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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-19311
IDEC PHARMACEUTICALS CORPORATION
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(Exact name of registrant as specified in its charter)
California 33-0112644
- ------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Torreyana Road, San Diego, CA 92121
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(Address of principal executive offices) (Zip code)
(619) 550-8500
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(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
--- ---
As of April 30, 1997, the Registrant had 18,698,376 shares of its common stock,
no par value issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<S> <C>
Condensed Consolidated Balance Sheets -- March 31, 1997 and December 31, 1996............. 1
Condensed Consolidated Statements of Operations -- Three months ended
March 31, 1997 and 1996 .................................................................. 2
Condensed Consolidated Statements of Cash Flows -- Three months ended
March 31, 1997 and 1996 .................................................................. 3
Notes to Condensed Consolidated Financial Statements ..................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................... 12
Item 2. Changes in Securities ................................................................... 12
Item 3. Defaults upon Senior Securities ......................................................... 12
Item 4. Submission of Matters to a Vote of Shareholders ......................................... 12
Item 5. Other Information ....................................................................... 12
Item 6. Exhibits and Reports on Form 8-K ........................................................ 12
</TABLE>
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,855 $ 25,337
Securities available-for-sale 52,228 53,390
Current portion of note receivable 847 804
Contract research revenue receivables 1,778 3,635
License fees receivable 4,075 --
Due from related party -- 1,532
Inventories 6,198 4,384
Prepaid expenses and other current assets 2,622 2,533
--------- ---------
Total current assets 85,603 91,615
Property and equipment, net 23,352 21,453
Note receivable, less current portion 213 445
Deposits and other assets 390 316
--------- ---------
$ 109,558 $ 113,829
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,752 $ 3,830
Accounts payable 1,787 3,106
Accrued expenses 6,080 6,751
--------- ---------
Total current liabilities 11,619 13,687
Notes payable, less current portion 4,178 5,015
Deferred rent 1,710 1,513
Due from related party 1,000 1,000
Shareholders' equity:
Convertible preferred stock, no par value 19,649 26,586
Common stock, no par value 156,261 148,597
Additional paid-in capital 1,283 1,283
Unrealized losses on securities available-for-sale (95) (37)
Accumulated deficit (86,047) (83,815)
--------- ---------
Total shareholders' equity 91,051 92,614
--------- ---------
$ 109,558 $ 113,829
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Contract research revenues $ 2,664 $ 2,936
License fees 4,000 7,000
-------- --------
6,664 9,936
Operating expenses:
Research and development 7,474 5,641
Selling, general and administrative 2,208 1,854
-------- --------
9,682 7,495
-------- --------
Income (loss) from operations (3,018) 2,441
Interest income (expense), net 786 (594)
-------- --------
Net income (loss) $ (2,232) $ 1,847
======== ========
Net income (loss) per share $ (0.12) $ 0.10
======== ========
Shares used in computing net income (loss) per share 18,195 19,121
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net cash used in operating activities $ (5,644) $ (3,394)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,755) (258)
Purchase of securities available-for-sale (14,361) (5,977)
Sales and maturities of securities available-for-sale 15,465 3,830
-------- --------
Net cash used in investing activities (1,651) (2,405)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable -- 779
Payments on notes payable (914) (847)
Proceeds from issuance of common stock 727 563
Proceeds from issuance of convertible preferred stock -- 5,000
-------- --------
Net cash provided by (used in) financing activities (187) 5,495
-------- --------
Net decrease in cash and cash equivalents (7,482) (304)
Cash and cash equivalents, beginning of period 25,337 18,828
-------- --------
Cash and cash equivalents, end of period $ 17,855 $ 18,524
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The information at March 31, 1997, and for the three-month periods ended
March 31, 1997 and 1996, is unaudited. In the opinion of management, these
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results for the interim
periods presented. Interim results are not necessarily indicative of results for
a full year. These financial statements should be read in conjunction with IDEC
Pharmaceuticals Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996, which was filed with the United States Securities and
Exchange Commission on March 31, 1997.
Net Income (Loss) Per Share
Net income per share is computed in accordance with the treasury stock
method. Net income per share is based upon the weighted average number of common
shares and dilutive common stock equivalents during the period in which they are
outstanding. Common stock equivalents include outstanding stock options under
the Company's stock option plans, outstanding warrants to purchase the Company's
common stock and outstanding convertible preferred stock convertible into shares
of the Company's common stock. Dual presentation of primary and fully diluted
net income per share is not shown on the face of the statements of operations
because the differences are insignificant. Computations of net loss per share
use the weighted average number of common shares outstanding. Common equivalent
shares from common stock options, warrants and convertible preferred stock are
excluded from the computations as their effect is anti-dilutive.
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("Statement No.
128"). Statement No. 128 supersedes Accounting Principles Board Opinion No. 15
("APB No. 15") and replaces "primary" and "fully diluted" earnings per share
("EPS") under APB No. 15 with "basic" and "diluted" EPS. Unlike primary EPS,
basic EPS excludes the dilutive effects of options, warrants and other
convertible securities. Dilutive EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted EPS. Statement No. 128 is effective for years ending after December 15,
1997. The Company is currently evaluating the impact of the implementation of
Statement No. 128.
NOTE 2. CONTINGENCIES
In February 1997, the Company acquired worldwide rights from Pharmacia &
Upjohn S.p.A. to 9-aminocamptothecin, a broad spectrum anti-cancer agent. Under
the terms of the agreement, the Company will reimburse Pharmacia & Upjohn for a
portion of their development costs by making an initial payment of $3.0 million.
No royalties are payable to Pharmacia & Upjohn under the agreement. Completion
of the transaction is awaiting approval by the United States Federal Trade
Commission and, therefore, no costs to acquire the technology rights have been
included in the condensed consolidated financial statements as of March 31,
1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
IDEC Pharmaceuticals Corporation (the "Company") is primarily engaged in the
research and development of targeted immunotherapies for the treatment of cancer
and autoimmune and inflammatory diseases. To date, the Company has not received
any revenues from the commercial sale of its products. The Company has funded
its operations primarily through the sale of equity securities as well as
through contract research and license fee revenues received in connection with
collaborative arrangements entered into with the Company's strategic partners.
The Company has incurred increasing annual operating expenses and, as the
Company prepares for product commercialization, it expects such trends to
continue. The Company has incurred annual operating losses since its inception
in 1985, and anticipates that such operating losses will continue for at least
the next one to two years. As of March 31, 1997, the Company had an accumulated
deficit of $86.0 million.
RESULTS OF OPERATIONS
License fees for the three months ended March 31, 1997 totaled $4.0 million,
compared to $7.0 million for the comparable period in 1996. License fees for the
quarter ended March 31, 1997 consisted of an initial payment from Boehringer
Ingelheim GmbH for the license of the Company's proprietary vector technology
for high expression of recombinant proteins in mammalian cells. License fees for
the three months ended March 31, 1996 include $4.5 million received for a
parallel vector technology license to Chugai Pharmaceutical Co., Ltd., $1.5
million from Genentech, Inc. for the expansion of its collaboration with the
Company to include two radioconjugates, IDEC-Y2B8 and IDEC-In2B8 for the
treatment and imaging, respectively, of B-cell lymphomas and $1.0 million from
Seikagaku Corporation for the achievement of a product development milestone
event. The Company continues to pursue other collaborative and license
arrangements; however, no assurance can be given that discussions in this regard
will result in any such arrangements or that the Company will receive
significant revenues from any such collaborative or license arrangements.
Research and development expenses totaled $7.5 million for the three months
ended March 31, 1997, compared to $5.6 million for the comparable period in
1996. The change in research and development expenses is primarily due to
increased personnel and other costs related to submission of a Biologics License
Application for the Company's lead product candidate, IDEC-C2B8 (rituximab),
increased costs for additional leased office and warehouse facilities and a
decrease in clinical costs due to the completion of a Phase III trial for
IDEC-C2B8 in 1996. The Company expects to continue incurring substantial
additional research and development costs in the future, due to expansion or
addition of research and development programs; patent- and regulatory-related
costs; preclinical and clinical testing of the Company's various products under
development; production scale-up and manufacturing of products used in clinical
trials; and manufacturing costs related to IDEC-C2B8.
General and administrative expenses totaled $2.2 million for the three months
ended March 31, 1997, compared to $1.9 million for the comparable period in
1996. General and administrative expenses increased in 1997 due to higher
personnel costs to support expanded manufacturing operations and initial costs
incurred for the creation of a marketing and sales organization. General and
administrative costs necessary to support expanded manufacturing capacity,
expanded clinical trials, research and development and the creation of a
marketing and sales organization are expected to increase in the foreseeable
future.
Net interest income totaled $0.8 million for the three months ended March 31,
1997, compared to net interest expense of $0.6 million during the comparable
period in 1996. The increase in net interest income in 1997 from net interest
expense in 1996 is due to higher balances in cash, cash equivalents and
securities available-for-sale, a decrease in noncash interest charges for common
stock warrants issued in connection with certain debt financings and a decrease
in interest expense due to lower balances in notes payable.
5
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LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures since
inception principally through the sale of equity securities, license fees,
contract research revenues, lease financing transactions and interest income.
The Company expects to finance its current and planned operating requirements
principally through cash on hand and with funds from existing collaborative
agreements and contracts which the Company believes will be sufficient to meet
its near-term operating requirements. Existing agreements and contracts,
however, could be canceled by the contracting parties. In addition, the Company
may pursue additional capital through a combination of new collaborative
agreements, strategic alliances and equity and debt financings. However, no
assurance can be provided that additional capital will be obtained through these
sources on favorable terms or at all. Should the Company not enter into any such
arrangements, the Company anticipates its cash, cash equivalents and securities
available-for-sale, together with the existing agreements and contracts, will
be sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures through early commercialization of its first product.
If adequate funds are not available from additional sources of financing, or if
the commercialization of IDEC-C2B8 is delayed, the Company's business could be
adversely affected.
The Company's working capital and capital requirements will depend upon
numerous factors, including the progress of the Company's preclinical and
clinical testing; manufacturing; research and development programs; timing and
cost of obtaining regulatory approvals; levels of resources that the Company
devotes to the development of manufacturing and marketing capabilities;
technological advances; status of competitors; and the ability of the Company to
establish collaborative arrangements with other organizations.
Until required for operations, the Company's policy under established
guidelines is to keep its cash reserves in bank deposits, certificates of
deposit, commercial paper, corporate notes, United States government instruments
and other readily marketable debt instruments, all of which are investment-grade
quality.
At March 31, 1997, the Company had $70.1 million in cash, cash equivalents
and securities available-for-sale compared to cash, cash equivalents and
securities available-for-sale of $78.7 million at December 31, 1996. Sources of
cash, cash equivalents and securities available-for-sale during the three months
ended March 31, 1997 include $0.7 million from the exercise of employee stock
options and from common stock issued under an employee stock purchase plan. Uses
of cash, cash equivalents and securities available-for-sale during the three
months ended March 31, 1997, included $5.6 million used in operations, $2.8
million used for leasehold improvements for clinical manufacturing, additional
office and warehouse facilities and to purchase capital equipment and $0.9
million used to pay notes payable.
In February 1997, the Company acquired worldwide rights from Pharmacia &
Upjohn S.p.A. to 9-aminocamptothecin, a broad spectrum anti-cancer agent. Under
the terms of the agreement, the Company will reimburse Pharmacia & Upjohn for a
portion of their development costs by making an initial payment of $3.0 million.
No royalties are payable to Pharmacia & Upjohn under the agreement. Completion
of the transaction is awaiting approval by the United States Federal Trade
Commission and, therefore, the acquisition costs for these technology rights
have not been included in the condensed consolidated financial statements as of
March 31, 1997.
In August 1995, the Company completed receipt of funding under a $10.0
million lease financing agreement to finance both equipment and facility
improvements. Terms of the financing agreement require final principal payments
of $1.1 million and $0.4 million in July 1998 and January 1999, respectively.
This quarterly report contains predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this outlook represents our current judgment on the future direction of
the business, such risks and uncertainties could cause actual results to differ
materially from any future performance suggested above. The Company undertakes
no obligation to release publicly the results of any revisions to these
forward-looking statements to reflect events or circumstances arising after the
date hereof other than as required by the Securities and Exchange Act of 1934.
6
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RISK FACTORS
Lengthy Regulatory Process; No Assurance of Regulatory Approvals
The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of IDEC Pharmaceuticals Corporation's ("IDEC
Pharmaceuticals" or the "Company") products are subject to extensive regulation
by governmental authorities in the United States and other countries. In the
United States, pharmaceutical products are regulated by the United States Food
and Drug Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act
and other laws, including, in the case of biologics, the Public Health Service
Act. At the present time, with the exception of 9-aminocamptothecin, the Company
believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulations.
The steps required before a biologic may be approved for marketing in the
United States generally include (i) preclinical laboratory tests and animal
tests, (ii) the submission to the FDA of an Investigational New Drug application
("IND") for human clinical testing, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product, (iv) the submission
to the FDA of a Biological License Application ("BLA"), (v) FDA review of the
BLA, and (vi) satisfactory completion of a FDA inspection of the manufacturing
facility or facilities at which the product is made to assess compliance with
Current Good Manufacturing Practices ("cGMP"). The testing and approval process
requires substantial time, effort and financial resources and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
FDA may suspend clinical trials at any time on various grounds, including a
finding that the subjects or patients are being exposed to an unacceptable
safety risk.
The results of the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a BLA requesting approval to market the
product. Before approving a BLA, the FDA will inspect the facilities at which
the product is manufactured, and will not approve the product unless cGMP
compliance is satisfactory. The FDA may deny a BLA if applicable regulatory
criteria are not satisfied, may require additional testing or information,
and/or may require postmarketing testing and surveillance to monitor the safety
or efficacy of a product. There can be no assurance that FDA approval of any BLA
submitted by the Company will be granted on a timely basis, if at all. Also, if
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
Both before and after approval is obtained, violations of regulatory
requirements, may result in various adverse consequences, including the FDA's
delay in approving or refusal to approve a product, withdrawal of an approved
product from the market, and/or the imposition of criminal penalties against the
manufacturer and/or license holder. For example, license holders are required to
report certain adverse reactions to the FDA, and to comply with certain
requirements concerning advertising and promotional labeling for their products.
Also, quality control and manufacturing procedures must continue to conform to
cGMP regulations after approval, and the FDA periodically inspects manufacturing
facilities to assess compliance with cGMP. Accordingly, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to maintain cGMP compliance. In addition, discovery of problems may
result in restrictions on a product, manufacturer or holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.
The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, the Company intends, to the extent possible,
to rely on foreign licensees, other than in Canada, to obtain regulatory
approval for marketing its products in foreign countries.
In February 1997, the Company and Genentech, Inc. ("Genentech") submitted
BLAs to the FDA for IDEC-C2B8 (rituximab) as a single agent therapy for the
treatment of relapsed low grade or follicular non-Hodgkin's lymphoma. F.
Hoffmann-La Roche Ltd ("Hoffmann-La Roche"), also submitted, through one of its
subsidiaries in the European Union, a Marketing Authorization Application
("MAA") with the European Medicines Evaluation Agency ("EMEA") for marketing
IDEC-C2B8 in Europe. There can be no assurance that the FDA and the EMEA
approval of the BLAs and MAA submitted by the Company, Genentech and
Hoffmann-La Roche will be granted on
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a timely basis, if at all, and delays in receipt or failure to receive
regulatory approval could have a material adverse effect on the Company's
business, financial condition and results of operations.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects fewer than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting a BLA. After the FDA
grants orphan drug designation, the generic identity of the therapeutic agent
and its potential orphan use are publicly disclosed by the FDA. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process. If a product that has an orphan drug
designation subsequently receives FDA approval for the indication for which it
has such designation, the product is entitled to orphan exclusivity, i.e., the
FDA may not approve any other applications to market the same drug for the same
indication, except in certain very limited circumstances, for a period of seven
years.
In 1994, the Company obtained orphan drug designation for IDEC-C2B8,
IDEC-Y2B8 and IDEC-In2B8 from the FDA to treat low grade B-cell lymphoma. There
can be no assurance that any of these compounds will receive orphan exclusivity
for the low grade B-cell lymphoma indication, and it is possible that
competitors of the Company could obtain approval, and attendant orphan drug
exclusivity, for these same compounds for the low grade B-cell lymphoma
indication, thus precluding the Company from marketing its products for the same
indication in the United States. In addition, even if the Company does obtain
orphan exclusivity for any of its compounds for low grade B-cell lymphoma, there
can be no assurance that competitors will not receive approval of other,
different drugs or biologics for low grade B-cell lymphoma. Although obtaining
FDA approval to market a product with orphan drug exclusivity can be
advantageous, there can be no assurance that the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug
designation will remain in effect in the future.
Uncertainties Associated with Clinical Trials
The Company has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety, efficacy and applicability of its
potential products. The rate of completion of the Company's clinical trials is
dependent upon, among other factors, the rate of patient enrollment. Patient
enrollment is a function of many factors, including the nature of the Company's
clinical trial protocols, existence of competing protocols, size of the patient
population, proximity of patients to clinical sites, changes in managed care and
eligibility criteria for the study. Delays in patient enrollment will result in
increased costs, which could have a material adverse effect on the Company. The
Company cannot ensure that patients enrolled in the Company's clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the FDA regulations
applicable to such testing can result in delay, suspension or cancellation of
such testing, and/or refusal by the FDA to accept the results of such testing.
In addition, the FDA may suspend clinical trials at any time if it concludes
that the subjects or patients participating in such trials are being exposed to
unacceptable health risks. Thus, there can be no assurance that Phase I, Phase
II or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's potential products.
Further, there can be no assurance that human clinical testing will show any
current or future product candidate to be safe and effective or that data
derived therefrom will be suitable for submission to the FDA or will support the
Company's submission of a BLA.
Reliance on Third Party Development and Marketing Efforts
The Company has adopted a research, development and product commercialization
strategy that is dependent upon various arrangements with strategic partners and
others. The success of the Company's products is substantially dependent upon
the success of these outside parties in performing their obligations, which
include, but are not limited to, providing funding, performing research and
development, fulfilling long term manufacturing demands and marketing,
distribution and sales with respect to the Company's products. The Company's
strategic partners may also develop products that may compete with the Company.
Although the Company believes that its partners have an economic incentive to
succeed in performing their contractual obligations, the amount and timing of
resources that they devote to these activities is not within the control of the
Company. There can be no assurance that these parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements. The Company has entered into collaborative research and
development and license agreements with Genentech, Zenyaku Kogyo, Ltd.
("Zenyaku"), SmithKline Beecham p.l.c. ("SmithKline Beecham"), Mitsubishi
Chemical Corporation ("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and
Eisai Co., Ltd. ("Eisai"). These agreements generally may be terminated at any
time by the strategic partner, typically on short notice to the
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Company. If one or more of these partners elect to terminate their
relationship with the Company, or if the Company or its partners fail to achieve
certain milestones, it could have a material adverse effect on the Company's
ability to fund the related programs and to develop any products that may have
resulted from such collaborations. There can be no assurance that these
collaborations will be successful. In addition, some of the Company's current
partners have certain rights to control the planning and execution of product
development and clinical programs, and there can be no assurance that such
partners' rights to control aspects of such programs will not impede the
Company's ability to conduct such programs in accordance with the schedules
currently contemplated by the Company for such programs and will not otherwise
impact the Company's strategy.
Limited Manufacturing Experience and Dependence on Contact Manufacturer
The Company has not yet commercialized any therapeutic products. To conduct
clinical trials on a timely basis, to obtain regulatory approval and to be
commercially successful, the Company must manufacture its products either
directly or through third parties in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. Although the Company has
produced its products in the laboratory, scaled its production process to pilot
levels and has the ability to manufacture limited commercial quantities of
certain of its products, the Company has not received regulatory approval for
such commercial production. The Company anticipates that production of its
products in commercial quantities will create technical as well as financial
challenges for the Company. The Company has limited experience in manufacturing,
and no assurance can be given as to the ultimate performance of the Company's
manufacturing facility in San Diego, its suitability for approval for commercial
production or the Company's ability to make a successful transition to
commercial production.
The Company is dependent upon Genentech to fulfill long term manufacturing
demands for its IDEC-C2B8 product and SmithKline Beecham to fulfill all of the
manufacturing requirements for IDEC-CE9.1. Genentech is currently constructing a
larger manufacturing plant to satisfy such long term demands. The Company is
considering the addition of another manufacturing facility to meet its long term
requirements for additional products under development. Failure by the Company
or its strategic partners to establish additional manufacturing capacity on a
timely basis would have a material adverse effect on the Company.
In November 1996, the Company contracted with Covance Biotechnology Services,
Inc. ("Covance") for the manufacture of the Company's antibody used in its
IDEC-Y2B8 and IDEC-In2B8 products, which are radiolabeled for the treatment of
non-Hodgkin's lymphoma. The Company is also developing this product in
partnership with Genentech. The Company is dependent upon Covance to fulfill its
manufacturing demands for clinical quantities of IDEC-Y2B8 and IDEC-In2B8. There
can be no assurance that Covance will be able to complete any such manufacturing
contract in a timely or cost-effective manner, if at all, or that the Company
could obtain such capacity from others. Failure by Covance to meet the Company's
manufacturing needs will result in delayed clinical trials for IDEC-Y2B8 and
IDEC-In2B8 and may have a material adverse effect on the Company.
Patents and Proprietary Rights
The Company's success will depend, in large part, on its ability to maintain
a proprietary position in its products through patents, trade secret and orphan
drug designation. The Company has title or exclusive rights to one issued and
nine allowed United States patents, 33 United States patent applications and
numerous corresponding foreign patent applications, and has licenses to patents
or patent applications of other entities. No assurance can be given, however,
that the patent applications of the Company or the Company's licensors will be
issued or that any issued patents will provide competitive advantages for the
Company's products or will not be successfully challenged or circumvented by its
competitors. Moreover, there can be no assurance that any patents issued to the
Company or the Company's licensors will not be infringed by others or will be
enforceable against others. In addition, there can be no assurance that the
patents, if issued, would not be held invalid or unenforceable by a court of
competent jurisdiction. Enforcement of the Company's patents may require
substantial financial and human resources. Moreover, the Company may have to
participate in interference proceedings if declared by the United States Patent
and Trademark Office to determine priority of inventions, which typically take
several years to resolve and could result in substantial cost to the Company.
A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, competitors may have filed applications for or have been issued
patents and are likely to obtain additional patents and proprietary rights
relating to products or processes competitive with or similar to those of the
Company. To date, no consistent policy has emerged regarding the
9
<PAGE> 12
breadth of claims allowed in biopharmaceutical patents, however, patents may
issue with claims that conflict with the Company's own patent filings or read on
its own products. There can be no assurance that patents do not already exist in
the United States or in foreign countries or that patents will not be issued
that would entail substantial costs to challenge and that, if unsuccessfully
challenged, would have a material adverse effect on the Company's ability to
market its products. Specifically, the Company is aware of several patents and
patent applications which may affect the Company's ability to make, use and sell
its products. Accordingly, the Company expects that commercializing monoclonal
antibody-based products may require licensing and/or cross-licensing of patents
with other companies in this field. There can be no assurance that the licenses,
which might be required for the Company's processes or products, would be
available, if at all, on commercially acceptable terms. The ability to license
any such patents and the likelihood of successfully contesting infringement or
validity of such patents are uncertain and the costs associated therewith may be
significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture or market its products would be materially adversely affected.
The owners, or licensees of the owners, of these patents may assert that one
or more of the Company's products infringe one or more claims of such patents.
If legal action is commenced against the Company to enforce any of these patents
and the plaintiff in such action prevails, the Company could be prevented from
practicing the subject matter claimed in such patents. In such event or under
other appropriate circumstances, the Company may attempt to obtain licenses to
such patents. However, no assurance can be given that any owner would license
the patents to the Company at all or on terms that would permit
commercialization of the Company's products. An inability to commercialize such
products could have a material adverse effect on the Company's operations and
ability to pursue its long term objectives.
Additional Financing Requirements and Uncertain Access to Capital
Markets
The Company has expended and will continue to expend substantial funds to
complete the research, development, manufacturing and marketing of its products.
The Company may seek additional funding for these purposes through a combination
of new collaborative arrangements, strategic alliances, additional equity or
debt financings or from other sources. There can be no assurance that such
additional funds will be available on acceptable terms, if at all. Even if
available, the cost of funds may result in substantial dilution to current
shareholders. If adequate funds are not available from operations or additional
sources of financing, the Company's business could be materially and adversely
affected.
Limited Sales and Marketing Experience
Commercialization of the Company's products is expensive and time-consuming.
The Company has adopted a strategy of pursuing collaborative agreements with
strategic partners that provide for co-promotion of certain of the Company's
products. In the event that the Company elects to participate in co-promotion
efforts in the United States or Canada, and, in those instances where the
Company has retained exclusive marketing rights in specified territories, the
Company will need to build a sales and marketing capability in the targeted
markets. The Company currently has limited marketing and sales personnel. There
can be no assurance that the Company will be able to establish a successful
direct sales and marketing capability in any or all targeted markets or that it
will be successful in gaining market acceptance for its products. To the extent
that the Company enters into co-promotion or other licensing arrangements, any
revenues received by the Company will be dependent on the efforts of third
parties and there can be no assurance that such efforts will be successful.
Outside of the United States and Canada, the Company has adopted a strategy to
pursue collaborative arrangements with established pharmaceutical companies for
marketing, distribution and sale of its products. There can be no assurance that
any of these companies or their sublicensees will successfully market,
distribute or sell the Company's products or that the Company will be able to
establish and maintain successful co-promotion or distribution arrangements.
Failure to establish a sales capability in the United States or outside the
United States may have a material adverse effect on the Company.
History of Operating Losses; Accumulated Deficit
The Company has incurred annual operating losses since its inception in 1985.
As of March 31, 1997, the Company's accumulated deficit was approximately $86.0
million. Depending on the commercial success of IDEC-C2B8, the Company
anticipates that it will continue to incur operating losses over at least the
next one to two years. Such losses have been and will be principally the result
of the various costs associated with the Company's research and development,
clinical and manufacturing activities. The Company has not generated operating
profits
10
<PAGE> 13
from the sale of its products. All revenues to date have resulted from
collaborative research, development and licensing arrangements, contract
manufacturing arrangements, research grants and interest income. The Company has
no products approved by the FDA or any foreign authority and does not expect to
achieve profitable operations on an annual basis unless product candidates now
under development receive FDA or foreign regulatory approval and are thereafter
commercialized successfully.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market price of the Company's common
stock, like the stock prices of many publicly traded biotechnology companies,
has been highly volatile. Announcements of technological innovations or new
commercial products by the Company or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or potential
medical results relating to products under development by the Company or its
competitors, regulatory developments in both the United States and foreign
countries, public concern as to the safety of biotechnology products and
economic and other external factors, as well as period-to-period fluctuations in
financial results may have a significant impact on the market price of the
Company's common stock. It is likely that, in some future quarter, the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's common stock would likely
be materially adversely affected.
Uncertainties Regarding Health Care Reimbursement and Reform
The future revenues and profitability of biopharmaceutical companies as well
as the availability of capital may be affected by the continuing efforts of
government and third party payors to contain or reduce costs of health care
through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government controls. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition or prospects.
The Company's ability to commercialize its products successfully will depend,
in part, on the extent to which appropriate reimbursement levels for the cost of
such products and related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third party payors are increasingly challenging the
prices charged for medical products and services. Also, the trend toward managed
health care in the United States and the concurrent growth of organizations such
as HMOs, which could control or significantly influence the purchase of health
care services and products, as well as legislative proposals to reform health
care or reduce government insurance programs may all result in lower prices for
the Company's products. The cost containment measures that health care payors
and providers are instituting and the effect of any health care reform could
materially adversely affect the Company's ability to operate profitably.
Product Liability Exposure
Clinical trials, manufacturing, marketing and sale of any of the Company's or
its strategic partners' pharmaceutical products or processes licensed by the
Company may expose the Company to product liability claims. The Company
currently carries limited product liability insurance. There can be no assurance
that the Company or its strategic partners will be able to continue to maintain
or obtain additional insurance or, if available, that sufficient coverage can be
acquired at a reasonable cost. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products developed by the Company or its strategic partners. A
product liability claim or recall would have a material adverse effect on the
business and financial condition of the Company.
Environmental Concerns
The Company's research and development involves the controlled use of
hazardous materials, chemicals and radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal 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
11
<PAGE> 14
be held liable for any damages that result and any such liability could exceed
the resources of the Company. In addition, disposal of radioactive materials
used by the Company in its research efforts may only be made at approved
facilities. Approval of a site in California has been delayed indefinitely. The
Company currently stores such radioactive materials on site. The Company may
incur substantial cost to comply with environmental regulations.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit.
The following exhibit is referenced.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. None
12
<PAGE> 15
SIGNATURES
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.
IDEC PHARMACEUTICALS CORPORATION
Date: May 13, 1997 By: /s/ William H. Rastetter
------------ ------------------------------------------
William H. Rastetter
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1997 By: /s/ Phillip M. Schneider
------------ -------------------------------------------
Phillip M. Schneider
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIALS STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<CASH> 17,855
<SECURITIES> 52,228
<RECEIVABLES> 5,853
<ALLOWANCES> 0
<INVENTORY> 6,198
<CURRENT-ASSETS> 85,603
<PP&E> 32,813
<DEPRECIATION> 9,461
<TOTAL-ASSETS> 109,558
<CURRENT-LIABILITIES> 11,619
<BONDS> 0
0
19,649
<COMMON> 156,261
<OTHER-SE> (84,859)
<TOTAL-LIABILITY-AND-EQUITY> 91,051
<SALES> 0
<TOTAL-REVENUES> 6,664
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,232)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> 0
</TABLE>
