existing corporate collaborations, and
through public or private financings if available. There can be no
assurances, however, that such collaboration arrangements, or any public or
private financings, will be available on acceptable terms, if at all. If
funds are raised through equity arrangements, further dilution to
stockholders may result. If adequate funds are not available, the Company may
be required to delay, reduce the scope of, or eliminate one or more of its
research or development programs or take other measures to cut costs, which
could have a material adverse effect on the Company. The Company estimates
that its existing capital resources, funding under existing research and
development collaborations and the commitment for equity funding from an
existing collaborative partner, together with currently available facility
and equipment financing, will be sufficient to fund its current and planned
operations for the remainder of 1999. There can be no assurances, however,
that changes in the Company's research and development plans or other changes
affecting the Company's operating expenses may result in the expenditure of
such resources before such time. In any event, the Company will need to raise
substantial additional capital to fund its operations in future periods.
IMPACT OF 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
September 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. A
contingency plan, if required, will be developed immediately upon completion of
the Company's assessment of our third party exposure. The Company has not yet
formulated a reasonably likely worst case scenario with respect to year 2000
failures.
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, 1998.)
RISK FACTORS
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. There can be no assurance that any of the Company's potential
products will prove to be safe and effective in clinical trials, that FDA or
other regulatory approvals will be obtained or that such products will achieve
market acceptance.
The Company's potential HIV immune-based therapy, REMUNE, is in a Phase 3
clinical endpoint trial designed to provide evidence of efficacy based on
clinical endpoints. There can be no assurance that the results of such clinical
trial will demonstrate that REMUNE is safe and efficacious or, that even if the
results of the clinical trial are considered successful by the Company, that the
Food and Drug Administration ("FDA") will not 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
3 clinical endpoint trial in a timely fashion and a failure to obtain FDA
approval of REMUNE will materially and adversely affect the Company. There can
be no assurance that the results of the Phase 3 trial will be consistent with
Phase 2 results. In addition, REMUNE is being tested in a Phase 2 clinical trial
in Thailand, in
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a pediatric Phase 1 clinical trial in the United States and in combination
trials with approved HIV therapies in the United States and Spain. 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 there can be no
assurance that human testing of potential products based on such technologies
will be permitted by regulatory authorities or, that even if human testing is
permitted, that products based on such technologies will be developed and
shown to be safe or efficacious. Potential immune-based therapies based on
certain of the Company's autoimmune technologies and certain of its cancer
technologies are at an early stage of clinical testing and there can be no
assurance that such products will be shown to be safe, efficacious or receive
regulatory approval.
There can be no assurance that the results of the Company's preclinical
studies and clinical trials will 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
3 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. There can be no assurance that any of the Company's
potential products will prove to be safe and effective in clinical trials,
that FDA or other regulatory approvals will be obtained or that such products
will 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.
There can be no assurance that unacceptable toxicities or side effects will
not occur at any time in the course of human clinical trials or, 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, there
can be no assurance that disease resistance will not limit the efficacy of
potential products.
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 1999, the REMUNE clinical trials and
manufacturing costs 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. In
particular, the Company anticipates additional capital improvements of
approximately $3 million to be made during the remainder of 1999 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, including investment in inventory, will depend on many factors,
including the results of interim analyses of the data from the Phase 3
clinical endpoint trial, the continuation of the Company's collaboration with
Agouron and 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 additional research and development agreements with suitable
corporate collaborators, extensions of existing corporate collaborations, and
through public or private financings if available. There can be no
assurances, however, that such collaboration arrangements, or any public or
private financings, will be available on acceptable terms, if at all. If
funds are raised through equity arrangements, further dilution to
stockholders may result. If adequate funds are not available, the Company may
be required to delay, reduce the scope of, or eliminate one or more of its
research or development programs or take other measures to cut costs, which
could have a material adverse effect on the Company. The Company estimates
that its existing capital
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resources, funding under existing research and development collaborations and
the commitment for equity funding from an existing collaborative partner,
together with currently available facility and equipment financing, will be
sufficient to fund its current and planned operations for the remainder of
1999. There can be no assurances, however, that changes in the Company's
research and development plans or other changes affecting the Company's
operating expenses will not result in the expenditure of such resources
before such time. In any event, the Company will need to raise substantial
additional capital to fund its operations in future periods.
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.
There can be no assurance that the Company will be successful in opposition
proceedings. An unfavorable outcome could have an adverse impact on the
Company's ability to consummate future corporate partnerships or market
autoimmune disease products. There can be no assurance that the Company will be
able to negotiate any necessary cross licenses, and if not successful, failure
to do so could have a negative impact on the Company. There can be no assurance
that the Company's patent applications will be issued as patents or that any of
its issued patents, or any patent that may be issued in the future, will 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 no assurance can be given that others will not 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 which contain claims applicable to the Company's product. There
can be no assurance that any of the Company's patents, or any patents issued to
the Company in the future, will afford meaningful protection against
competitors. Defending any such patent could be costly to the Company, and there
can be no assurance that the patent would 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. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or independently discovered by its competitors.
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.
There can be no assurance that such licenses would be available at all or on
terms commercially reasonable to the Company or that the Company could 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 March 31, 1999, the Company had a
consolidated accumulated deficit of $173 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. There can be no
12
<PAGE>
assurance that the Company will 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 Food, Drug and Cosmetic Act ("FDC Act"), as
amended by the Food and Drug Administration Act ("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 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 issues and 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. There can be no assurance as to the length of the clinical
trial period or 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. 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. There can be no assurance that the Company will 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 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 ("ELA") usually must be filed and approved by
the FDA.
13
<PAGE>
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.
There can be no assurance that the Company or its contract manufacturers, if
any, will 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
there can be no assurance that any of these products will be successful at
securing the requisite FDA marketing approval 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 3 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. There can be no assurance that the FDA will determine that
REMUNE meets all of the FDA's criteria for use of an investigational drug for
treatment use or that, even if the product is allowed for treatment use, that
third party payers will provide reimbursement for any of 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. There can be no assurance
that the FDA will 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 of 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
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. There can be no assurance that competitors have not or will
not 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
14
<PAGE>
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. There can be no assurance that competitors
will not 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, licensors, 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 Agouron, Schering-Plough and Bayer are the only
collaborative agreements that provides the Company with contract revenue.
Agouron is in the process of obtaining shareholder approval on the sale of
the company to Warner-Lambert Company ("Warner-Lambert"). Though Agouron is
to remain a separate entity as a wholly-owned subsidiary of Warner-Lambert,
there can be no assurance as to which Agouron research projects
Warner-Lambert will continue to fund in the future.
There can be no assurance that any of the Company's collaborations will not
be terminated or will result in the development of any commercial products.
Immune Response intends to seek additional collaborative arrangements to
develop and commercialize certain of its products. There can be no assurance
that the Company will be able to negotiate collaborative arrangements on
favorable terms, or at all, in the future, or that its current or future
collaborative arrangements will be successful.
DEPENDENCE ON KEY PERSONNEL. Since its inception, Immune Response has relied on
the technical and management skills of its experienced staff. The Company does
not maintain key man life insurance on any of its personnel. The Company's
success also depends in large part upon its ability to attract and retain highly
qualified scientific and management personnel. The Company faces competition for
such personnel from other companies, academic institutions, government entities
and other organizations. There can be no assurance that the Company will be
successful in hiring or retaining requisite personnel.
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. No assurance can be given that the Company, on a
timely basis, will 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. There can be no assurance that the Company will be
able to establish sales, marketing and distribution capabilities or make
arrangements with its collaborators, licensees or others to perform such
activities or that such efforts will be successful. There can be no assurance
of market acceptance of the Company's products, 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 Company's
15
<PAGE>
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 has amended its regulations in
this regard, and the Company believes that under the revised 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 payors 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 there can be no assurance that adequate third party
coverage will be available. Failure to obtain appropriate reimbursement would
have a material adverse effect on the Company.
PRODUCT LIABILITY EXPOSURE. The Company faces an inherent business risk of
exposure to product liability and other claims in the event that the
development or use of its technology or prospective products is alleged to
have resulted in adverse effects. While the Company has taken, and will
continue to take, what it believes are appropriate precautions, there can be
no assurance that it will avoid significant liability exposure. Although the
Company currently carries product liability insurance for clinical trials,
there can be no assurance that the Company has sufficient coverage, or can
obtain sufficient coverage, at a reasonable cost. An inability to obtain
product liability insurance at acceptable cost or to otherwise protect
against potential product liability claims could prevent or inhibit the
commercialization of products developed by the Company. A product liability
claim could have a material adverse effect on the Company's business,
financial condition and results of operations.
HAZARDOUS MATERIALS/ENVIRONMENTAL MATTERS. Although the Company does not
currently manufacture commercial quantities of its product candidates, it
produces limited quantities of such products for its clinical trials. The
Company's research and development processes involve the controlled storage,
use and disposal of hazardous materials, biological hazardous materials and
radioactive compounds. The Company is subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of such materials and certain waste products. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by such laws and regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result, and any such liability could exceed
the resources of the Company. There can be no assurance that the Company will
not be required to incur significant costs to comply with current or future
environmental laws and regulations nor that the operations, business or
assets of the Company will not be materially or adversely affected by current
or future environmental laws or regulations.
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
16
<PAGE>
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.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation and Bylaws include provisions that could discourage potential
takeover attempts and make attempts by stockholders to change management more
difficult. The approval of 66 2/3 percent of the Company's voting stock is
required to approve certain transactions and to take certain stockholder
actions, including the calling of special meetings of stockholders and the
amendment of any of the anti-takeover provisions contained in the Company's
Certificate of Incorporation. Further, pursuant to the terms of its
stockholder rights plan, the Company has distributed a dividend of one right
for each outstanding share of common stock. These rights will cause
substantial dilution to the ownership of a person or group that attempts to
acquire the Company on terms not approved by the Board of Directors and may
have the effect of deterring hostile takeover attempts.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
Not applicable
18
<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: May 11, 1999 /s/ Rand P. Mulford
-------------------------------------
Rand P. Mulford
Sr. Vice President, Corporate Development,
Chief Financial Officer, Secretary and Treasurer
19
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATE STATEMENTS OF OPERATIONS
EXTRACTED FROM ITEM 1 OF FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999, FOR THE
YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 27,008
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<CURRENT-ASSETS> 27,746
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<COMMON> 61
<OTHER-SE> 23,242
<TOTAL-LIABILITY-AND-EQUITY> 38,922
<SALES> 0
<TOTAL-REVENUES> 9,586
<CGS> 0
<TOTAL-COSTS> 10,913
<OTHER-EXPENSES> 0
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