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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, 2000
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---- EXCHANGE ACT OF 1934.
For the transition period from ________________ to ______________
Commission file number 0-18006
THE IMMUNE RESPONSE CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0255679
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
5935 DARWIN COURT, CARLSBAD, CA 92008
(Address of Principal Executive Offices)
(Zip Code)
TELEPHONE (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 27, 2000, 30,198,900 shares of common stock were outstanding.
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THE IMMUNE RESPONSE CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I - FINANCIAL INFORMATION
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
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in securities 17
Item 3. 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
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------ -----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,428 $ 4,183
Marketable securities - available-for-sale 26,924 18,904
Other current assets 422 202
------------------ -----------------
Total current assets 35,774 23,289
Property and equipment, net 8,908 10,760
Licensed technology 4,415 4,945
Deposits and other assets 847 1,003
------------------ -----------------
$ 49,944 $ 39,997
================== =================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 1,239 $ 1,536
Accrued expenses 1,806 3,024
License contract payable 243 3,609
Current portion of equipment notes payable 557 287
Deferred revenue 29 -
Deferred rent obligation 59 147
------------------ -----------------
Total current liabilities 3,933 8,603
Long-term deferred revenue 138 -
Equipment notes payable 1,988 1,221
Redeemable, convertible preferred stock, $0.001 par value, 400 shares
authorized, 200 shares issued and outstanding at September 30, 2000 and
December 31, 1999, (preference in liquidation of $10,000,000) 9,837 9,627
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized; 200 shares issued
and outstanding as redeemable, convertible preferred stock - -
Common stock, $.0025 par value, 65,000,000 shares authorized,
30,173,680 and 26,370,135 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 75 66
Warrants 2,144 2,144
Additional paid-in capital 225,988 203,131
Accumulated other comprehensive income 3,684 1,735
Accumulated deficit (197,843) (186,530)
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Total stockholders' equity 34,048 20,546
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$ 49,944 $ 39,997
================== =================
</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Contract research revenue $ 108 $ 3,494 $ 3,420 $ 10,732
Licensed research revenue -- 333 333 6,195
--------------- --------------- --------------- ---------------
108 3,827 3,753 16,927
Expenses:
Research and development 5,649 7,692 15,841 26,129
General and administrative 1,207 1,288 3,361 4,023
Restructuring costs -- -- -- 650
--------------- --------------- --------------- ---------------
6,856 8,980 19,202 30,802
Other income:
Investment income 611 304 3,400 1,007
Other income -- -- 736 --
--------------- --------------- --------------- ---------------
Net loss (6,137) (4,849) (11,313) (12,868)
Accretion of preferred stock (70) (70) (210) (210)
Dividends on preferred stock (188) (189) (561) (561)
--------------- --------------- --------------- ---------------
Net loss applicable to common stockholders $ (6,395) $ (5,108) $ (12,084) $ (13,639)
=============== =============== =============== ===============
Net loss per share - basic and diluted $ (0.22) $ (0.21) $ (0.44) $ (0.56)
=============== =============== =============== ===============
Weighted average number of shares
outstanding 28,912,001 24,852,510 27,734,937 24,502,843
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
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THE IMMUNE RESPONSE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-----------------------------------------
2000 1999
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<S> <C> <C>
Operating activities:
Net income (loss) $ (11,313) $ (12,868)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,890 1,144
Deferred income 167
Deferred rent expense (89) (89)
Gain on sale of assets (736) -
Changes in operating assets and liabilities:
Other current assets (220) 513
Accounts payable (297) 948
Accrued expenses (1,217) 3,175
Licensed contracts payable (701) -
---------------- --------------
Net cash used in operating activities (12,516) (7,177)
Investing activities:
Sale (purchase) of marketable securities, net (6,071) 3,734
Purchase of property and equipment (847) (3,779)
Proceeds from sale of land and equipment 2,074 -
Deposits and other assets 156 (40)
---------------- --------------
Net cash provided by (used in) investing activities (4,688) (85)
Financing activities:
Proceeds from equipment notes payable 1,385 1,621
Principal payments under equipment notes payable (349) -
Net proceeds from sale of common stock through public offering 14,896 -
Net proceeds from other sales of common stock 1,667 4,805
Net proceeds from exercise of stock options 3,850 1,726
---------------- --------------
Net cash provided by financing activities 21,449 8,152
---------------- --------------
Net increase in cash and cash equivalents 4,245 890
Cash and cash equivalents at beginning of period 4,183 1,519
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Cash and cash equivalents at end of period $ 8,428 $ 2,409
================ ==============
Supplemental disclosure of cash flow information:
Interest paid $ 228 $ -
================ ==============
Supplemental disclosure of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities $ 1,949 $ (169)
================ ==============
Settlement of license contract payable with equity $ 2,664 $ -
================ ==============
Accretion of convertible preferred stock $ 210 $ 210
================ ==============
Payment of dividend on convertible preferred stock $ 561 $ 561
================ ==============
Declared dividend on convertible preferred stock $ 188 $ 189
================ ==============
</TABLE>
See accompanying notes.
5
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THE IMMUNE RESPONSE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of The Immune Response
Corporation, or the Company, for the three and nine-month periods ended
September 30, 2000 and 1999 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, 2000, and the
consolidated results of operations for the three and nine-month periods
ended September 30, 2000 and 1999. The results of operations for the
three and nine months ended September 30, 2000 are not necessarily
indicative of the results to be expected for the year ended December 31,
2000. 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, 1999
included in the Company's Form 10-K filed with the Securities and
Exchange Commission.
2. LONG-LIVED ASSETS
The Company evaluates potential impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards ("FAS")
FAS No. 121, "Accounting for the Impairment of Long-Lived Assets". FAS
No. 121 establishes procedures for review of recoverability and
measurement of impairment, if necessary, of long-lived assets and
certain identifiable intangibles held and used by an entity. FAS No.
121 requires that those assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be fully recoverable based on expected
undiscounted cash flows attributable to that asset. The amount of any
impairment is measured as the difference between the carrying value
and the fair value of the impaired asset. As of September 30, 2000,
the Company believes that there has not been any impairment of the
Company's long-lived assets or other identifiable intangibles.
3. RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." The bulletin draws on existing accounting rules and provides
specific guidance on how those accounting rules should be applied and
specifically addresses revenue recognition for non-refundable technology
access fees in the biotechnology industry. Adoption of SAB No. 101 is
required in the fourth quarter of fiscal year 2000. The Company has not
completed its evaluation of the impact of SAB No. 101 on its financial
statements. However, the impact is expected to be in a pre-tax range of
approximately $10 million to $15 million charged to the Company's results
of operations in the first quarter of fiscal year 2000 as a cumulative
effect of a change in accounting principle.
In April 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. ("FIN") 44, "Accounting for Certain
Transactions involving Stock Compensation: an interpretation of FAS
No. 25." FIN 44 affects awards and modifications made after
December 15, 1998. Management believes that their accounting policies
comply with the applicable provisions of FIN 44.
4. NET LOSS PER SHARE
Net loss per share for the three and nine months ended September 30, 2000
and 1999 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 their
effect would be antidilutive. Therefore, there is no difference between
basic and diluted net loss per share.
5. COMPREHENSIVE INCOME
The Company accounts for comprehensive income in accordance with the
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net loss $(6,137) $(4,849) $(11,313) $(12,868)
Net unrealized gain (loss)
on marketable securities 1,042 (15) 1,949 (169)
------- ------- -------- --------
Comprehensive loss $(5,095) $(4,864) $ (9,364) $(13,037)
======= ======= ======== ========
</TABLE>
6
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6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
In April 1998, the Company sold 200 shares of its Series F Redeemable,
Convertible Preferred Stock, or Series F Stock, in return for gross
proceeds of $10 million with an initial conversion price of $14.07 per
share of common stock. The conversion price has since been adjusted
downward to $4.17 per share of common stock. The conversion price may be
further adjusted downward if the Company's common stock does not trade at
prices higher than the conversion price over a period of time. The Series
F Stock is convertible into common stock at the option of the holder
limited to 4.99% of the Company's outstanding common stock.
Additionally, on April 24, 2001 the Company will be required to redeem
the Series F Stock in either cash or shares of the Company's common
stock. The Series F Stock bears a dividend of 7.5% per annum. In general,
the dividend is payable in shares of common stock or cash at the
Company's option. For the nine months ended September 30, 2000 and 1999,
83,571 and 53,331 shares, respectively, of the Company's common stock
were issued as dividends to the Series F shareholders. 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.
7. EQUITY TRANSACTION
In August 2000, the Company completed a public offering of 2,400,000
shares of its common stock at a price of $6.00 per share. The
underwriters exercised an over-allotment option to purchase an additional
360,000 shares. The net proceeds from the offering, after expenses, were
$14.9 million.
8. COLLABORATION WITH AGOURON PHARMACEUTICALS, INC.
During June 1998, the Company and Agouron Pharmaceuticals, Inc., or
Agouron, a wholly-owned subsidiary of Pfizer Inc., entered into a binding
agreement under which the Company agreed to exclusively license to
Agouron certain rights relating to REMUNE-TM-, its immune-based therapy
under development for the treatment of HIV infection. Under the terms of
the agreement, the Company will exclusively manufacture commercial
supplies of REMUNE, and Agouron will have exclusive rights to market
REMUNE in North America, Europe, Japan and certain other countries, if
regulatory approvals are received. As a result of this agreement, the
Company may potentially receive in the aggregate up to $77 million,
including license and milestone payments of $45 million, payments to
support research and development of $18 million and $14 million for the
purchase of 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.
As of September 30, 2000, the Company had received a total of $47 million
from Agouron under the agreement. Agouron will make additional payments
upon achievement of certain milestones. In January 2000, the Company
received a $5 million payment from Agouron consisting of $3 million for
research and development and $2 million for the purchase of 266,667
shares of unregistered common stock priced at a $333,000 premium to the
market price which was recognized as license revenue. This was the final
payment in a series of six quarterly payments made by Agouron to fund
research and development and to purchase unregistered common stock under
the June 1998 agreement. In July 1999, April 1999 and January 1999, the
Company received a $5 million payment in each month from Agouron
consisting of a $3 million payment for research and development and a $2
million payment for the purchase of 292,078, 189,350 and 149,911 shares
of unregistered common stock, respectively, priced at a total premium of
$1,195,000 to the market which was recognized as license revenue for the
nine months ended September 30, 1999. Also in conjunction with this
agreement, the Company received a $5 million milestone payment in
February 1999. In September 2000, the Company filed a registration
statement with the Securities and Exchange Commission covering the resale
of 1,317,609 shares of common stock owned by Agouron.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
SUMMARY
The Immune Response Corporation is a biopharmaceutical company developing
immune-based therapies to induce specific immune responses for the treatment of
HIV, autoimmune diseases and cancer. In addition, we are developing a targeted
non-viral delivery technology for gene therapy, which is designed to enable the
delivery of genes directly to the liver via intravenous injection.
This discussion contains forward-looking statements concerning our operating
results and timing of anticipated revenues and 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. We undertake 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 2000, we received a $5.0 million payment from Agouron consisting of a
$3.0 million payment for research and development and a $2.0 million payment for
the purchase of 266,667 shares of unregistered common stock priced at a $333,000
premium to the market which was recognized as license revenue. This was the
final payment in a series of six quarterly payments made by Agouron to fund
research and development and to purchase unregistered common stock under the
June 1998 agreement. In September 2000, the Company filed a registration
statement with the Securities and Exchange Commission covering the resale of
1,317,609 shares of common stock owned by Agouron.
In March 2000, we sold 4.65 acres of undeveloped property adjacent to our
headquarters facility in Carlsbad, California for approximately $2.0 million.
Also in the first and third quarters of 2000, we sold for cash approximately
$2.3 million and $252,000, respectively, of an equity security held for sale
that was acquired through the licensing of technology.
In May 2000, we utilized the remaining $1.4 million of available credit under a
$3.0 million equipment line of credit as reimbursement for capital expenditures
during the past seven months.
In August 2000, we completed a public offering of 2,400,000 shares of common
stock at a price of $6.00 per share. The underwriters exercised an
over-allotment option to purchase an additional 360,000 shares. The net
proceeds, after expenses, were $14.9 million.
We have not been profitable since inception and had an accumulated deficit of
$197.8 million as of September 30, 2000. To date, we have not recorded any
revenues from the sale of products. Revenues recorded through September 30, 2000
were primarily received from contract research, licensing of technology,
milestone achievement payments and investment income. We expect our operating
losses to continue, as well as to have quarter-to-quarter fluctuations, some of
which could be significant, due to research, development and clinical trial
activities. There can be no assurance that we will be able to generate
sufficient product revenue to become profitable at all or on a sustained basis.
In December 1999, the Securities and Exchange Commission issued a Staff
Accounting Bulletin regarding revenue recognition in financial statements for
non-refundable technology access fees in the biotechnology industry, which will
impact the Company's financial statements during the first quarter of 2000. See
Note 2 to the Condensed Consolidated Financial Statements.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended September 30, 2000 were $108,000
and $3.8 million, respectively, as compared to $3.8 million and $16.9 million
for the same periods in 1999. The decrease in revenues in 2000 was primarily
attributed to the receipt of only one quarterly research and development payment
and one stock premium payment in 2000 of approximately $3.3 million from Agouron
versus three quarterly payments in 1999 of
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approximately $3.4 million each. In addition, we received in 1999 a one-time
$5.0 million milestone payment from Agouron and a $1.0 million research
collaboration payment from Schering Corporation (Schering). We received the
final quarterly payment under the agreement with Agouron in January 2000, and
Schering's obligation to fund under their collaboration with us expired on
December 31, 1999. As a result, we expect no additional revenues unless it is
earned through existing corporate collaborations or new research and development
agreements, if any. We have not received any revenues from the commercial sale
of products and do not expect to derive revenue from the sale of products for
the foreseeable future.
Research and development expenditures for the three and nine months ended
September 30, 2000 of $5.6 million and $15.8 million, respectively, decreased
from $7.7 million and $26.1 million during the same periods in 1999. The
decrease of $10.3 million in research and development spending from 1999 to 2000
was due primarily to reduced clinical and regulatory costs of $7.4 million,
reduced spending associated with REMUNE manufacturing scale up activities of
$1.8 million and reduced costs of approximately $1.1 million associated with the
autoimmune disease, gene therapy and cancer programs as a result of our
workforce reduction in mid 1999.
With the current U.S. pivotal HIV clinical study being conducted and paid for by
Agouron, future clinical study spending for REMUNE is expected to remain
consistent with this quarter. However, spending associated with our scale-up of
the manufacturing process for REMUNE, the cost of producing clinical supplies
for ongoing and future REMUNE studies along with spending on clinical studies in
our autoimmune disease development program could increase in the foreseeable
future. Future research and development expenditures are expected to remain
somewhat level with the current quarter, but quarter to quarter fluctuations may
occur due to the timing of expenditures. If additional collaborations are
entered into, research and development expenditures would increase over current
levels.
General and administrative expenses for the three and nine months ended
September 30, 2000 were $1.2 million and $3.4 million, respectively, as compared
to $1.3 million and $4.0 million for the same periods in 1999. This decrease in
spending was primarily attributed to our workforce reduction in 1999 and
somewhat lower professional fees for the current nine months. As of December 31,
1999, there was approximately $100,000 of accrued restructuring costs remaining
to provide for severance costs for salaries. These amounts were paid out in the
first quarter of 2000. Quarterly general and administrative expenses for the
fourth quarter of 2000 are expected to remain consistent with third quarter
levels.
Investment income for the three months ended September 30, 2000 was higher,
$611,000 as compared to $304,000 for the same period of 1999 due primarily to a
$250,000 gain on sale of an equity security held for sale. Investment income
increased to $3.4 million for the nine months ended September 30, 2000 from $1.0
million during the same period in 1999. The increase in investment income in
2000 compared to 1999 was due primarily to the sale in the first and third
quarters of 2000 of approximately $2.5 million of an equity security held for
sale.
Other income of $736,000 for the nine months ended September 30, 2000 was
primarily attributable to the gain recognized from the sale in the first quarter
of 2000 of undeveloped property adjacent to our headquarters facility in
Carlsbad, California resulting in approximately $2.0 million gross proceeds.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception through September 30, 2000, we have financed our activities
primarily from public and private sales of equity, funding from collaborations
with corporate partners and investment income. At September 30, 2000, we had
working capital of $31.8 million and $35.4 million of cash, cash equivalents and
marketable securities. This compares with working capital of $14.7 million and
$23.1 million of cash, cash equivalents and marketable securities as of December
31, 1999. Working capital increased as a result of the public offering that
netted $14.9 million in August 2000, the sales of $2.5 million of an equity
security held for sale and $2.0 million of undeveloped property, as well as the
lower cost of operations, in particular the reduced cost of the REMUNE HIV
clinical trials, clinical trial materials and manufacturing supplies. During May
2000, we utilized all of the remaining $1.4 million of available credit under a
$3.0 million equipment line of credit entered into during 1999.
We will need to raise additional funds to conduct research and development,
preclinical studies and clinical trials necessary to bring potential products to
market and to establish manufacturing and marketing capabilities. We anticipate
that for the foreseeable future, the scale-up of the manufacturing process for
REMUNE and the cost of producing clinical supplies for ongoing and future REMUNE
studies will continue to represent a significant portion of our overall
expenditures. We also anticipate that costs related to the clinical trials of
REMUNE will decrease from 1999 levels, as the
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current U.S. pivotal study and any future pivotal studies are expected to be
conducted by Agouron. Overall, future research and development expenditures are
expected to remain somewhat constant to third quarter levels. However, future
spending for research and development may increase if we enter into additional
collaborations or if new clinical studies are initiated in our other development
programs. We anticipate additional capital improvements of approximately $1.5
million for 2000 related to the scale-up of the manufacturing process, some of
which we anticipate will be funded with debt financing. Other anticipated costs
with respect to REMUNE, including investment in inventory, will depend on many
factors including the results of clinical trials, the continuation of our
collaboration with Agouron and other factors which will influence our
determination of the appropriate continued investment of our financial resources
in this program.
Our future capital requirements will depend on many factors, including continued
scientific progress in our 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 and inventories, effective commercialization
activities and arrangements and other factors not within our control. We intend
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.
However, there can be no assurance 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, we may be required
to delay, reduce the scope of or eliminate one or more of our research or
development programs or take other measures to cut costs, which could have a
material adverse effect on us. We estimate that our existing capital resources
will be sufficient to fund our current and planned operations through 2001.
There can be no assurance, however, that changes in our research and development
plans or other changes affecting our operating expenses may result in the
expenditure of such resources before that time. In any event, we will need to
raise substantial additional capital to fund our operations in future periods.
RISK FACTORS
OUR FAILURE TO DEVELOP AND COMMERCIALIZE PRODUCTS SUCCESSFULLY MAY CAUSE US TO
CEASE OPERATIONS
We have not completed the development of any products. Our failure to develop
and commercialize products successfully may cause us to cease operations. Our
potential therapies under development will require significant additional
research and development efforts and regulatory approvals prior to potential
commercialization.
The discontinuation of a previous Phase 3 trial of REMUNE in May 1999 due to
lack of efficacy has had a material adverse effect on us. If our primary
marketing partner, Agouron, a Pfizer Inc. Company, does not successfully
complete the current pivotal trial of REMUNE, we may have to abandon REMUNE or
seek additional funding.
Our other therapies and technologies are at earlier stages of development than
REMUNE and may not be shown to be safe or efficacious or ever receive regulatory
approval. Some of our technologies have not yet been tested in humans. Human
testing of potential products based on these technologies may not be permitted
by regulatory authorities. Even if human testing is permitted, the products
based on these technologies may not be successfully developed or be shown to be
safe and efficacious.
The results of our 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 will be
required if we are to develop any products. Delays in planned patient enrollment
in our clinical trials may result in increased costs, program delays or both.
None of our potential products may prove to be safe and effective in clinical
trials. Food and Drug Administration, or FDA, or other regulatory approvals may
not be obtained and even if successfully developed and approved, our products
may not achieve market acceptance. Any products resulting from our 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 or, if any products are successfully developed and
approved for marketing, during commercial use of our products. The appearance of
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any unacceptable toxicities or side effects could interrupt, limit, delay or
abort the development of any of our products or, if previously approved,
necessitate their withdrawal from the market.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY
ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS
We will need to raise additional funds to conduct research and development,
preclinical studies and clinical trials necessary to bring our potential
products to market and to establish manufacturing and marketing capabilities.
A failure to raise additional funds would require us to scale back or
eliminate some or all of our research and development programs or license to
third parties products or technologies that we would otherwise seek to
develop ourselves. We estimate that our existing capital resources will be
sufficient to fund our current and planned operations through 2001. We will
need to obtain additional financial resources to fund operations beyond 2001.
Although we anticipate that development of REMUNE will continue to represent a
significant portion of our overall expenditures, we also anticipate that costs
related to the development of REMUNE will decrease in 2000. Other anticipated
costs with respect to REMUNE will depend on many factors, in particular the
continuation of our collaboration with Agouron.
The timing and amount of our future capital requirements will depend on many
factors, including:
- continued scientific progress in our 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 our control.
Our access to capital could be limited if we are not capable of continued
progress in:
- our research and development programs;
- our preclinical and clinical trials;
- obtaining regulatory approvals; or
- scaling up manufacturing.
It could also be limited by overall financial market conditions.
IF AGOURON TERMINATES ITS COLLABORATION WITH US WE MAY HAVE TO ABANDON REMUNE
According to its terms, our binding letter of intent with Agouron may be
terminated at will and at any time by Agouron. The termination of our agreement
with Agouron might require us to abandon REMUNE. Agouron has been acquired by
Pfizer Inc. We do not know which Agouron research products, if any, Pfizer Inc.
will continue to fund in the future.
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WE MAY BE UNABLE TO ENTER INTO ADDITIONAL COLLABORATIONS OR MAINTAIN EXISTING
ONES
We intend to seek additional collaborative arrangements to develop and
commercialize our products. We may not be able to negotiate collaborative
arrangements on favorable terms, or at all, in the future and our current or
future collaborative arrangements may not be successful or continue. Under the
Schering collaboration, Schering's obligation to fund expired on December 31,
1999. Without funding arrangements, we may have to abandon some of our products
under development.
OUR PATENTS AND PROPRIETARY TECHNOLOGY MAY NOT PROVIDE US WITH ANY BENEFIT AND
THE PATENTS AND PROPRIETARY TECHNOLOGY OF OTHERS MAY PREVENT US FROM
COMMERCIALIZING PRODUCTS
A failure to obtain meaningful patent protection for our potential products and
processes would greatly diminish the value of our potential products and
processes.
In addition, whether or not our patents are issued, or issued with limited
coverage, others may receive patents which contain claims applicable to our
products. We are aware that AstraZeneca PLC has acquired the rights to a patent,
which has been issued in Europe and other countries, that may interfere with our
ability to develop some of our technologies related to autoimmune disease if the
patent is upheld after current opposition proceedings. This patent, and others
that we are not aware of, may adversely affect our ability to develop and
commercialize products.
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. We also rely upon unpatented trade secrets and know how, and others
may independently develop substantially equivalent trade secrets or know how.
We also rely on protecting our proprietary technology in part through
confidentiality agreements with our corporate collaborators, employees,
consultants and certain contractors. These agreements may be breached and we may
not have adequate remedies for any breach. In addition, our trade secrets may
otherwise become known or independently discovered by our competitors.
Our products and processes may infringe, or be found to infringe on, patents not
owned or controlled by us, such as the patent owned by AstraZeneca PLC. If
relevant claims of third-party patents are upheld as valid and enforceable, we
could be prevented from practicing the subject matter claimed in the patents, or
would be required to obtain licenses or redesign our products or processes to
avoid infringement. Licenses may not be available at all or on commercially
reasonable terms, and we may not be able to redesign our products or processes
to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
our patents or to protect trade secrets. Litigation could result in substantial
costs and diversion of management efforts regardless of the results of the
litigation. An adverse result in litigation could subject us to significant
liabilities to third parties, require disputed rights to be licensed or require
us to cease using certain technologies.
OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS
As of September 30, 2000 we had a consolidated accumulated deficit of $197.8
million. We have not generated revenues from the commercialization of any
product. We expect to incur substantial net operating losses over the next
several years, which may imperil our ability to continue operations. We may not
be able to generate sufficient product revenue to become profitable on a
sustained basis, or at all.
THE LENGTHY PRODUCT APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS
Clinical testing, manufacture, promotion and sale of our products are subject to
extensive regulation by numerous governmental authorities in the United States,
principally the FDA, and corresponding state and foreign regulatory
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agencies. This regulation may delay or prevent us from commercializing 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. We may not
receive necessary FDA clearances for any of our potential products in a timely
manner, or at all. The length of the clinical trial process 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 our products is uncertain.
Even if additional clinical trials of REMUNE are successfully completed, the FDA
may not approve REMUNE for commercial sale. We may encounter significant delays
or excessive costs in our efforts to secure necessary approvals. Regulatory
requirements are evolving and uncertain. Future United States or foreign
legislative or administrative acts could also prevent or delay regulatory
approval of our products. We may not be able to obtain the necessary approvals
for clinical trials, manufacturing or marketing of any of our 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.
Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices, or
GMP. 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 products meet applicable specifications and other
requirements. Failure to comply with the FDA's GMP requirements subjects
manufacturers to possible FDA regulatory action. We or our contract
manufacturers, if any, may not be able to maintain compliance with the FDA's GMP
requirements on a continuing basis. Failure to maintain compliance could have a
material adverse effect on us.
The FDA has not designated expanded access protocols for REMUNE as "treatment"
protocols. The FDA may not determine that REMUNE meets all of the FDA's criteria
for use of an investigational drug for treatment use. Even if REMUNE is allowed
for treatment use, third party payors may not provide reimbursement for the
costs of treatment with REMUNE.
The FDA may not consider REMUNE or any other of our products under development
to be an appropriate candidate for accelerated approval, expedited review or
fast track designation.
Marketing any drug products outside of the United States will subject us to
numerous and varying foreign regulatory requirements governing the design and
conduct of human clinical trials and marketing approval. Approval procedures
vary among countries and can involve additional testing, and the time required
to obtain approval may differ from that required to obtain FDA approval. Foreign
regulatory approval processes include 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 MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE
The biotechnology industry continues to undergo rapid change and competition is
intense and expected to increase. Competitors may succeed in developing
technologies and products that are more effective or affordable than any that we
are developing or that would render our technology and products obsolete and
noncompetitive. Many of our competitors have substantially greater experience,
financial and technical resources and production, marketing and development
capabilities than us. Accordingly, some of our competitors may succeed in
obtaining regulatory approval for products more rapidly or effectively than us.
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OUR LACK OF COMMERCIAL MANUFACTURING AND MARKETING EXPERIENCE MAY PREVENT US
FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS
We have not manufactured any of our product candidates in commercial quantities.
We may not successfully make the transition from manufacturing clinical trial
quantities to commercial production quantities or be able to arrange for
contract manufacturing and this could prevent us from commercializing products.
Even if REMUNE is successfully developed and receives FDA approval, we have not
demonstrated the capability to manufacture REMUNE in commercial quantities.
Except for REMUNE, we have not demonstrated the ability to manufacture our
treatments in large-scale clinical quantities either. We rely on a third party
for the final inactivation step of the REMUNE manufacturing process. If the
existing manufacturing operations prove inadequate, there can be no assurance
that any arrangement with a third party can be established on a timely basis, or
that we can establish other manufacturing capacity on a timely basis.
We have no experience in the sales, marketing or distribution of pharmaceutical
products. Thus, our products may not be successfully commercialized even if they
are developed and approved for commercialization.
The manufacturing process of our products involves a number of steps and
requires compliance with stringent quality control specifications imposed by us
and by the FDA. Moreover, our products can only be manufactured in a facility
that has undergone a satisfactory inspection by the FDA. For these reasons, we
would not be able to quickly replace our manufacturing capacity if we were
unable to use our 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 GMP requirements and
the non-compliance could not be rapidly rectified. Our inability or reduced
capacity to manufacture our products would prevent us from successfully
commercializing products.
We may enter into arrangements with contract manufacturing companies to expand
our own production capacity in order to meet requirements for our products, or
to attempt to improve manufacturing efficiency. If we choose to contract for
manufacturing services and encounter delays or difficulties in establishing
relationships with manufacturers to produce, package and distribute our finished
products, it may result in delay of clinical trials, market introduction and
subsequent sales of the products. Further, contract manufacturers must also
operate in compliance with the FDA's GMP requirements; failure to do so could
result in, among other things, the disruption of product supplies. Our potential
dependence upon third parties for the manufacture of our products may adversely
affect our profit margins and our ability to develop and deliver products on a
timely and competitive basis.
ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS
Our ability to earn sufficient returns on our products will depend in part on
the extent to which reimbursement for the costs of the products and related
treatments will be available from government health administration authorities,
private health coverage insurers, managed care organizations and other
organizations. Failure to obtain appropriate reimbursement could prevent us from
successfully commercializing products. Third party payors are increasingly
challenging the price of medical products and services. If purchasers or users
of our products are not able to obtain adequate reimbursement for the cost of
using the products, they may forego or reduce their use. Significant uncertainty
exists as to the reimbursement status of newly approved health care products and
whether adequate third party coverage will be available.
PRODUCT LIABILITY EXPOSURE MAY EXPOSE US TO SIGNIFICANT LIABILITY
We face an inherent business risk of exposure to product liability and other
claims in the event that the development or use of our technology or prospective
products is alleged to have resulted in adverse effects. We may not avoid
significant liability exposure. We may not have sufficient insurance coverage,
and we may not be able to obtain sufficient coverage at a reasonable cost. An
inability to obtain product liability insurance at an acceptable cost or to
otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of our products. A product liability claim could
hurt our financial performance. Even if we avoid liability exposure, significant
costs could be incurred that could hurt our financial performance.
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HAZARDOUS MATERIALS AND ENVIRONMENTAL MATTERS COULD EXPOSE US TO SIGNIFICANT
COSTS
Although we do not currently manufacture commercial quantities of our product
candidates, we produce limited quantities of these products for our clinical
trials. We may be required to incur significant costs to comply with current or
future environmental laws and regulations. Our research and development
processes involve the controlled storage, use and disposal of hazardous
materials, biological hazardous materials and radioactive compounds. We are
subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of these materials and some waste
products. Although we believe that our safety procedures for handling and
disposing of these materials comply with the standards prescribed by these laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of an accident, we could
be held liable for any damages that result, and any liability could exceed our
resources. Our operations, business or assets may be materially and adversely
affected by current or future environmental laws or regulations.
SUBORDINATION OF COMMON STOCK TO PREFERRED STOCK COULD HURT COMMON STOCKHOLDERS
Our common stock is expressly subordinate to our Series F Convertible Preferred
Stock in the event of our liquidation, dissolution or winding up. If we were to
cease operations and liquidate our 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.
YOU COULD SUFFER SUBSTANTIAL DILUTION OF YOUR INVESTMENT IF OUR PREFERRED STOCK
IS CONVERTED INTO COMMON STOCK OR CERTAIN OPTIONS OR WARRANTS TO PURCHASE COMMON
STOCK ARE EXERCISED
In 1998 we sold 200 shares of Series F Convertible Preferred Stock, or Series F
Stock, in return for gross proceeds of $10 million. These shares of Series F
Stock are currently convertible into at least 2.4 million shares of our common
stock, which number is subject to increase if our common stock does not meet
certain specified price trading levels. Additionally, on April 24, 2001 we will
be required to redeem the Series F Stock in either cash or in shares of our
common stock. Further, as of September 30, 2000 we had reserved 6.3 million
shares of our common stock for potential issuances upon the exercise of stock
options and warrants and payment of dividends on the Series F Stock. Issuance of
any of these additional shares could substantially dilute your interest in our
company.
VOLATILITY OF STOCK PRICE AND ABSENCE OF DIVIDENDS MAY HURT COMMON STOCKHOLDERS
The market price of our 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 following could have a significant adverse impact on the
market price of our common stock:
- the results of preclinical studies and clinical trials by us, our
collaborators or our competitors;
- concern as to, or other evidence of, the safety or efficacy of our products
or our competitors products;
- announcements of technological innovations or new products by us or our
competitors;
- governmental regulatory actions;
- actual or anticipated changes in drug reimbursement policies;
- developments with our collaborators;
- developments concerning patent or other proprietary rights of ours or our
competitors (including litigation);
- period-to-period fluctuations in our operating results;
- changes in estimates of our performance by securities analysts;
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- market conditions for biopharmaceutical stocks in general; and
- other factors not within our control
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR REPORTED RESULTS OF
OPERATIONS
We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the Securities and Exchange
Commission and various bodies formed to interpret and create appropriate
accounting policies. A change in those policies can have a significant effect on
our reported results and may even affect our reporting of transactions completed
before a change is announced. Accounting policies affecting many other aspects
of our business, including rules relating to purchase and pooling-of-interests
accounting for business combinations, employee stock option grants and revenue
recognition have recently been revised or are under review. Changes to those
rules or the questioning of current practices may adversely affect our reported
financial results or the way we conduct our business. To date there have been no
changes in financial reporting that have affected our results of operations. In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101 - "Revenue Recognition in Financial Statements." The
bulletin draws on existing accounting rules and provides specific guidance on
how those accounting rules should be applied and specifically addresses revenue
recognition for non-refundable technology access fees in the biotechnology
industry. Adoption of SAB No. 101 is required in the fourth quarter of fiscal
year 2000. The Company has not completed its evaluation of the impact of SAB No.
101 on its financial statements. However, the cumulative impact is expected to
be in a pre-tax range of approximately $10 million to $15 million charged to the
Company's results of operations in the first quarter of fiscal year 2000.
In addition, our preparation of financial statements in accordance with GAAP
requires that we make estimates and assumptions that affect the recorded amounts
of assets and liabilities, disclosure of those assets and liabilities and at the
date of the financial statements and the recorded amounts of expenses during the
reporting period. A change in the facts and circumstances surrounding those
estimates could result in a change to our estimates and could impact our future
operating results.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS INCLUDE PROVISIONS THAT COULD MAKE
ATTEMPTS BY STOCKHOLDERS TO CHANGE MANAGEMENT MORE DIFFICULT
The approval of 66 2/3 percent of our 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, such as those providing for a classified board of
directors, contained in our certificate of incorporation. The practical effect
of these provisions is to make attempts by stockholders to change management
more difficult.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest our excess cash primarily in U.S. government securities and money
market accounts. These instruments have maturities of two years or less when
acquired. We do not utilize derivative financial instruments, derivative
commodity instruments or other market risk sensitive instruments, positions or
transactions. Accordingly, we believe that, while the instruments we hold are
subject to changes in the financial standing of the issuer of such securities,
we are not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices, equity prices or other market
changes that affect market risk sensitive instruments.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2000, the Company initiated binding arbitration proceedings in a
claim against the University of California San Francisco and a member of its
faculty, Dr. James Kahn. The principal basis for the arbitration is over the
public disclosure of clinical data by Dr. Kahn, which the Company believes is
subject to customary confidentiality obligations under the terms of a Research
Agreement and an Investigational Site Agreement.
ITEM 2. CHANGES IN SECURITIES
On September 28, 2000, a registration statement on Form S-3 (No. 333-46872) was
filed with the Securities and Exchange Commission pursuant to which the company
proposes to register 1,317,609 shares of common stock for sale to the public by
Agouron Pharmaceuticals, Inc.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.76 Fifth Amendment to the Lease dated as of May 22, 1989, between
the Company and BDN Carlsbad #1 Limited Partnership.
27 Financial Data Schedule
b) Reports on Form 8-K
A report on Form 8-K dated August 7, 2000 was filed by The Immune Response
Corporation reporting under Item 7., Financial Statements and Exhibits, to
disclose and file as an exhibit the Underwriting Agreement entered into by
the Company with First Security Van Kasper, Inc. and Gruntal & Co. LLC.
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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 14, 2000 /s/ Howard Sampson
-------------------------------------
Howard Sampson
Vice President, Finance
Chief Financial Officer
Secretary and Treasurer
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