<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 2, 1998
REGISTRATION NO. 333-46767
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IDEC PHARMACEUTICALS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 33-0112644
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
11011 TORREYANA ROAD
SAN DIEGO, CA 92121
(619) 550-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PHILLIP M. SCHNEIDER
CHIEF FINANCIAL OFFICER
IDEC PHARMACEUTICALS CORPORATION
11011 TORREYANA ROAD
SAN DIEGO, CA 92121
(619) 550-8500
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
J. STEPHAN DOLEZALEK, ESQ. JAY K. HACHIGIAN, ESQ.
KIMBERLEY E. HENNINGSEN, ESQ. BRIAN K. BEARD, ESQ.
PETER D. ROSENTHAL, ESQ. RENEE F. LANAM, ESQ.
MATTHEW L. JACOBSON, ESQ. JONATHAN J. NOBLE, ESQ.
BROBECK, PHLEGER & HARRISON LLP GUNDERSON DETTMER STOUGH VILLENEUVE
TWO EMBARCADERO PLACE FRANKLIN & HACHIGIAN, LLP
2200 GENG ROAD 155 CONSTITUTION DRIVE
PALO ALTO, CA 94303 MENLO PARK, CA 94025
(650) 424-0160 (650) 321-2400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
- ------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Issued March 2, 1998
2,000,000 Shares
LOGO
COMMON STOCK
------------------------
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY.
THE COMPANY'S COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "IDPH." ON FEBRUARY 27, 1998, THE REPORTED LAST SALE PRICE OF THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET WAS $45 3/8 PER SHARE. SEE "COMMON STOCK
PRICE RANGE AND DIVIDENDS."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
---------------- ------------------- ---------------------
<S> <C> <C> <C>
Per Share............................ $ $ $
Total(3)............................. $ $ $
</TABLE>
- ------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $275,000.
(3) The Company has granted the Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 300,000
additional Shares at the price to public less underwriting discounts and
commissions for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total price to public,
underwriting discounts and commissions and proceeds to Company will be
$ , $ and $ , respectively. See "Underwriters."
------------------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to the approval of certain legal
matters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
counsel for the Underwriters. It is expected that delivery of the Shares will be
made on or about March , 1998 at the offices of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in same day funds.
------------------------
MORGAN STANLEY DEAN WITTER
NATIONSBANC MONTGOMERY SECURITIES LLC
March , 1998
<PAGE> 3
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SHARES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents
by Reference.............................. 2
Prospectus Summary.......................... 3
Forward Looking Statements.................. 6
Risk Factors................................ 6
Use of Proceeds............................. 17
Common Stock Price Range and Dividends...... 17
Capitalization.............................. 18
Dilution.................................... 19
Selected Consolidated Financial Data........ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ 21
<CAPTION>
PAGE
----
<S> <C>
Business.................................... 27
Management.................................. 47
Principal Stockholders...................... 51
Description of Capital Stock................ 53
Underwriters................................ 56
Legal Matters............................... 57
Experts..................................... 57
Available Information....................... 58
Index to Consolidated Financial
Statements................................ F-1
</TABLE>
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents or portions of documents filed by the Company (File
No. 0-19311) with the Securities and Exchange Commission (the "SEC" or
"Commission") are incorporated herein by reference: (a) Annual Report on Form
10-K for the fiscal year ended December 31, 1997; (b) Proxy Statement dated
April 22, 1997; (c) the description of the Company's Common Stock which is
contained in its Registration Statement on Form 8-A filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), on May 24, 1991; and (d)
the description of the Company's Series X Junior Participating Preferred Stock
contained in the Company's Registration Statement on Form 8-A filed under the
Exchange Act on August 2, 1997, including any amendments or reports filed for
the purpose of updating any of such reports, statements or descriptions.
All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the filing
of a post-effective amendment which indicates that all securities offered hereby
have been sold or which deregisters all securities remaining unsold, shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such reports and documents. Any statement contained in a
document incorporated by reference herein shall be deemed modified or superseded
for purposes of this Prospectus to the extent that a statement contained or
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered a copy of any or all of such documents which are
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into the documents that
this Prospectus incorporates). Written or oral requests for copies should be
directed to Secretary, IDEC Pharmaceuticals Corporation, at the Company's
executive offices located at 11011 Torreyana Road, San Diego, CA 92121; (619)
550-8500.
------------------------
IDEC Pharmaceuticals(R) and PRIMATIZED(R) are registered United States
trademarks of the Company and Rituxan(TM) and PROVAX(TM) are trademarks of the
Company. Other trademarks used herein belong to the various third parties as
identified in the text.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITERS."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere herein or incorporated by
reference in this Prospectus. Unless otherwise indicated, the information
contained in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. Unless the context otherwise requires, references in this
Prospectus to "IDEC Pharmaceuticals" and the "Company" shall refer to IDEC
Pharmaceuticals Corporation and its wholly owned subsidiary, IDEC Seiyaku, a
Japanese corporation.
THE COMPANY
IDEC Pharmaceuticals is primarily engaged in the commercialization and
research and development of targeted therapies for the treatment of cancer and
autoimmune and inflammatory diseases. The Company's first commercialized
product, Rituxan, and its most advanced product candidate are for treatment of
B-cell non-Hodgkin's lymphomas, which afflict approximately 250,000 patients in
the United States. The Company is also developing products for the treatment of
solid tumors, which afflict approximately 1,100,000 new patients each year in
the United States, and rheumatoid arthritis, which afflicts approximately
2,000,000 people in the United States.
Rituxan was approved by the U.S. Food and Drug Administration (the "FDA")
on November 26, 1997 and was launched into the U.S. market jointly with
Genentech, Inc. ("Genentech") in December 1997. Rituxan is the trade name in the
United States for the compound Rituximab (formerly known as IDEC-C2B8). In
Switzerland, and upon approval in the rest of Europe, Rituximab is marketed as
MabThera (Rituximab, Rituxan and MabThera are collectively referred to herein as
"Rituxan," except where otherwise indicated). Rituxan was developed through
collaborative relationships with Genentech and Genentech's affiliate F.
Hoffmann-LaRoche, Inc. ("Hoffmann-LaRoche") and is being developed for the
Japanese market in collaboration with Zenyaku Kogyo, Ltd. ("Zenyaku"). Rituxan
received Swiss marketing approval on November 28, 1997 and was recently
introduced in the Swiss market by Hoffmann-LaRoche, which holds sales and
marketing rights worldwide except in the United States and Japan. Approval to
market Rituxan in the European Union is currently pending and is not expected
before mid-1998, at the earliest. Zenyaku is developing Rituxan in Japan where
the regulatory process requires additional human clinical testing. Approval in
Japan is not expected in the near future.
Rituxan is the first monoclonal antibody approved by the FDA for a cancer
therapy indication. Rituxan is unique in the treatment of non-Hodgkin's lymphoma
due to its specificity for the antigen, CD20, which is expressed on normal and
malignant B cells but not on other tissues of the body, and mechanism of action
as compared to conventional lymphoma therapies. These properties of Rituxan also
contribute to the agent's favorable side effect profile as compared to
chemotherapy and allow its use in clinical settings where chemotherapy is either
poorly tolerated or ineffective in inducing disease remissions. Rituxan is
administered in an outpatient setting by personnel trained in the use of
chemotherapies. A full course of Rituxan therapy is short in duration,
consisting of four intravenous infusions given on days 1, 8, 15 and 22, whereas
chemotherapy is typically given in repeating cycles for four to eight months.
Rituxan is indicated for single agent use in relapsed or refractory,
low-grade or follicular, CD20 positive, B-cell non-Hodgkin's lymphomas ("B-cell
non-Hodgkin's lymphomas"), which comprise about half of the prevalence of the
disease in the United States. Ongoing or completed Phase II studies suggest that
Rituxan may also be useful in combination with chemotherapy in low-grade or
follicular lymphomas, and as a single agent, or in combination with chemotherapy
in the treatment of other forms of non-Hodgkin's lymphoma. In Phase III clinical
trials, Rituxan given as a single agent to patients with B-cell non-Hodgkin's
lymphoma, demonstrated tumor shrinkage in 87% of patients. Fifty percent of
evaluable patients (76 of 151 patients) or 48% of entered patients achieved
partial or complete responses to therapy, i.e., achieved tumor shrinkage of
greater than 50%. The median time to progression (time to tumor regrowth
following treatment) in these 76 responders had not been reached at 12.5 months
following initiation of therapy, despite the short duration (22 days) of the
full course of therapy. Rituxan has been well tolerated in clinical studies,
with side effects being primarily mild to moderate flu-like symptoms that
generally are limited to the period of infusion. As
3
<PAGE> 5
compared to chemotherapy, Rituxan does not harm the bone marrow and therefore
does not cause the myelosuppression that is a source of much of the
chemotherapy-associated morbidity and mortality. Also, Rituxan has been shown to
induce meaningful remissions of disease in poor prognosis patients such as the
elderly, patients failing autologous bone marrow transplants or anthracycline
containing therapies, and patients who have become refractory to chemotherapy.
In an effort to identify expanded applications for Rituxan, the Company, in
collaboration with Genentech, has authorized over 35 Rituxan post-marketing
trials to date. Several of these trials will explore the use of Rituxan in a
variety of B-cell non-Hodgkin's lymphoma clinical settings such as: combination
therapy with widely used chemotherapy regimens for both low-grade and
intermediate/high-grade disease; single agent therapy in newly diagnosed,
previously untreated low-grade disease; integration into autologous bone marrow
transplant regimens both as an in-vivo purging agent prior to bone marrow
harvest and post-transplant as consolidation therapy; and AIDS-related lymphoma.
Additionally, clinical trials are expected to be initiated in other B-cell
malignancies and pre-malignant conditions such as chronic lymphocytic leukemia
("CLL"), multiple myeloma, and lymphoproliferative disorders associated with
solid organ transplant therapies.
A second antibody product for the treatment of B-cell non-Hodgkin's
lymphomas, IDEC-Y2B8, which was opened to Phase III testing in December 1997.
IDEC-Y2B8 is an anti-CD20 murine antibody that is radiolabelled with the isotope
yttrium-90. IDEC Pharmaceuticals controls all U.S. rights to IDEC-Y2B8 while
Hoffmann-LaRoche holds an option to develop it for commercialization outside of
the United States. The Company believes that Rituxan and IDEC-Y2B8 may provide
complementary products for the management of non-Hodgkin's lymphomas.
The Company's product candidate for the treatment of solid tumors is the
drug 9-Aminocamptothecin ("9-AC"), which the Company in-licensed from Pharmacia
& Upjohn S.p.A. ("Pharmacia") in 1997. This drug belongs to the class of
anti-tumor agents that inhibits the activity of the enzyme topoisomerase-I,
which is required for solid tumor growth. The National Cancer Institute ("NCI")
was the primary developer of 9-AC through various Phase II human clinical
trials. The Company initiated its own Phase I/II trials with 9-AC during late
1997 with the objective of verifying the maximum tolerated dose identified by
other investigators and identifying solid tumor indications for further
development. IDEC Pharmaceuticals has worldwide rights to 9-AC.
For the treatment of autoimmune and inflammatory diseases, IDEC
Pharmaceuticals is developing a new class of antibodies, termed PRIMATIZED
antibodies, that are of part human, part macaque monkey, origin. These
antibodies are structurally similar to, and potentially indistinguishable by a
patient's immune system from, human antibodies. PRIMATIZED antibodies may
provide therapeutic intervention for diseases or conditions not amenable to
chronic treatment with mouse-derived antibodies, which are distinguishable from
human antibodies and therefore eventually rendered ineffective by the patient's
immune system. The Company's objective with its PRIMATIZED antibodies is to
provide therapies that can be used to control autoimmune diseases characterized
by overactive immune functions.
The Company's anti-CD4 PRIMATIZED antibody product candidates, IDEC-151 and
IDEC-CE9.1, are being developed worldwide in collaboration with SmithKline
Beecham, p.l.c. ("SmithKline Beecham"). IDEC-151 is the lead antibody selected
for rheumatoid arthritis; IDEC-CE9.1 is under consideration for other
indications. The Company's other product candidates for the treatment of
autoimmune or inflammatory diseases are being developed in collaborative
relationships with Mitsubishi Chemical Corporation ("Mitsubishi"), Seikagaku
Corporation ("Seikagaku") and Eisai, Co., Ltd. ("Eisai"). In addition, the
Company submitted an Investigational New Drug application ("IND") with the FDA
in late 1997 and initiated human clinical testing in a Phase I trial of its
humanized anti-gp39 antibody (IDEC-131) in patients with systemic lupus
erythematosus ("SLE").
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................. 2,000,000 shares(1)
Common Stock to be outstanding after the
offering....................................... 21,630,694 shares(1)(2)
Use of proceeds.................................. To fund commercialization of Rituxan,
research and development activities and
clinical trials, expansion of laboratory
and manufacturing capacity, repayment of
indebtedness, and general corporate
purposes. A portion of the net proceeds
may also be used to acquire or invest in
complementary businesses or products or
to obtain the right to use complementary
technologies. See "Use of Proceeds."
Nasdaq National Market symbol.................... IDPH
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Revenues from unconsolidated joint
business(3)............................... $ -- $ -- $ -- $ -- $ 9,266
Contract revenues............................ 4,329 5,143 12,136 15,759 11,840
License fees................................. 8,385 2,300 11,500 14,250 23,500
-------- -------- -------- -------- --------
Total revenues.......................... 12,714 7,443 23,636 30,009 44,606
Total operating expenses(4).................... 22,985 25,959 40,037 35,445 62,602
Net loss applicable to common stock............ $(8,882) $(18,031) $(17,292) $(5,651) $(15,538)
Net loss per share............................. $ (.96) $ (1.65) $ (1.18) $ (.34) $ (.83)
Shares used in computing net loss per share.... 9,265 10,931 14,650 16,573 18,739
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(5)
-------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and securities available-for-sale........... $ 69,657 $154,687
Total assets....................................................... 106,013 191,043
Notes payable...................................................... 7,794 7,794
Total stockholders' equity......................................... 80,679 165,709
</TABLE>
- ------------
(1) Assumes the Underwriters' over-allotment option is not exercised. See
"Underwriters."
(2) Based on the number of shares outstanding as of January 31, 1998. Excludes:
(i) 3,902,619 shares of Common Stock issuable upon exercise of outstanding
stock options and (ii) convertible preferred stock convertible into
1,490,793 shares of Common Stock, each outstanding as of January 31, 1998.
(3) Reflects revenues received from co-promotion of Rituxan with Genentech.
(4) Includes $11,437,000 in 1995 for the repurchase of technology rights to the
Company's lymphoma products and a $3,000,000 up-front licensing fee for
exclusive rights to 9-AC in 1997.
(5) Adjusted to reflect the sale of 2,000,000 shares offered by the Company
hereby, after deducting estimated underwriting discounts and commissions and
estimated offering expenses. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
FORWARD LOOKING STATEMENTS
This Prospectus contains, in addition to historical data, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange Act, which are
subject to the "safe harbor" created by those sections. These forward-looking
statements include risks and uncertainties and include, but are not limited to,
statements concerning the Company's plans to commercialize its product, Rituxan;
continue development of its current product candidates; conduct clinical trials
with respect to its product candidates; utilize the Company's capital resources
and the net proceeds from this offering and the time periods related thereto;
seek regulatory approvals; expand its manufacturing capability; engage
third-party manufacturers to supply its clinical trials and commercial
requirements; maintain and expand its marketing, sales and distribution
capability; and evaluate additional product candidates for acquisition and
subsequent clinical and commercial development. These forward-looking statements
may be found in the "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Forward-looking statements not specifically set
forth above may also be found in these and other sections of this Prospectus.
Actual results could differ materially from those discussed in the
forward-looking statements as a result of certain factors, including those
discussed in "Risk Factors" and elsewhere in this Prospectus.
RISK FACTORS
Prospective purchasers of the Shares offered hereby should carefully
consider the following risk factors in addition to the other information
presented in this Prospectus.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
The Company has incurred annual operating losses since its inception in
1985 and may incur additional losses in the future. As of December 31, 1997, the
Company's accumulated deficit was approximately $99.4 million. Historical losses
have been principally the result of the various costs associated with the
Company's research and development, clinical and manufacturing activities prior
to approval for marketing of any of the Company's products. Substantially all
revenues to date have resulted from collaborative research, development and
licensing arrangements, research grants and interest income. There is no
guarantee that the Company will achieve profitable operations on an annual basis
unless either Rituxan achieves commercial success or product candidates now
under development receive FDA or foreign regulatory approval and thereafter are
commercialized successfully.
Rituxan, which received regulatory approval in the United States on
November 26, 1997 and in Switzerland on November 28, 1997, is the Company's only
approved product. For Rituxan to succeed commercially, the Company, either alone
or through its collaborative relationships, must successfully manufacture,
introduce, market and sell Rituxan. To achieve the successful commercialization
of other product candidates, the Company, alone or through its collaborative
relationships, must successfully develop, obtain FDA or foreign regulatory
approval for, manufacture, introduce, market and sell its potential products.
There can be no assurance that either Rituxan or any other product candidate
will be successfully commercialized. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
LIMITED MANUFACTURING EXPERIENCE
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 Rituxan, the Company has only limited experience with regard to
producing such commercial quantities of Rituxan and has not yet received
regulatory approval for commercial production of any other products. In
addition, the Company has limited experience in bulk drug manufacturing in
general and no chemical manufacturing experience, no fill/finish experience, and
no fill/finish capacity. Thus, no assurance can be given as to the ultimate
performance of the Company's manufacturing facility or the Company's ability to
make a successful transition to ongoing commercial production.
6
<PAGE> 8
Biologics manufacturing as performed by IDEC Pharmaceuticals involves the
growing and harvest of cells and the purification of the target protein by
removal of impurities in controlled environments. This process is extremely
susceptible to product loss due to any microbial or viral contamination of the
process. Since the process is highly defined and controlled, any material
problem due to equipment failure or operator error could cause the loss of the
entire batch being manufactured. Certain bacterial or viral contaminations could
cause the closure of the manufacturing plant for an extended period of time,
until the cause of the contamination is identified and corrective action is
implemented. Certain items of manufacturing equipment may have long lead times
to perform repair and revalidation prior to use. The Company has attempted to
plan for most equipment failure contingencies. Not all potential problems,
however, can be appropriately addressed ahead of time nor spare parts obtained
in a reasonable time frame. Any extended unplanned plant shutdowns will
ultimately create higher manufacturing cost of goods for the Company and could
result in inventory and product shortages.
The Company's agreement with Genentech calls for IDEC Pharmaceuticals to
commit its full manufacturing capacity to supply Genentech with bulk Rituxan at
the higher of a fixed price per gram or Genentech's cost to manufacture per gram
until the end of 1999. The Company then has the option to supply Rituxan to
Genentech, at the lower of the Company's or Genentech's cost per gram. The
Company currently manufactures Rituxan at a cost in excess of the Genentech
contract's fixed price. Any continuing manufacturing costs above the contract
price per gram or costs attributable to equipment repair or facility down time
could result in an unreimburseable cost, wholly attributable to IDEC
Pharmaceuticals, which would, in turn, result in decreased margins. Furthermore,
the Company is aware that several of its manufacturing software systems are not
yet Year 2000 compliant. See "-- Year 2000 Compliance."
DEPENDENCE ON CONTRACT MANUFACTURERS AND SOLE SOURCE SUPPLIER
Although the Company has the ability to manufacture limited commercial bulk
quantities of Rituxan, it is dependent upon Genentech to manufacture additional
worldwide requirements and to complete all the fill/finish production of
Rituxan. Genentech is manufacturing Rituxan in a facility that is still pending
FDA approval for Rituxan manufacture and is currently constructing an additional
manufacturing plant to satisfy long-term demands for Rituxan. Such facility must
be approved by the FDA before it can supply commercial quantities of Rituxan
and, even if approved, there can be no assurance that the Company or Genentech
can manufacture sufficient quantities of Rituxan to meet as yet undetermined
market demands or that Genentech will be able to fill/finish Rituxan on a timely
and cost effective basis to avoid an insufficient supply of Rituxan inventory,
any of which could materially and adversely affect the Company's business,
results of operation and financial condition.
The Company is contractually dependent upon SmithKline Beecham to fulfill
all of the manufacturing requirements for IDEC-151 and IDEC-CE9.1. SmithKline
Beecham has constructed a commercial-scale manufacturing plant for IDEC-151
and/or IDEC-CE9.1. However, there can be no assurance that SmithKline Beecham
will be able to manufacture sufficient quantities of IDEC-151 or IDEC-CE9.1,
should either or both receive FDA approval to meet as yet undetermined market
demands.
Because the Company's capacity is committed to the manufacture of Rituxan
for two years, the Company does not have the current cell culture capacity to
manufacture commercial qualifying material for the Company's IDEC-Y2B8 or In2B8
products. The Company is currently accepting proposals for a qualified
commercial contractor to meet the long-term manufacturing demands for IDEC-Y2B8
or In2B8. In addition, as the Company does not have expertise or facilities for
small molecule chemical manufacturing, the Company will need to establish a
long-term manufacturing arrangement for 9-AC with an appropriate contract
manufacturer. The Company's 9-AC clinical materials requirements will be met
over the next two years by Pharmacia, as part of the product in-license
agreement. Additionally, as the Company does not have fill/finish expertise, the
Company will be dependent on outside contractors to meet all of the Company's
current and future fill/finish requirements.
The Company has several vendors for raw materials that are used in the
manufacture of products for commercial or clinical trial use that are the sole
source available. Any disruption in the supply of these materials would have a
material adverse effect on the Company's ability to meet its manufacturing
commitments, and would ultimately have a negative effect on manufacturing costs,
or could delay significantly
7
<PAGE> 9
current clinical studies. Due to the need for raw materials to meet certain
regulatory, pre-qualification and release specifications prior to their use for
manufacturing, the Company is limited to specific suppliers. The Company has
initiated a program for identifying alternative suppliers for certain raw
materials, where possible.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in commercial sales and marketing. 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. To the extent that the Company elects to participate in co-promotion
efforts in the United States or Canada, and in those instances where the Company
retains exclusive marketing rights in specified territories, the Company will
need to maintain and expand its sales and marketing capability in order to
establish a successful direct sales and marketing capability in the targeted
markets. The Company will also need to build marketing support services
including customer service, order entry, shipping and billing, customer
reimbursement assistance, managed-care sales support, medical information and
sales training. 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 has entered or in the future 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. Failure to establish a sales
capability either in the United States or outside the United States may have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Sales and Marketing."
During 1998, the Company will depend on the successful marketing and sales
of Rituxan for much of its anticipated revenue. Rituxan is being marketed and
sold in the United States pursuant to a co-promotion agreement with Genentech,
which currently has a sales and marketing staff of approximately 50
professionals that is largely dedicated to the commercialization of Rituxan. In
an effort to establish its own direct sales capability for Rituxan, the Company
has recently created a marketing staff and a sales organization of 32
professionals with experience primarily in the oncology therapeutic category,
who are dedicated exclusively to the commercialization of Rituxan. The Company
relies heavily on Genentech to supply related marketing support services
including customer service, order entry, shipping and billing, customer
reimbursement assistance, managed-care sales support, medical information and
sales training. There can be no assurance that the Company's sales and marketing
staff will successfully transition the Company into long-term profitability.
Furthermore, there can be no assurance that Genentech will successfully perform
its role in the co-promotion relationship.
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.
OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS
The Company's quarterly revenues, expenses and operating results are likely
to vary significantly in the future due to a variety of factors such as demand
for the Company's products, the Company's achievement of certain payment
milestones, hospital and pharmacy buying decisions, physician acceptance rates,
changes in government or private reimbursement policies, manufacturing
constraints, the ability of the Company to obtain approvals of additional
products for commercial sale on a timely basis, changes in the Company's level
of operating expenses, the Company's ability to attract and retain qualified
personnel, changes in the Company's sales incentive plans or co-promotion
agreements, foreign currency exchange rates and overall economic conditions.
Furthermore, because the Company is commercializing Rituxan through a co-
promotion, profit-sharing agreement with Genentech, the Company's ability to
report revenues from the commercialization of Rituxan will be dependent upon the
timeliness of Genentech's reporting of Rituxan sales. There can be no assurance
that Genentech will report on a timely basis. Because the Company's expense
levels are based to a significant extent on the Company's expectations of future
revenues and therefore will
8
<PAGE> 10
vary only slightly in the short term, if revenues fall below expectations,
operating results are likely to be adversely and disproportionately affected.
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 and
performing research and development with respect to the Company's products. The
Company's strategic partners may also develop products that may compete with the
Company. Although IDEC Pharmaceuticals 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 agreements
with Genentech, Zenyaku, SmithKline Beecham, Mitsubishi, Seikagaku and Eisai.
These agreements generally may be terminated at any time by the strategic
partner, typically on short notice to the 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Strategic Alliances."
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF ADDITIONAL REGULATORY APPROVALS
The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's proposed 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
FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in
the case of biologics, the Public Health Service Act. The nature and extent of
regulation by governmental authorities in the United States differs with respect
to different products. At the present time, with the exception of 9-AC, the
Company believes that its products will be regulated by the FDA as biologics.
Biologics require the submission of a Biologics License Application ("BLA") and
approval by the FDA prior to being marketed in the United States. The Company
believes that the FDA will regulate the Company's 9-AC product candidate as a
drug which will require the submission of a New Drug Application ("NDA") for
approval by the FDA prior to being marketed in the United States. The regulatory
approval process for a NDA is similar to the approval process for a BLA.
Manufacturers of biologics or drugs may also be subject to state regulation.
The steps required before a product 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 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 BLA or NDA, (v) FDA
review of the BLA or NDA and (vi) satisfactory completion of an 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. 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 product candidates.
Furthermore, 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 health risk.
9
<PAGE> 11
The results of the preclinical studies and clinical study or studies,
together with detailed information on the manufacture and composition of the
product, are submitted to the FDA in the form of a BLA or NDA requesting
approval to market the product. Before approving a BLA or NDA, 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 or NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, and/or 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 or NDA submitted by the Company will be
granted on a timely basis or at all. Also, if regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
it may be marketed.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the BLA or
NDA review process, or thereafter (including after approval) 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 BLA or NDA
holder. For example, BLA or NDA 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 BLA or NDA 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 to obtain regulatory approval for marketing its
products in foreign countries.
In February 1997, the Company and Genentech submitted BLAs to the FDA for
Rituxan as a single agent therapy for the treatment of B-cell non-Hodgkin's
lymphoma, and on November 26, 1997, Rituxan was approved for marketing by the
FDA. Hoffmann-LaRoche submitted an application to the Swiss regulatory agency,
the Office Intercantonal de Controle de Medicaments, for the marketing of
Rituxan in Switzerland. On November 28, 1997, Rituxan was approved for marketing
in Switzerland and was launched in the Swiss market in late 1997 by
Hoffmann-LaRoche. Hoffmann-LaRoche also submitted a Marketing Authorization
Application ("MAA") with the European Medicines Evaluation Agency ("EMEA") for
marketing Rituxan in the European Union. There can be no assurance that EMEA
approval of the MAA will be granted on 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, results of operations and financial condition.
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 or
NDA. 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 drug
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 Rituxan,
IDEC-Y2B8 and IDEC-In2B8 from the FDA to treat certain B-cell non-Hodgkin's
lymphomas (as defined on page 3). In connection with its approval by the FDA,
Rituxan has received orphan drug exclusivity in the United States. However,
there can
10
<PAGE> 12
be no assurance that IDEC-Y2B8 or IDEC-In2B8 will receive orphan drug
exclusivity for the B-cell non-Hodgkin's lymphoma indication, and it is possible
that competitors of the Company could obtain approval, and attendant orphan drug
exclusivity, for IDEC-Y2B8 or IDEC-In2B8 for the B-cell non-Hodgkin's lymphoma
indication, thus precluding the Company from marketing IDEC-Y2B8 or IDEC-In2B8
for that indication in the United States. In addition, even if the Company does
obtain orphan exclusivity for any of its compounds for B-cell non-Hodgkin's
lymphoma, there can be no assurance that competitors will not receive approval
of other, different drugs or biologics for B-cell non-Hodgkin's 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
IDEC Pharmaceuticals has conducted and plans to continue to undertake
extensive and costly clinical testing to assess the safety and efficacy 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 and eligibility criteria for
the study. Delays in patient enrollment will result in increased expenses and
delays, which could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company cannot assure 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 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 or NDA. See "Business -- Government Regulation."
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 secrets
and orphan drug designation. IDEC Pharmaceuticals owns by assignment seven
issued and 14 allowed U.S. patents, 16 U.S. patent applications and numerous
corresponding foreign patent applications, and has licenses to patents or patent
applications that are assigned to 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 or its licensees may have to participate in interference proceedings if
declared by the U.S. Patent and Trademark Office ("PTO") to determine priority
of inventions, which typically take several years to resolve and could result in
diminished scope of patent protection and 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 may 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 breadth of claims allowed
in biopharmaceutical patents. Moreover, United States and foreign country patent
laws are distinct and the interpretations thereunder unique to each country.
Thus, patentability, validity and infringement issues for the same technology or
invention may be resolved differently in different jurisdictions.
11
<PAGE> 13
There can be no assurance that patents do not exist in the United States or in
foreign countries or that patents will not be issued that would have an 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. See "Business -- Patents
and Proprietary Rights." Accordingly, the Company expects that commercializing
monoclonal antibody-based products may require licensing and/or cross-licensing
of patents with other companies or entities 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, enforceability 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 making, using, offering to sell, selling or importing 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 business, results of operations and
financial condition.
Furthermore, the patent position worldwide of biotechnology companies in
relation to proprietary products is highly uncertain and involves complex legal
and factual questions. There is a substantial backlog of biotechnology patents
at the PTO. The Company also relies on trade secrets and proprietary know-how
which it seeks to protect, in part, by confidentiality agreements with its
employees, collaborators and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known or be independently developed by competitors. See "Business -- Patents and
Proprietary Technology."
ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAIN ACCESS TO CAPITAL MARKETS
The Company has expended and will continue to expend substantial funds to
increase sales of Rituxan and to complete the research, development,
manufacturing and marketing of its other products. The Company has obtained and
intends to seek additional funding for these purposes through a combination of
new collaborative arrangements, strategic alliances, and additional equity or
debt financings or from other sources. There can be no assurance that such
future 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
stockholders. If adequate funds are not available from operations or additional
sources of financing, the Company's business, results of operations and
financial condition could be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in part upon the continued contributions of
its senior management and key scientific and technical personnel. The Company's
success is also dependent upon its ability to attract and retain additional
qualified scientific, technical, manufacturing and managerial personnel and to
develop and maintain relationships with qualified clinical researchers.
Significant competition exists among pharmaceutical and biotechnology companies
for such personnel, and there can be no assurance that the Company will retain
such personnel or that it will be able to attract, assimilate and retain such
personnel as may be required in the future or to develop and maintain
relationships with such researchers. The Company does not maintain or intend to
purchase "key person" life insurance on any of its personnel. See
"Business -- Employees" and "Management."
12
<PAGE> 14
SUBSTANTIAL COMPETITION
Substantial competition exists in the biotechnology industry from
pharmaceutical and biotechnology companies which may have technical or
competitive advantages. The Company competes with these companies in the
development of technologies and processes and sometimes competes with them in
acquiring technology from academic institutions, government agencies, and other
private and public research organizations. There can be no assurance that the
Company will be able to produce or acquire rights to products that have
commercial potential. Even if the Company achieves product commercialization,
there can be no assurance that one or more of the Company's competitors may not:
(i) achieve product commercialization earlier than the Company, (ii) receive
patent protection that dominates or adversely affects the Company's activities,
(iii) have significantly greater sales and marketing capabilities or (iv)
develop products that are more widely accepted than those developed by the
Company. See "Business -- Competition."
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. During 1997, the Company's stock price fluctuated
between $15 3/4 per share and $46 1/4 per share. 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 or products
under development by the Company or its competitors, regulatory developments in
either the United States or foreign countries, public concern as to the safety
of biotechnology products and economic and other external factors including the
buying and selling of shares by option holders to offset their risk, 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. See "Common Stock
Price Range and Dividends" and "-- Outstanding Options; Possible Dilution and
Hedging."
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, operating results and financial condition.
The Company's ability to commercialize its products successfully will
depend in part on the extent 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 business,
results of operations and financial condition. See "Business -- Pharmaceutical
Pricing and Reimbursement."
13
<PAGE> 15
The speed with which Rituxan is adopted into the marketplace will be
dependent on the rate of acceptance of the product into reimbursement programs
operated by governmental authorities, private health insurers and other
organizations, such as HMOs. Any significant delay in the ability of health-care
providers to receive reimbursement for Rituxan will similarly delay the adoption
of Rituxan and could have a material adverse effect on the Company's business,
operating results and financial condition.
PRODUCT LIABILITY EXPOSURE
Clinical trials, manufacturing, marketing and sale of any of the products
or products under development owned or 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 could have a material adverse effect on the Company's business, operating
results and financial condition.
ENVIRONMENTAL RISKS
The Company's business 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 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. See "Business -- Environmental Regulation."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial numbers of shares of Common Stock in the public market
following this offering could materially adversely affect the market price of
the Common Stock. Upon completion of this offering, the Company will have
outstanding 21,630,694 shares of Common Stock, all of which will be freely
tradeable in the public market, subject to limitations on sales of shares held
by "affiliates" of the Company as defined in Rule 144 promulgated under the
Securities Act. However, the executive officers, directors and certain other
stockholders of the Company, who will together hold 2,477,861 of the outstanding
shares upon completion of this offering, have agreed that for a period of 90
days from the date of this Prospectus and without the prior written consent of
Morgan Stanley & Co. Incorporated they will not (i) offer, pledge, lend, sell,
contract to sell, sell any option contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer, lend or dispose of, directly or indirectly, any shares of Common Stock
or any securities convertible into or exercisable or exchangeable for Common
Stock, or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise. The Company has also agreed, subject to certain exceptions,
that without the prior written consent of Morgan Stanley & Co. Incorporated, it
will not issue, offer, sell or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable for the
Company's Common Stock for a period of 90 days after the date of this
Prospectus. However, the Company may, without such consent, grant options or
issue stock upon the exercise of outstanding stock options pursuant to the
Company's stock option plans. In addition, certain stockholders who in the
aggregate beneficially own 2,157,460 shares of Common Stock hold certain rights
with respect to the registration for the offer or sale to the public of such
shares. Upon completion
14
<PAGE> 16
of the offering, there will be outstanding options to purchase a total of
approximately 3,902,619 shares of the Company's Common Stock under the Company's
stock option plans. See "Description of Capital Stock."
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company has taken a number of actions that could have the effect of
discouraging a takeover attempt that might be beneficial to stockholders who
wish to receive a premium for their shares from a potential bidder. The Company
has adopted a Shareholder Rights Plan that would cause substantial dilution to a
person who attempts to acquire the Company on terms not approved by the
Company's Board of Directors. The Shareholder Rights Plan may therefore have the
effect of delaying or preventing any change in control and deterring any
prospective acquisition of the Company. In addition, the Company's Certificate
of Incorporation grants the Board of Directors the authority to issue up to
8,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
shares of Preferred Stock that may be issued in the future. While the Company
has no present intention to issue shares of Preferred Stock, such issuance,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
or less attractive for a third party to acquire a majority of the outstanding
voting stock of the Company. Such Preferred Stock may also have other rights,
including economic rights senior to the Common Stock, and, as a result, the
issuance thereof could have a material adverse effect on the market value of the
Common Stock. Furthermore, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"), which prohibits the Company from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or preventing
a change of control of the Company.
OUTSTANDING OPTIONS; POSSIBLE HEDGING AND DILUTION
In September 1997, the Company entered into an agreement with a financial
institution under which the Company sold to the financial institution a call
option, exercisable only at maturity, entitling the financial institution to
purchase from the Company up to 900,000 shares of the Company's Common Stock at
a certain strike price per share. The Company has the right to settle the call
option with cash or stock and, if exercised, the Company expects to settle the
call option by issuing up to 900,000 shares of the Company's Common Stock to the
financial institution. The financial institution has advised the Company that it
has engaged, and may continue to engage, in transactions, including buying and
selling shares of the Company's Common Stock, to offset its risk relating to the
call option, which could affect the market price of the Company's Common Stock.
Furthermore, should the Company settle the call option by issuing stock, new
investors will experience an immediate dilution at the time of issuance. Other
outstanding options and warrants will further dilute the Company's stock.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements.
Management has initiated an enterprise-wide program to prepare the
Company's computer systems and other electronic applications for the year 2000
(the "Year 2000 Program"). This Year 2000 Program, which is performed by a task
force assembled by the Company, consists of (i) an audit on all electronic and
computer systems in order to identify potential Year 2000 problems within the
Company, (ii) identification of third parties whose Year 2000 non-compliance
would have a material adverse effect on the Company's business, results of
operations or financial condition and requiring such third parties to confirm
that they are developing plans to address their own Year 2000 issues, and (iii)
a remedial phase to correct any discovered problems.
15
<PAGE> 17
The Company's Year 2000 Program has already identified several
manufacturing software systems that are not yet Year 2000 compliant. The Company
expects to complete its audit by the end of February 1998 and intends to
complete its third-party confirmations and begin its remedial phase by the end
of the third quarter. While the Company has begun evaluating potential
strategies for resolving Year 2000 problems, the dollar amount that the Company
will spend to remediate its Year 2000 issues remains uncertain, and management
has not yet assessed the Year 2000 compliance expenses and related potential
effect on the Company's operations. The Company expects to incur internal
personnel expenses as well as consulting and other expenses related to the
infrastructure and facilities enhancements necessary to prepare the Company's
systems for the year 2000.
The Company anticipates its Year 2000 Program will be completed before
January 1, 2000. However, there can be no assurance that the Year 2000 Program,
or computer systems and applications of other companies on which the Company's
operations rely, will be timely converted, or that any such failure to convert
by another company would not have a material adverse effect on the Company's
systems. Moreover, a failure to correct any non-compliant manufacturing software
could disable the Company's manufacturing capacity, resulting in inventory and
product shortages and ultimately creating higher manufacturing costs of goods of
the Company. See "-- Limited Manufacturing Experience."
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be approximately $85.0 million
($97.8 million if the Underwriters' over-allotment option is exercised in full)
after deducting underwriting discounts and commissions and estimated expenses of
the offering. The Company anticipates that the net proceeds of this offering
will be used to fund commercialization of Rituxan, research and development
activities and clinical trials, expansion of laboratory and manufacturing
capacity, repayment of indebtedness and general corporate purposes. A portion of
the net proceeds may also be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
The Company has no current plans, agreements or commitments with respect to any
such acquisitions or investments, and the Company is not currently engaged in
any negotiations with respect to any such transactions. The use of proceeds is
subject to change based upon competitive developments, the rate of the Company's
progress in product sales and development, the timing of regulatory approval and
the availability of various methods of financing, including agreements with
other companies relating to the development and marketing of the Company's
products. The Company reserves the right, at the discretion of its Board of
Directors, to reallocate its use of the proceeds of this offering in response to
these and other factors. Pending such uses, the net proceeds will be temporarily
invested in investment-grade, interest-bearing marketable securities.
COMMON STOCK PRICE RANGE AND DIVIDENDS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "IDPH." The following table sets forth for the periods indicated the
high and low reported sale prices as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
-----------------------
HIGH LOW
--------- --------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
First Quarter............................................... $23 1/8 $15 7/8
Second Quarter.............................................. 32 5/8 21
Third Quarter............................................... 27 3/8 13 7/8
Fourth Quarter.............................................. 26 3/8 18 1/8
Year Ended December 31, 1997
First Quarter............................................... 30 3/4 19 7/8
Second Quarter.............................................. 27 1/8 15 3/4
Third Quarter............................................... 42 7/16 23 3/8
Fourth Quarter.............................................. 46 1/4 30 3/4
Year Ending December 31, 1998
First Quarter (through February 27, 1998)................... 46 5/8 32 3/4
</TABLE>
A recently reported last sale price for the Company's Common Stock as
reported on the Nasdaq National Market is set forth on the cover page of this
Prospectus. On January 31, 1998, there were approximately 425 holders of record
of the Company's Common Stock.
The Company has never declared or paid any cash dividends on the Common
Stock. The Company expects to retain its earnings for the development and
expansion of its business and, therefore, does not intend to pay dividends on
its Common Stock in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the Company's Board of Directors and will
depend upon the earnings of the Company, its financial condition, capital
requirements and other factors as the Company's Board of Directors may deem
relevant.
17
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1997, and as adjusted to reflect the sale by the Company of
2,000,000 shares of Common Stock pursuant to this offering (assuming that the
Underwriter's over-allotment option is not exercised).
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable (1)..................................................... $ 7,794 $ 7,794
Stockholders' equity:
Convertible preferred stock, par value $0.001 per share, 8,000,000
shares authorized; 245,014 shares issued and outstanding,
$19,225,000 liquidation value, actual and as adjusted............ -- --
Common stock, par value $0.001 per share, 50,000,000 shares
authorized; 19,356,108 shares issued and outstanding, actual;
21,356,108 shares issued and outstanding, as adjusted (2)........ 19 21
Additional paid-in capital.......................................... 179,956 264,984
Unrealized gains on securities available-for-sale................... 57 57
Accumulated deficit................................................. (99,353) (99,353)
-------- --------
Total stockholders' equity.................................. 80,679 165,709
-------- --------
Total capitalization........................................ $ 88,473 $ 173,503
======== ========
</TABLE>
- ---------------
(1) See Note 4 of Notes to Consolidated Financial Statements for information
concerning the Company's notes payable.
(2) Assumes no exercise of the Underwriters' over-allotment option. Excludes:
(i) 3,948,101 shares of Common Stock issuable upon exercise of stock
options, (ii) 30,145 shares of Common Stock issuable upon exercise of
warrants and (iii) convertible preferred stock convertible into 1,665,793
shares of Common Stock, each outstanding as of December 31, 1997. See Note 8
of Notes to Consolidated Financial Statements.
18
<PAGE> 20
DILUTION
The net tangible book value of the Company at December 31, 1997 was
$80,679,000 or approximately $4.17 per share of Common Stock. Net tangible book
value per share represents the amount of total tangible assets less total
liabilities of the Company, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale by the Company of 2,000,000 shares
of Common Stock in this offering at the offering price of $42.52 per share
(calculated after deduction of underwriting discount and commissions and
estimated expenses associated with the offering) the net tangible book value of
the Company at December 31, 1997 would have been $165,709,000 or $7.76 per share
of Common Stock. This represents an immediate dilution in net tangible book
value of $37.62 per share to the purchasers of the Common Stock in the offering.
The following table illustrates the calculation of the per share dilution
described above:
<TABLE>
<S> <C> <C>
Public offering price per share(1).................................... $45.38
Net tangible book value per share prior to the offering.......... $4.17
Increase in net tangible book value per share attributable to new
investors....................................................... 3.59
-----
Net tangible book value per share after giving effect to the
offering.............................................................. 7.76
------
Dilution per share to new investors................................... $37.62
======
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and offering
expenses associated with the offering to be paid by the Company.
All of the above computations assume no exercise of outstanding warrants or
options to purchase Common Stock and no conversion of outstanding convertible
preferred stock. The Company also had an additional (i) 3,948,101 shares of
Common Stock issuable upon exercise of stock options, (ii) 30,145 shares of
Common Stock issuable upon exercise of warrants and (iii) convertible preferred
stock convertible into 1,665,793 shares of Common Stock, each outstanding as of
December 31, 1997. Further dilution to new investors may result from the
exercise of such outstanding warrants and options or the conversion of such
outstanding shares of preferred stock. See "Description of Capital Stock."
19
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions
"Consolidated Statement of Operations Data" and "Consolidated Balance Sheet
Data" for, and as of the end of, each of the years in the five-year period ended
December 31, 1997, are derived from the consolidated financial statements of the
Company, which consolidated financial statements have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The consolidated
financial statements as of December 31, 1996 and 1997, and for each of the years
in the three-year period ended December 31, 1997, and the report thereon, are
included elsewhere in this Prospectus. The information set forth below is not
necessarily indicative of the results of future operations and should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
that are included in this Prospectus and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Revenues from unconsolidated joint
business................................. $ -- $ -- $ -- $ -- $ 9,266
Contract revenues........................... 4,329 5,143 12,136 15,759 11,840
License fees................................ 8,385 2,300 11,500 14,250 23,500
-------- -------- -------- -------- -------
Total revenues...................... 12,714 7,443 23,636 30,009 44,606
Operating expenses:
Manufacturing costs......................... -- -- -- -- 18,875
Research and development.................... 18,723 21,191 22,488 28,147 32,407
Selling, general and administrative......... 4,262 4,768 6,112 7,298 11,320
Acquired technology rights.................. -- -- 11,437 -- --
-------- -------- -------- -------- -------
Total operating expenses............ 22,985 25,959 40,037 35,445 62,602
-------- -------- -------- -------- -------
Loss from operations.......................... (10,271) (18,516) (16,401) (5,436) (17,996)
Interest income (expense), net................ 1,174 485 (891) 481 2,572
Other income (expense)........................ 215 -- -- -- (114)
Convertible preferred stock dividends......... -- -- -- (696) --
-------- -------- -------- -------- -------
Net loss applicable to common stock........... $ (8,882) $(18,031) $(17,292) $(5,651) $(15,538)
======== ======== ======== ======== =======
Net loss per share............................ $ (.96) $ (1.65) $ (1.18) $ (.34) $ (.83)
Shares used in computing net loss per
common share................................ 9,265 10,931 14,650 16,573 18,739
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and securities
available-for-sale............................ $26,503 $20,601 $24,010 $ 78,727 $ 69,657
Total assets.................................... 50,728 45,494 47,626 113,029 106,013
Notes payable................................... 4,697 11,062 9,846 8,845 7,794
Total stockholders' equity...................... 35,674 27,896 31,169 92,614 80,679
</TABLE>
20
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains predictions, estimates and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve a number of risks and uncertainties including, without limitation,
those set forth in "Risk Factors." While this outlook represents the Company's
current judgment on the future direction of its business, such risks and
uncertainties could cause actual results to differ materially from any future
performance suggested in this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto of IDEC
Pharmaceuticals appearing elsewhere in this Prospectus.
OVERVIEW
IDEC Pharmaceuticals is primarily engaged in the commercialization and
research and development of targeted therapies for the treatment of cancer and
autoimmune and inflammatory diseases. In November 1997, the Company received
approval from the FDA to market its first product, Rituxan, in the United States
and Hoffmann-LaRoche, the Company's European marketing partner, received
marketing clearance for Rituxan from the Swiss regulatory body, the Office
Intercantonal de Controle de Medicaments. Rituxan is being co-promoted in the
United States under a joint business arrangement with Genentech, with the
Company receiving a share of the pretax co-promotion operating results. Under
the terms of separate agreements with Genentech, commercialization of Rituxan
outside the United States will be the responsibility of Hoffmann-LaRoche, except
in Japan where Zenyaku will be responsible for product development, marketing
and sales. The Company will receive royalties on Rituxan sales outside the
United States.
Revenues for the Company consists of revenues from the unconsolidated joint
business with Genentech, contract revenues and license fees. To date a
substantial portion of the Company's revenues have been derived from contract
revenues and license fees and the Company anticipates that revenues from
unconsolidated joint business will comprise an increasing portion of total
revenues in the future resulting from the commercialization of Rituxan.
Revenues from unconsolidated joint business consists of the Company's share
of the pretax operating results generated from its joint business arrangement
with Genentech, revenue from bulk Rituxan sales to Genentech and reimbursement
from Genentech of the Company's sales force and development expenses. Revenues
also include royalty income from Hoffmann-LaRoche and Zenyaku on sales of
Rituxan outside the United States. Under the joint business arrangement, all
U.S. sales of Rituxan and associated expenses will be recognized by Genentech
with the Company recording its share of the pretax operating results on a
quarterly basis, as defined in the Company's collaborative agreement with
Genentech. "Pretax operating results" under the joint business arrangement are
derived by taking the net U.S. sales of Rituxan to third-party customers less
costs of sales, third-party royalty expenses, distribution, selling and
marketing expenses and joint development expenses by the Company and Genentech.
Contract revenues consist of non-refundable research and development
funding under collaborative agreements with the Company's various strategic
partners and other funding under contractual arrangements with other parties.
Contract research and development funding generally compensates the Company for
discovery, preclinical and clinical expenses related to the collaborative
development programs for certain products of the Company.
License fees consist of non-refundable fees from product development
milestone payments, the sale of license rights to the Company's propriety gene
expression technology and non-refundable fees from the sale of product rights
under collaborative development and license agreements with the Company's
strategic partners.
The Company is obligated to manufacture and supply bulk Rituxan to
Genentech through the end of 1999 with an option to continue supplying Rituxan
thereafter. The cost of bulk Rituxan sold to Genentech is recorded as
manufacturing cost in the Company's consolidated statements of operations. Under
the
21
<PAGE> 23
Company's collaborative agreement with Genentech, the sales price of bulk
Rituxan sold to Genentech is capped at a price which is currently less than the
Company's cost to manufacture bulk Rituxan. See "Risk Factors -- Limited Sales
and Marketing Experience."
The Company has incurred increasing annual operating expenses and, with the
commercialization of Rituxan, the Company expects such trends to continue. The
Company has incurred annual operating losses since its inception in 1985, and
the transition of the Company to profitability will be dependent upon the
commercial success of Rituxan. As of December 31, 1997, the Company had an
accumulated deficit of $99.4 million. See "Risk Factors -- History of Operating
Losses; Accumulated Deficit."
RECENT DEVELOPMENTS
Beginning with its commercialization date of December 16, 1997, Rituxan net
sales to third-party customers in the United States as reported by Genentech
amounted to $5.1 million, $13.2 million and $11.1 million for December 1997,
January 1998 and February 1998, respectively. Net sales represent sales less
returns and allowances. The Company's share of pretax operating results from
Rituxan sales have been, with respect to December 1997, and will be, with
respect to January and February 1998, reported by the Company as revenues from
unconsolidated joint business. Because such revenues represent the initial three
months of Rituxan sales, they may not be indicative of revenues for future
periods. Future revenues may be influenced by, among other factors, the efficacy
of Rituxan, the rate of physician and hospital acceptance, reimbursement
practices, fulfillment of pre-existing demand, potential expansion of
therapeutic indications and competition.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues from Unconsolidated Joint Business. The Company earned revenues
from unconsolidated joint business for the first time in 1997. Revenues from
unconsolidated joint business totaled $9.3 million in 1997 and consists of $10.6
million of bulk Rituxan sales to Genentech, $3.0 million in reimbursement for
the Company's sales force and development expenses for Rituxan from Genentech
and the Company's share of the joint business operating loss equaling $4.3
million. During 1997, the joint business recorded an operating loss due to
significant shared expenses related to the product launch of Rituxan in the
United States in December 1997. Rituxan sales to third-party customers recorded
by Genentech totaled $5.5 million, which amounted to net sales of $5.1 million
after returns and allowances. The $5.1 million of net sales of Rituxan were
driven in part by pre-existing demand for Rituxan upon launch in December 1997.
The Company anticipates that revenues from unconsolidated joint business will
continue to increase in the near term due to the commercialization of Rituxan.
Contract Revenues. Contract revenues totaled $11.8 million in 1997 compared
to $15.8 million in 1996. The decrease in contract revenues in 1997 was
primarily due to the completion of funding in 1996 under the Company's
collaborative development agreement with Mitsubishi Chemical Corporation.
License Fees. License fees totaled $23.5 million in 1997 compared to $14.3
million in 1996. The increase in license fees in 1997 was primarily due to a
$15.0 million product development milestone payment received from Genentech upon
FDA approval of Rituxan. License fee revenues can vary significantly from year
to year based upon the consummation of new corporate alliances and the
achievement of product development milestone events. 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.
Manufacturing Costs. The Company incurred manufacturing costs for the first
time in 1997. Manufacturing costs totaled $18.9 million in 1997 and consisted of
manufacturing costs related to production of bulk Rituxan sold to Genentech and
includes costs of approximately $2.0 million incurred for the start-up of the
Company's manufacturing facility. The Company expects to continue incurring
substantial additional manufacturing costs as the Company continues to
manufacture bulk Rituxan.
22
<PAGE> 24
Research and Development. Research and development expenses totaled $32.4
million in 1997 compared to $28.1 million in 1996. The increase in research and
development expenses in 1997 was primarily due to a $3.0 million up-front
licensing fee to Pharmacia for exclusive rights to 9-AC, a broad spectrum
anti-cancer agent, a license fee payment for Anti-MIF antibody technology
rights, contract manufacturing expenses for IDEC-Y2B8 in preparation for a Phase
III trial in 1998 and higher facility expenses. Research and development
expenses in 1997 were partially offset by the utilization of the Company's
manufacturing facility for bulk production of Rituxan inventory in 1997 compared
to research and development manufacturing production in 1996 of clinical
material used for clinical trials. The Company expects to continue incurring
substantial additional research and development expenses in the future, due to
expansion of research and development programs; technology inlicensing and
regulatory-related expenses; preclinical and clinical testing of the Company's
various products under development; and production scale-up and manufacturing of
products used in clinical trials.
Selling, General and Administrative. Selling, general and administrative
expenses totaled $11.3 million in 1997 compared to $7.3 million in 1996. The
increase in selling, general and administrative expenses in 1997 was primarily
due to the creation of a sales and marketing infrastructure, expenses resulting
from the commercial launch of Rituxan and higher personnel expenses to support
expanded manufacturing operations. Selling, general and administrative expenses
necessary to support expanded manufacturing capacity, expanded clinical trials,
research and development and the potential expansion of the sales and marketing
organization are expected to increase in the foreseeable future.
Interest Income/Expense. Net interest income totaled $2.6 million in 1997
compared to $.5 million in 1996. The increase in net interest income in 1997 was
due to higher average 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.
Income Taxes. IDEC Pharmaceuticals has incurred losses on an annualized
basis since inception; therefore, no provision for income taxes has been
recorded. The Company's net operating loss carryforwards available to offset
future taxable income at December 31, 1997 are approximately $82.0 million for
federal income tax purposes and expire between 1999 and 2012. The future
utilization of net operating loss carryforwards may be limited under the
Internal Revenue Code ("IRC") due to an IRC defined ownership change that
occurred during 1991. However, the Company believes that such limitations will
not have a material impact upon the utilization of the net operating loss
carryforwards.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Contract Revenues. Contract revenues totaled $15.8 million in 1996 compared
to $12.1 million in 1995. The increase in contract revenues in 1996 was
primarily due to revenue from a collaboration entered into with Eisai in
December 1995, revenue from a one-time contract manufacturing and cell line
development arrangement with OraVax, Inc. and ongoing efforts under existing
collaborative agreements with Genentech and Seikagaku, offset by decreased
revenues from SmithKline Beecham as a result of the planned transfer of clinical
development of IDEC-CE9.1 to SmithKline Beecham in late 1995.
License Fees. License fees totaled $14.3 million in 1996 compared to $11.5
million in 1995. License fees in 1996 include $4.5 million received for the
license to Chugai of the Company's gene expression technology, $4.0 million
received from SmithKline Beecham for the initiation of a Phase III trial by
SmithKline Beecham of IDEC-CE9.1, $4.0 million from Genentech for the expansion
of its collaboration with the Company and for the achievement of a product
development milestone event for Rituxan and license fee revenues received from
Seikagaku and Eisai also for the achievement of product development milestone
events.
Research and Development. Research and development expenses totaled $28.1
million in 1996 compared to $22.5 million in 1995. The increase in research and
development expenses in 1996 was primarily due to a $1.3 million expense for
access to certain patent rights related to Rituxan, increased personnel expenses
related to the completion of the Phase III trial, preparation of the Biologics
License Application and the preparation for building of Rituxan commercial
inventory.
23
<PAGE> 25
Selling, General and Administrative. Selling, general and administrative
expenses totaled $7.3 million in 1996 compared to $6.1 million in 1995. Selling,
general and administrative expenses increased in 1996 due to higher personnel
expenses to support expanded manufacturing operations, completion of the Phase
III trial and preparation of the Biologics License Applications for Rituxan.
Acquired Technology Rights. In March 1995, the Company issued 1,000,000
shares of its Common Stock and 69,375 shares of its 10% Series B Nonvoting
Cumulative Convertible Preferred Stock for the repurchase of all Merrill
Lynch/Morgan Stanley, L.P. rights in the Company's lymphoma products. In the
first quarter of 1995, the Company recorded a non-cash charge of $11.4 million,
representing the purchase of the acquired technology rights.
Interest Income/Expense. Net interest income totaled $.5 million in 1996
compared to net interest expense of $.9 million in 1995. The increase in net
interest income in 1996 from net interest expense in 1995 was due to higher
balances in cash, cash equivalents and securities available-for-sale, offset by
an increase in interest expense resulting from increases in notes payable used
to finance certain capital purchases and an increase in non-cash interest
charges for certain common stock warrants issued in connection with certain debt
financings.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital expenditures since
inception principally through the sale of equity securities, contract revenues,
license fees, lease financing transactions and interest income. The Company
expects to finance its current and planned operating requirements principally
through the proceeds of this offering, cash on hand, funds from its joint
business arrangement with Genentech and with funds from existing collaborative
agreements and contracts which the Company believes will be sufficient to meet
its near-term operating requirements. The Company believes that its cash,
including proceeds from this offering, cash equivalents and securities
available-for-sale, together with cash generated from its existing agreements,
contracts and joint business arrangement, will be sufficient to finance the
Company's currently anticipated needs for operating and capital expenditures for
the foreseeable future. Existing agreements and contracts, however, could be
canceled by the contracting parties. In addition, the Company may, from time to
time, seek additional funding through a combination of new collaborative
agreements, strategic alliances and additional equity and debt financings or
from other sources. There can be no assurance that such additional funds can be
obtained through these sources on acceptable terms, if at all. If adequate funds
are not available from the joint business arrangement, operations or additional
sources of financing, the Company's business could be materially and 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; fluctuating or increasing manufacturing requirements, research
and development programs; timing and expenses of obtaining regulatory approvals;
levels of resources that the Company devotes to the development of
manufacturing, sales 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 December 31, 1997, the Company had $69.7 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 1997 include
$3.5 million from the issuance of common stock under employee stock option and
employee stock purchase plans and $3.0 million from funding under a loan to
finance equipment purchases. Uses of cash, cash equivalents and securities
available-for-sale during 1997 include $2.8 million used in operations, $5.9
million used to purchase capital equipment, a $3.0 million preferred equity
investment in Cytokine Networks, Inc. ("CNI") and $4.1 million used to pay notes
payable.
24
<PAGE> 26
In September 1997, the Company entered into an agreement with a financial
institution under which the Company purchased in a private transaction a capped
call option, exercisable only at maturity, representing the Company's right to
purchase from the financial institution up to 600,000 shares of the Company's
Common Stock. The Company has the right to settle the capped call option by
receiving cash or stock. The capped call option which the Company purchased is
expected to be settled, if exercised, with cash paid to the Company in an amount
equal to the difference between the strike price and the market price, subject
to caps which will limit the total amount of cash the Company could receive.
Simultaneously, with its purchase of the capped call option, the Company
sold to the same financial institution a call option, exercisable only at
maturity, entitling the financial institution to purchase from the Company up to
900,000 shares of the Company's Common Stock at a certain strike price per
share. The Company has the right to settle the call option with cash or stock
and, if exercised, the Company expects to settle the call option by issuing up
to 900,000 shares of the Company's Common Stock to the financial institution.
The financial institution has advised the Company that it has engaged, and may
continue to engage, in transactions, including buying and selling shares of the
Company's Common Stock, to offset its risk relating to the call option, which
could affect the market price of the Company's Common Stock.
In September 1997, the Company and CNI entered into a development and
license agreement for the development of inflammatory and autoimmune disease
products based upon CNI's Anti-MIF antibody technology and a stock purchase
agreement providing for certain equity investments in CNI by the Company. Under
the terms of these agreements, the Company may make payments totaling up to
$10.5 million, subject to the attainment of certain product development
milestone events. Additionally, the Company will pay CNI royalties on sales by
the Company of any products emerging from the collaboration. In 1997 the Company
made a $3.0 million preferred equity investment in CNI.
Under the terms of the 9-AC asset transfer agreement, the Company may make
payments to Pharmacia totaling up to $16.0 million, subject to the attainment of
certain product development milestone events. No royalties are payable to
Pharmacia on sales of any products commercialized by the Company emerging from
the agreement. The Company anticipates achieving a product development milestone
event in 1999 that would result in the Company making a $6.0 million payment to
Pharmacia.
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 $.4 million in July 1998 and January 1999, respectively.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("Statement No. 130"). Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purposes financial
statements. Statement No. 130 shall be effective for fiscal years beginning
after December 15, 1997 and requires reclassification of earlier periods
presented. The Company does not believe the adoption of Statement No. 130 will
have a significant impact on the Company's results of operations or financial
position for the year ending December 31, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("Statement No. 131"), effective for fiscal years beginning after December 15,
1997. Statement No. 131 establishes standards for reporting information about
operating segments in annual financial statements and selected information about
operating segments in interim financial reports issued to stockholders. The
Company does not believe the adoption of Statement No. 131 will have a
significant impact on the Company's consolidated financial statement
disclosures.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit
25
<PAGE> 27
entries to distinguish 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Management has initiated its Year 2000 Program, which has already
identified several manufacturing software systems that are not yet Year 2000
compliant. The Company expects to complete its audit by the end of February and
intends to complete its third-party confirmations and begin its remedial phase
by the end of the third quarter. While the Company has begun evaluating
potential strategies for resolving Year 2000 problems, the dollar amount that
the Company will spend to remediate its Year 2000 issues remains uncertain, and
management has not yet assessed the Year 2000 compliance expenses and related
potential effect on the Company's operations. The Company expects to incur
internal personnel expenses as well as consulting and other expenses related to
the infrastructure and facilities enhancements necessary to prepare the
Company's systems for the year 2000.
The Company anticipates its Year 2000 Program will be completed before
January 1, 2000. However, there can be no assurance that the Year 2000 Program,
or computer systems and applications of other companies on which the Company's
operations rely, will be timely converted, or that any such failure to convert
by another company would not have a material adverse effect on the Company's
systems. Moreover, a failure to correct any non-compliant manufacturing software
could disable the Company's manufacturing capacity, resulting in inventory and
product shortages and ultimately creating higher manufacturing costs for the
Company. See "Risk Factors -- Limited Manufacturing Experience."
26
<PAGE> 28
BUSINESS
IDEC Pharmaceuticals is primarily engaged in the commercialization and
research and development of targeted therapies for the treatment of cancer and
autoimmune and inflammatory diseases. The Company's first commercial product,
Rituxan, and its most advanced product candidate are for treatment of B-cell
non-Hodgkin's lymphomas, which afflict approximately 250,000 patients in the
United States. The Company is also developing products for the treatment of
solid tumors, which afflict approximately 1,100,000 new patients each year in
the Unites States, and rheumatoid arthritis, which afflicts approximately
2,000,000 people in the United States.
BACKGROUND
ANTIBODIES AND THE IMMUNE SYSTEM
The immune system is composed of specialized cells, including B cells and T
cells, that function in the recognition, destruction and elimination of disease
causing foreign substances and of virally infected or malignant cells. The role
of these specialized cells is determined by receptors on the cell surface which
govern the interaction of the cell with foreign substances and with the rest of
the immune system. For example, each differentiated B cell of the immune system
has a different antibody anchored to its surface that serves as a receptor to
recognize foreign substances. This antibody then triggers the production of
additional antibodies which as free-floating molecules bind to and eliminate
these foreign substances. Each foreign substance is individually identifiable by
structures on its surface known as antigens, which serve as binding sites for
the specific antibodies. T cells play more diverse roles, including the
identification and destruction of virally infected or malignant cells.
A variety of technologies have been developed to produce antibodies as
therapeutic agents. These include hybridoma technology and molecular biology
techniques such as gene cloning and expression, which can now be applied to the
generation, selection and production of hybrid monoclonal antibody varieties
known as chimeric and humanized antibodies, as well as strictly human
antibodies. Chimeric antibodies are constructed from portions of non-human
species (e.g., mouse) antibodies and human antibodies. In these applications,
the portion of the antibody responsible for antigen binding (the "variable
region") is taken from a non-human antibody and the remainder of the antibody
(the "constant region") is taken from a human antibody. Compared to mouse
("murine") monoclonal antibodies, chimeric antibodies generally exhibit lower
immunogenicity (the tendency to trigger an often adverse immune response such as
a human anti-mouse antibody, or "HAMA" response), are cleared more slowly from
the body, and function more naturally in the human immune system. Humanized
antibodies can be constructed by grafting several small pieces of a murine
antibody's variable region onto a constant region framework provided by a human
antibody. This process, known as "CDR grafting," reduces the amount of foreign
materials in the antibody, rendering it closer to a human antibody. However, the
construction of humanized antibodies by CDR grafting requires complex computer
modeling, and the properties of the resulting antibody are not completely
predictable and may, in fact, still trigger a HAMA response.
B-CELL NON-HODGKIN'S LYMPHOMAS
As with other cell types in the body, B cells and T cells may become
malignant and grow as immune system tumors, such as lymphomas. B-cell
non-Hodgkin's lymphomas are cancers of the immune system which currently afflict
approximately 250,000 patients in the United States. Treatment alternatives for
lymphoma patients include chemotherapy, radiation therapy, and more recently,
the Company's Rituxan that is indicated for use in relapsed or refractory,
low-grade or follicular, CD20 positive, B-cell non-Hodgkin's lymphoma. B-cell
non-Hodgkin's lymphomas are diverse with respect to prognosis and treatment, and
are generally classified into one of three groups (low, intermediate or
high-grade) based on histology and clinical features. These three groups are
further subdivided by the International Working Formulation ("IWF") into
subclasses A through J: low grade (A, B and C); intermediate grade (D, E, F and
G); and high grade (H, I and J). Low grade or follicular B-cell non-Hodgkin's
lymphoma is comprised of IWF subclasses A through D. The Company estimates that
approximately half of the 250,000 patients afflicted with B-cell non-Hodgkin's
27
<PAGE> 29
lymphoma in the United States have low grade or follicular disease; of these
roughly 18,000 will have been diagnosed during the past 12 months. Patients with
low-grade lymphomas have a fairly long life expectancy from the time of
diagnosis (median survival 6.6 years), despite the fact that low-grade lymphomas
are almost always incurable. Intermediate-grade and high-grade lymphomas are
more rapidly growing forms of these cancers, which in a minority of cases can be
cured with early, aggressive chemotherapy. New diagnoses of non-Hodgkin's
lymphomas have increased approximately 5.9% annually over the past decade, with
55,400 new diagnoses estimated for 1998. The increase is due in part to the
aging of the population and to the increasing prevalence of lymphomas in the
AIDS patient population. In approximately 90% of the cases in the United States,
non-Hodgkin's lymphomas are of B-cell origin, the remainder is of T-cell origin.
Owing to the fluid nature of the immune system, B-cell lymphomas are
usually widely disseminated and characterized by multiple tumors at various
sites throughout the body at first presentation. Treatment courses with
chemotherapy or radiation therapy often result in a limited number of remissions
for patients with B-cell lymphomas. The majority of patients in remission will
relapse and ultimately die either from their cancer or from complications of
standard therapy. Fewer patients achieve additional remissions following relapse
and those remissions are generally of shorter duration as the tumors become
increasingly resistant to subsequent courses of chemotherapy. Therapeutic
product development efforts for these cancers have focused on both improving
treatment results and minimizing the toxicities associated with standard
treatment regimens. Immunotherapies with low toxicity and demonstrated efficacy,
such as Rituxan, might be expected to reduce treatment and hospitalization costs
associated with side effects or opportunistic infections, which can result from
the use of chemotherapy and radiation therapy.
SOLID TUMOR CANCERS
Solid tumor cancers consist primarily of non-hematologic malignancies and,
according to American Cancer Society estimates, approximately 1.1 million new
cases will be diagnosed in 1998. The five most frequently diagnosed solid tumors
account for 59% of all cancers (722,300 new cases) and include prostate
(184,500), breast (180,300), lung (171,500), colorectal (131,600) and bladder
(54,000). Standard therapies for most solid tumors include surgery, radiation,
chemotherapy or some combination of the three modalities. The Company has
initiated a Phase I/II indication-seeking clinical trial for 9-AC in eight
different solid tumor-types. The selection of the specific tumor-types focused
mainly on those cancers that are characterized as "chemotherapy resistant" where
objective response rates of greater than 20% are considered clinically
meaningful. These eight tumor types include head and neck, non-small cell lung,
pancreatic, gastric, colorectal, hormone refractory prostate, bladder and renal.
Together, these tumor-types are estimated to account for 505,500 new cases of
cancer in 1998.
AUTOIMMUNE AND INFLAMMATORY DISEASES
Rheumatoid arthritis, SLE, psoriasis, inflammatory bowel disease ("IBD")
and multiple sclerosis ("MS") are autoimmune and inflammatory diseases that
require ongoing therapy and afflict more than 6 million patients in the United
States. Of these, approximately 2,000,000 people are afflicted with rheumatoid
arthritis. Autoimmune disease occurs when the patient's immune system goes awry,
initiating a cascade of events which results in an attack by the patient's
immune system against otherwise healthy tissue and often includes inflammation
of the involved tissue. In rheumatoid arthritis, the disease attacks the
synovial lining of the patient's joints, usually resulting in the destruction of
the joints of the hands, hips and knees. The patient's condition evolves from
constantly painful joints to the disability of deformed, misaligned joints.
Autoimmune diseases such as rheumatoid arthritis are typically treated with
products such as steroids and nonsteroidal, anti-inflammatory agents and with
other therapies, all of which are limited for several reasons, including their
lack of specificity and ineffectiveness when used chronically. Furthermore,
steroids suppress the immune system and make the patient susceptible to
infections while nonsteroidal, anti-inflammatory agents have been implicated in
the formation of gastro-intestinal ulcerations.
28
<PAGE> 30
ANTIBODIES AND THE REGULATION OF IMMUNE SYSTEM CELLS
Monoclonal antibodies may be used to bind to specific subsets of human
immune system cells and may act to deplete or to suppress the activity of the
targeted cells. Indeed, the high specificity of monoclonal antibodies enable
them to discriminately act against different types of B cells or T cells.
Depletion of diseased immune cells or suppression of disease-causing immune
activities may be possible by using antibodies that attach to specific
determinants on the surface of target immune system cells. In particular, the
individual B and T cells of the immune system express a broad variety of surface
determinants (cell surface markers). Such determinants not only differentiate
one cell type from another, but also differentiate individual cells from other
cells with specificity for different antigens. Monoclonal antibodies may also be
used to bind to molecules, such as cytokines, in the plasma which serve as
soluble mediators of immune system cell activity. By neutralizing these
molecules, monoclonal antibodies may be used to alter immune cell activity
and/or migration, for example, in inflammatory conditions.
IDEC PHARMACEUTICALS' TECHNOLOGY
IDEC Pharmaceuticals is developing products for the management of immune
system cancers, solid tumors and autoimmune and inflammatory diseases. The
Company's antibody products bind to specific subsets of human immune system
cells, or to soluble mediators of immune cell activity, and act to deplete or to
alter the activity of these cells. The products are administered intravenously
and target cells or soluble mediators located in easily accessible compartments
of the body, specifically the blood, the lymphatic fluid and the synovial fluid.
For treatment of non-Hodgkin's B-cell lymphomas, the Company's products target a
cell surface marker known as CD20 which is present only on B cells but not on
B-cell precursors. These products act to reduce total B-cell levels, including
both malignant and normal B cells. The depletion of normal B cells observed in
clinical experience to date has been only temporary, with regeneration occurring
within months. The Company believes that its recently launched product, Rituxan,
and the successful development of radioimmunotherapeutic agents, such as
IDEC-Y2B8, may provide therapeutic alternatives to complement and, in some
cases, replace chemotherapeutic agents in the treatment of B-cell non-Hodgkin's
lymphomas.
Due to their specificity and affinity for cell surface receptors,
monoclonal antibodies are also an attractive means by which to treat autoimmune
diseases. Attachment of monoclonal antibodies to specific cell surface receptors
can be used to suppress aberrant and unwanted immune activity. Historically,
however, the use of monoclonal antibodies as an ongoing therapy has been limited
by the body's rejection of the mouse derived components of the antibodies.
Murine monoclonal antibodies, which are structurally different from human
antibodies, tend to trigger adverse immune reactions when used as therapies.
These reactions include a HAMA response in which the patient's immune system
produces antibodies against the therapeutic antibody, thus limiting its
effectiveness.
The Company has developed a proprietary PRIMATIZED antibody technology
designed to avoid HAMA responses and other immunogenicity problems by developing
monoclonal antibodies from primate rather than mouse B cells. These antibodies
are characterized by their strong similarity to human antibodies and by the
absence of mouse components. In March 1996, the Company received a Notice of
Allowance for a U.S. patent application claiming the Company's PRIMATIZED
antibodies. Underlying this proprietary technology is the Company's discovery
that macaque monkeys produce antibodies that are structurally indistinguishable
from human antibodies in their variable (antigen-binding) regions. Further, the
Company found that the macaque monkey can be immunized to make antibodies that
react with human, but not with macaque, antigens. Genetic engineering techniques
are then used to isolate the portions of the macaque antibody gene that encode
the variable region from a macaque B cell. This genetic material is combined
with constant region genetic material from a human B cell and inserted into a
host cell line which then expresses the desired antibody specific to the given
antigen. The result is a part human, part macaque PRIMATIZED antibody which
appears structurally to be so similar to human antibodies that it may be
accepted by the patient's immune system as "self." This development allows the
possibility of therapeutic intervention in chronic diseases or other conditions
that are not amenable to treatment with antibodies containing mouse components.
29
<PAGE> 31
The Company has also discovered a proprietary antigen formulation, PROVAX,
which has shown the ability to induce cellular immunity, manifested by cytotoxic
T lymphocytes, in animals immunized with protein antigens. Cellular immunity is
a counterpart to antibody-based immunity and is responsible for the direct
destruction of virally infected and malignant cells. PROVAX is a combination of
defined chemical entities and may provide a practical means for the development
of effective immunotherapies that act through the induction of both antibody and
cell-mediated immunity. The Company believes such immunotherapies may be useful
for the treatment of certain cancers and viral diseases. Preliminary studies
also indicate that PROVAX can be safely administered by injection to human
subjects. The Company intends to make PROVAX available through licenses and
collaborations to interested partners for development of immunotherapeutic
vaccines.
IDEC Pharmaceuticals has developed methods of engineering mammalian cell
cultures using proprietary gene expression technologies (its "vector
technologies") that rapidly and reproducibly select for stable cells, producing
high levels of desired proteins. These technologies allow the efficient
production of proteins at yields that may be significantly higher, and costs
that may be significantly lower, than current, competing cell culture methods.
IDEC Pharmaceuticals has successfully applied one of these technologies to the
commercial scale production of Rituxan.
30
<PAGE> 32
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
Rituxan and the Company's primary products under development address immune
system cancers, such as lymphomas, solid tumors, and autoimmune and inflammatory
diseases, such as rheumatoid arthritis. In addition, the Company has discovered
certain other products through the application of its technology platform. The
products in preclinical and clinical development by the Company include the
following.
<TABLE>
<S> <C> <C> <C>
INDICATION STATUS(1) DEVELOPMENT/MARKETING
------------------------- ------------------------- -------------------------
IMMUNE SYSTEM CANCER PRODUCTS:
Rituxan........................ Certain B-cell non- U.S.: Approved Genentech (U.S.
Hodgkin's lymphomas co-promotion)
European Union: MAA Hoffmann-LaRoche
pending
Switzerland: Approved Hoffmann-LaRoche
Japan: Phase II Zenyaku
IDEC-Y2B8...................... Certain B-cell non- Phase III Hoffmann-LaRoche (option
Hodgkin's lymphomas to commercialize outside
(radioimmunotherapy) the U.S.)
IDEC-In2B8..................... Certain B-cell non- Phase III Hoffmann-LaRoche (option
Hodgkin's lymphomas to commercialize outside
(tumor imaging and the U.S.)
dosimetry)
9-AC........................... Solid tumors Phase I/II No current partner
AUTOIMMUNE AND INFLAMMATORY PRODUCTS:
PRIMATIZED IDEC-151............ Rheumatoid arthritis Phase II portion of Phase I/II SmithKline Beecham
(worldwide)
PRIMATIZED IDEC-CE9.1.......... Under consideration for -- SmithKline Beecham
new indication (worldwide)
Humanized Anti-gp39 Various autoimmune Phase I Eisai (Europe and Asia)
(IDEC-131)................... diseases, initially SLE
PRIMATIZED Anti-gp39........... Various autoimmune Lead compound selected Eisai (Europe and Asia)
diseases
PRIMATIZED Anti-B7............. Various autoimmune Preclinical development Mitsubishi (Asia)
diseases, initially
psoriasis
PRIMATIZED Anti-CD23........... Various allergic Lead compound selected Seikagaku (Europe and
conditions, initially Asia)
allergic asthma
Humanized and PRIMATIZED
Anti-MIF..................... Various Inflammatory Discovery No current partner
conditions
OTHER PRODUCTS:
PROVAX (antigen formulation)... Cancer therapeutic Phase I(2) No current partner
vaccines
</TABLE>
- ---------------
(1) As used in this Prospectus, "Discovery" means that the research phase is
ongoing and a lead compound has not yet been selected. "Lead compound
selected" means agents have been identified that meet preselected criteria
in assays for activity and potency. "Preclinical development" means lead
compound undergoing testing required prior to submission of IND. "Phase I"
means initial human studies designed to establish the safety, dose tolerance
and pharmacokinetics of a compound. "Phase I/II" means initial human studies
designed to establish the safety, dose tolerance and pharmacokinetics of a
compound and which may be designed to show preliminary activity of a
compound in patients with the targeted disease. "Phase II" means human
studies designed to establish safety, optimal dosage and preliminary
activity of a compound. "Phase III" means human studies designed to lead to
accumulation of data sufficient to support a BLA, including data relating to
efficacy. For a further description of "On Clinical Hold," see "-- Products
and Products Under Development -- Autoimmune and Inflammatory
Products -- PRIMATIZED IDEC-151 and IDEC-CE9.1.
(2) Although Phase I trials have been completed, the Company does not intend to
pursue further development unless and until it enters into a partnering
arrangement for such development.
IMMUNE SYSTEM CANCER PRODUCTS
IDEC Pharmaceuticals' objective with respect to treating non-Hodgkin's
B-cell lymphomas is to use its pan-B antibodies to target, bind to and
selectively eliminate both the patient's normal and malignant B cells.
31
<PAGE> 33
Rituxan. Rituxan is a genetically engineered, chimeric murine/human
monoclonal antibody designed to harness the patient's own immune mechanisms to
destroy tumor cells. Rituxan was approved by the FDA for treatment of certain
B-cell non-Hodgkin's lymphomas. Rituxan has also been approved in Switzerland
and other European approvals are pending. Laboratory studies performed by the
Company have shown that the antibody attaches to the CD20 antigen on B cells and
activates a group of proteins known as "complement," leading to normal and
malignant B-cell destruction. Additionally, the antibody, when bound to the CD20
antigen, recruits macrophages and natural killer cells to attack the B cell.
Through these and other mechanisms, the antibody utilizes the body's immune
defenses to lyse (rupture) and deplete B cells. B cells have the capacity to
regenerate from early precursor cells that do not express the CD20 determinant.
The depletion of normal B cells observed in clinical experience to date has been
only temporary, with normal B-cell regeneration typically occurring within six
to nine months. The capacity of a tumor to regrow after treatment with Rituxan
will depend on the number of malignant B cells, or malignant B-cell precursors
(if the malignancy first appeared within a precursor cell), remaining after
treatment.
Rituxan is the first monoclonal antibody approved by the FDA for a cancer
therapy indication. Rituxan is unique in the treatment of non-Hodgkin's lymphoma
due to its specificity for the antigen CD20, which is expressed only on normal
and malignant B cells, but not on other tissues of the body, and mechanism of
action as compared to conventional lymphoma therapies. These properties of
Rituxan contribute to the agent's favorable side effect profile as compared to
chemotherapy and allows its use in clinical settings where chemotherapy is
either poorly tolerated or ineffective in inducing disease remissions. Rituxan
is easily administered in the outpatient setting by personnel trained in the use
of chemotherapies. A full course of Rituxan therapy consists of four intravenous
infusions given on days 1, 8, 15 and 22, whereas chemotherapy is given typically
in repeating cycles for up to four to eight months.
Rituxan is indicated for single agent use in relapsed or refractory, low
grade or follicular, CD20 positive, B-cell non-Hodgkin's lymphomas, which
comprise about half of the prevalence of the disease in the United States.
Ongoing or completed Phase II studies suggest that Rituxan may also be useful in
combination with chemotherapy in low grade or follicular lymphomas, and as a
single agent, or in combination with various chemotherapies, in the treatment of
other forms of non-Hodgkin's lymphoma. In Phase III clinical trials, Rituxan
given as a single agent to patients with relapsed or refractory, low grade or
follicular, CD20 positive, B-cell non-Hodgkin's lymphoma, demonstrated tumor
shrinkage in 87% of patients. Fifty percent of evaluable patients (76 of 151
patients) achieved partial or complete responses to therapy, i.e., achieved
tumor shrinkage of greater than 50%. The median time to progression (time to
tumor regrowth following treatment) in these 76 responders had not been reached
at 12.5 months following initiation of therapy, despite the short duration (22
days) of the full course of therapy. Rituxan has been well tolerated in clinical
studies with side effects being primarily mild to moderate flu-like symptoms
that generally are limited to the period of infusion. As compared to
chemotherapy, Rituxan does not harm the bone marrow and therefore does not cause
the myelosuppression that is a source of much of chemotherapy-associated
morbidity and mortality. Also, Rituxan has been shown to induce meaningful
remissions of disease in poor prognosis patients such as the elderly, patients
failing autologous bone marrow transplants and/or anthracycline containing
therapies, and patients who have become refractory to chemotherapy.
In 1996, the Company and Genentech completed a Phase III trial of Rituxan
at over 30 clinical sites including leading cancer centers in the United States
and Canada. In this Phase III open label, single arm testing of Rituxan as a
single agent therapeutic, each of the patients participating in the study
received four infusions of the antibody on an outpatient basis during a 22-day
period. Of the 166 patients entered into the study, 161 completed all four
courses of therapy. Of the 166 patients entered into the study, 151 patients
were evaluable for response rate analysis. The 15 patients not considered
evaluable, due to lack of therapy completion or protocol violations, are
included in the overall response rate as non-responders. Of 166 patients
entered, 80 responded (showed at least 50% reduction in tumor size) to treatment
with Rituxan, for an overall response rate of 48%. Ten of these responses were
complete responses (6%) and 70 were partial responses (42%). As of the most
recent analysis, of the responding patients, 47% were still in remission at over
12.5 months' median follow-up, with the longest ongoing duration of response at
22.8 months.
32
<PAGE> 34
The following table shows the percentage change in tumor size in all 166
patients entered into the Phase III trial of Rituxan in B-cell non-Hodgkin's
lymphoma. Though all patients had progressive disease at the initiation of
treatment, 87% showed evidence of reduction in tumor bulk. Among the responders
(tumor shrinkage of at least 50%), the median tumor shrinkage was 90%.
MAXIMUM PERCENTAGE CHANGE IN TUMOR SIZE AMONG ALL TREATED PATIENTS(1)
GRAPH
(1) Tumor shrinkage measured radiographically for the 166 patients
by sum of products of lesion perpendicular diameters. Data
represents the greatest shrinkage achieved by each patient
during the observation period. Subsequent tumor growth may
have occurred and data for three patients are unavailable.
(2) Includes two patients with increase in lesion size greater
than 100%.
Retrospective analysis of patient subgroups in the Phase III Rituxan trial
showed responses in patients with poor prognostic features such as age greater
than 60, extranodal disease, prior relapse from autologous bone marrow
transplant, or relapse or failure of anthracycline containing regimens.
The most common adverse events associated with Rituxan, based on the
Company's clinical trial experience, were infusion-related, consisting mainly of
mild to moderate flu-like symptoms (e.g., fever, chills, rigors) that occurred
in the majority of patients during the first infusion. Other events which
occurred with less frequency included nausea, rashes, fatigue and headaches.
More serious events included hypotension, wheezing, sensation of tongue or
throat swelling and recurrence of cardiac events in patients with a history of
angina or arrhythmia. These symptoms were usually limited in duration to the
period of infusion and decreased with subsequent infusions. These adverse events
are generally more mild and of a shorter duration than the adverse events
associated with chemotherapy.
33
<PAGE> 35
In addition to these findings, the Company observed the disappearance from
the patients' bone marrow of a chromosomal translocation marker (bcl-2)
associated with malignant cells, which was present prior to treatment. The tumor
marker gene reverted to negative in the peripheral blood of over 70% of the
patients who were positive at baseline, and in the bone marrow of over 50% of
patients who were positive at baseline. Researchers have previously reported
clearance of this marker from bone marrow with marrow transplantation regimens
incorporating ex-vivo marrow purging and only rarely with chemotherapy regimens.
However, the clinical significance of bcl-2 conversion has not yet been
determined.
The completion of the Phase III clinical trial supported the submission to
the FDA in February 1997, by the Company and Genentech, of BLAs for Rituxan as a
single agent therapy for the treatment of relapsed or refractory, low grade or
follicular, CD20 positive, B-cell non-Hodgkin's lymphoma. Hoffmann-LaRoche also
submitted an MAA with the EMEA for marketing Rituxan (under the trade name
MabThera) in Europe. On November 26, 1997, IDEC Pharmaceuticals received
approval from the FDA to begin marketing Rituxan in the United States. On
November 28, 1997, Hoffmann-LaRoche received approval to begin marketing
MabThera in Switzerland. Approval to begin marketing in the 15 European Union
countries is not anticipated until mid-1998, at the earliest.
In an effort to identify expanded applications for Rituxan, the Company, in
conjunction with Genentech, has authorized over 35 Rituxan post-marketing trials
to date. Several of these trials will explore the use of Rituxan in a variety of
investigational B-cell non-Hodgkins lymphoma clinical settings including: (i)
combination therapy with widely used chemotherapy regimens for both low grade
and intermediate/high grade disease; (ii) single agent therapy in newly
diagnosed, previously untreated low grade disease; (iii) integration into
autologous bone marrow transplant regimens both as an in-vivo purging agent
prior to bone marrow harvest and post-transplant as consolidation therapy; and
(iv) treatment of AIDS-related lymphoma. Additionally, clinical trials will be
initiated in other B-cell malignancies and pre-malignant conditions such as CLL,
multiple myeloma and lymphoproliferative disorders associated with solid organ
transplant therapies.
Also, the Company and Genentech have committed to providing drug to a small
group of trials to be undertaken by NCI-funded cooperative study groups. At
least two of these trials will be large Phase III studies designed to explore
the utility of Rituxan in combination with standard chemotherapy regimens. No
assurance can be given that such trials will be successful or that any of them
will lead to a broadening of the usage of Rituxan.
IDEC-Y2B8 and IDEC-In2B8. Due to the sensitivity of B-cell tumors to
radiation, radiation therapy has historically played, and continues to play, an
important role in the management of B-cell lymphomas. Radiation therapy
currently consists of external beam radiation focused on certain areas of the
body with tumor burden. IDEC Pharmaceuticals is developing two antibody products
which are intended to deliver targeted immunotherapy by means of injectable
radiation to target sites expressing the CD20 determinant, such as lymphatic
B-cell tumors, targeted for later stage patients requiring more aggressive
treatment. In clinical testing, IDEC-In2B8 is first used to image the patient's
tumor and to ensure that normal organs are not exposed to undue radiation from
the subsequently administered therapeutic product. The low-energy gamma particle
emitted by IDEC-In2B8 is detectable outside the body, thereby allowing the
physician to determine the localization of the antibody in the tumor. The
companion therapeutic product, IDEC-Y2B8, provides targeted radiation therapy by
emitting a high-energy beta particle that is absorbed by surrounding tissue,
leading to tumor destruction. The Company's objective with these products is to
provide safer, more effective radiation therapy than is possible with external
beam radiation and to provide this radiation therapy in an outpatient setting.
IDEC-Y2B8 is an anti-CD20 murine antibody that is securely bound to the
isotope yttrium-90. This radioisotope is well suited for therapeutic purposes
because of its energy, radius of activity and half-life. It emits only beta
radiation. Other radioisotopes, such as iodine-131, emit both beta and gamma
radiation and at certain therapeutic doses require that the patient be
hospitalized and isolated in a lead-shielded room for several days. In contrast,
the beta particle emitted by yttrium-90 is absorbed by tissue immediately
adjacent to
34
<PAGE> 36
the antibody. The Company believes that this short penetrating radiation will
permit the use of the product in outpatient therapy, and has conducted its
clinical trials in the outpatient setting.
The Company completed a dose-escalating Phase I clinical trial with
IDEC-Y2B8 in early 1995. Single doses of IDEC-Y2B8 showed clinical activity
comparable to that of intensive, multiple dose, salvage chemotherapy, with
response durations exceeding those of the patients' most recent chemotherapy. In
August 1996, the Company initiated a clinical trial that incorporates both
IDEC-Y2B8 and Rituxan, and preliminary results of this trial were reported at
the December 1997 meeting of the American Society of Hematology ("ASH"). In this
open label, Phase I/II clinical trial, patients with advanced, relapsed B-cell
non-Hodgkin's lymphoma received pretreatment with Rituxan to maximize tumor
localization and efficacy of subsequently administered IDEC-Y2B8. Patients
received 250mg/m(2) of Rituxan plus an imaging dose of IDEC-In2B8 on day one.
During the following week, patient tumors were imaged using the low-energy gamma
radiation emitted by the indium isotope. On day eight, patients received a
second infusion of Rituxan at 250mg/m(2) followed by a therapeutic dose of
IDEC-Y2B8 at 0.2, 0.3 or 0.4 mCi/kg of body weight. Across all dose groups, an
82% response rate was seen in the subpopulation of B-cell non-Hodgkin's lymphoma
(with a total of 31 patients having been evaluated). At the dose group of 0.4
mCi/kg, a 100% overall response rate was seen (seven of seven patients) in this
patient population.
The Company has initiated a Phase III trial of IDEC-Y2B8 for the proposed
treatment of B-cell non-Hodgkin's lymphoma. Accrual for this trial should be
completed in approximately one year. For this trial, 0.4 mCi/kg has been
selected as the standard dose, with patients having low platelet counts being
eligible for treatment at the lower dose of 0.3 mCi/kg.
The Company expects that Rituxan and IDEC-Y2B8 will provide complementary
products for the management of non-Hodgkin's lymphomas. Because most lymphomas
are treated today in community-based group practices, Rituxan fits nicely into
the community practice, as no special equipment or extensive training is
required for its administration or for management of treatment related side
effects. Rituxan has shown activity even in patients refractory to chemotherapy
and is indicated for this use, so that it may provide a viable option for the
community-based oncologist prior to referral of the patient to the major medical
center for treatment with more aggressive therapies, potentially including
IDEC-Y2B8. By contrast, all radioimmunotherapies will be administered by the
nuclear medicine specialist or radiation oncologist at the major medical center
that is equipped for the handling, administration and disposal of radioisotopes.
Also, the nuclear medicine department, but not the community-based practice, has
the specialized equipment and governmental licenses that are required for use of
radioisotopes. Thus the Company believes that referral patterns will develop for
treatment of lymphoma patients with radioimmunotherapies at major medical
centers after the community-based oncologist has exhausted all other options,
such as Rituxan or chemotherapy, for the management of his or her patients. This
trend will be further reinforced by the observation made by the Company, and by
others working in the field, of the substantial clinical activity of
radioimmunotherapies in patients with late-stage disease that has become
refractory to chemotherapies. Thus, IDEC Pharmaceuticals is committed to the
development and commercialization of Rituxan and the investigational agent
IDEC-Y2B8 as complementary products which might be used throughout the course of
a patient's disease providing alternatives, for both the patient and the
healthcare professional, to conventional chemotherapies.
9-Aminocamptothecin. In July 1997, IDEC Pharmaceuticals completed its
acquisition of worldwide rights to 9-AC from Pharmacia. This drug was acquired
as part of a consent decree issued by the Federal Trade Commission ("FTC")
regarding the merger of Pharmacia AB with The Upjohn Company. IDEC
Pharmaceuticals now holds exclusive rights to all licenses and technology
related to 9-AC and is proceeding with clinical development of the compound. In
preclinical and Phase I/II clinical studies conducted by Pharmacia and the NCI,
9-AC has shown broad-spectrum activity against a variety of solid tumors. A
semi-synthetic analogue of the plant-derived molecule camptothecin, 9-AC belongs
to a class of drugs known as camptothecins that interferes with DNA replication
by inhibiting a critical nuclear enzyme, topoisomerase I. During 1996, two
compounds from the camptothecin class were approved for marketing by the FDA:
Hycamptin(R) (SmithKline Beecham) for the treatment of ovarian cancer and
Camptosar(R) (Pharmacia) for the treatment of colorectal cancer. In October
1997, the Company announced that it had begun treating patients as part of a
Phase I/II clinical trial of 9-AC. The trial is aimed at verifying the maximum
tolerated
35
<PAGE> 37
dose of 9-AC, determined by other investigators in earlier trials, and at
seeking an initial indication to pursue for marketing approval. The
investigational study population includes patients with any one of eight solid
tumor types: non-small cell lung, colorectal, pancreatic, gastric, bladder,
prostate, head and neck, or kidney. The initial protocol of the Phase I/II
study, being managed at the University of Alabama, is an escalating dose safety
study of 9-AC in nine patients. Once the maximum tolerated dose is confirmed,
the Company expects that patients, up to a total of 14 individuals in each of
the targeted tumor types, will be enrolled in Phase IIA of the study. The
Company intends to involve additional centers in the Phase II portion of the
trial. If the investigators see at least one response in any tumor type,
additional patients with that cancer will be studied in Phase IIB of the trial
to determine an estimate of the response rate for that disease. Once the
investigators identify a meaningful response rate for one or more tumor types,
the Company intends to choose one of those indications to take into a
registration or pivotal study.
AUTOIMMUNE AND INFLAMMATORY PRODUCTS
IDEC Pharmaceuticals is developing a new class of antibodies, termed
PRIMATIZED antibodies, that are of part human, part macaque monkey, origin.
These antibodies are structurally similar to, and potentially indistinguishable
by a patient's immune system from, human antibodies. PRIMATIZED antibodies may
provide therapeutic intervention for diseases or conditions not amenable to
chronic treatment with mouse-derived antibodies. The Company's objective with
its PRIMATIZED antibodies is to provide therapies that can be used to control
autoimmune diseases characterized by overactive immune functions. The Company
has entered into research and development collaborations with SmithKline
Beecham, Mitsubishi, Seikagaku and Eisai, all of which utilize the Company's
PRIMATIZED technology and which target distinct, cell surface determinants or
soluble mediators. See "-- Strategic Alliances."
PRIMATIZED IDEC-151 and IDEC-CE9.1. In March 1998, the Company and
SmithKline Beecham announced that they had selected IDEC-151 (designated
SB-217969 by SmithKline Beecham for its clinical development) as their lead
PRIMATIZED anti-CD4 antibody for the treatment of rheumatoid arthritis,
replacing IDEC-CE9.1 for that indication. The primary reason for this change was
that in the Phase I single dose, dose-escalating, placebo-controlled,
double-blinded portion of a Phase I/II study of 32 patients with moderate to
severe rheumatoid arthritis announced in late November 1997, IDEC-151 displayed
no CD4 depletion, no infusion-related adverse events and longer cell-coating
action than IDEC-CE9.1. Longer cell-coating action may be important for enhanced
clinical activity and may enable less frequent dosing as compared to IDEC-CE9.1.
By contrast, in June 1997, Phase III and supportive clinical trials of
IDEC-CE9.1 were placed on hold due to lowered CD4 cell counts in 35 out of 103
patients completing the first month of treatment, compared to 10 out of 136
measured at the same point in the Phase II trial. The earlier Phase II study
demonstrated significant clinical improvement in the signs and symptoms of
rheumatoid arthritis with IDEC-CE9.1 treatment. For example, according to the
American College of Rheumatology ACR-20 composite endpoint, 69%, 51% and 42%
response rates were seen in the 140 mg, 80 mg and 40 mg dose groups,
respectively, versus 19% in the placebo group in this double-blinded, Phase II
study.
The reason for the observed discrepancy in the frequency of CD4 depletion
between the Phase III trial and the earlier Phase II experience is uncertain.
Potential sources of this variation, including dose and schedule changes,
manufacturing changes and patient variables, will be investigated as part of a
comprehensive review of preclinical and clinical data. The rationale of anti-CD4
antibody for patients with rheumatoid arthritis is not to deplete CD4 but rather
to regulate their function. Because of IDEC-151's percent benefit of non-CD4
depletion and longer cell coating, IDEC-151 has replaced IDEC-CE9.1 as the lead
anti-CD4 product candidate for treatment of rheumatoid arthritis. The Company is
currently considering IDEC-CE9.1 for indications where CD4 depletion is better
tolerated or even warranted, such as bone marrow transplantation. When an
indication is chosen, the Company plans to undertake new clinical trials.
Humanized Anti-gp39 (IDEC-131) and PRIMATIZED Anti-gp39. In December 1995,
the Company entered into a research and development collaborative agreement with
Eisai. The collaboration focuses on developing humanized and PRIMATIZED
antibodies against the gp39 antigen. This antigen, also referred to
36
<PAGE> 38
as the CD40 ligand, is an essential immune system trigger for B-cell activation
and antibody production. Potential target indications include transplantation
and antibody-mediated autoimmune diseases such as idiopathic thrombocytopenic
purpura ("ITP") and SLE. The development of the Company's humanized anti-gp39
monoclonal antibody ("IDEC-131") is based on technology that the Company
licensed from Dartmouth College, where researchers have shown that the binding
of gp39 to its CD40 receptor on B cells is essential for proper immune system
function. These researchers generated anti-gp39 antibodies that blocked this
T-cell and B-cell interaction and halted disease progression in a variety of
animal models of disease characterized by abnormal or unwanted immune response.
Moreover, when researchers ended the animals' anti-gp39 treatments, the animals'
antibody-producing capacity returned to normal levels, but their disease
remained suppressed. Treatment with the anti-gp39 antibodies appeared to have
reset the animals' immune systems and restored a normal immune response. Under
the collaborative agreement, the Company and Eisai have agreed to develop a
humanized anti-gp39 antibody and launch additional efforts to develop a second
generation, PRIMATIZED anti-gp39 antibody. This effort has resulted in the
identification of the humanized anti-gp39 antibody lead candidate, IDEC-131,
which underwent preclinical testing, process development and manufacturing of
clinical trial material in early 1997. The Company filed an IND for IDEC-131 in
November 1997 and began a Phase I clinical study in SLE in February 1998.
PRIMATIZED Anti-B7. In November 1993, the Company entered into a research
and development collaboration with Mitsubishi that focuses on the development of
PRIMATIZED antibodies directed at a B7 determinant. This B7 determinant appears
on the surface of antigen-presenting cells and is involved in the interaction of
these cells with T cells in triggering a cascade of immune system responses.
Antibodies directed at B7 determinants may block this cascade and, therefore,
may be useful in preventing unwanted immune responses in certain inflammatory
and chronic autoimmune conditions such as psoriasis, arthritis and MS.
Mitsubishi has actively shared in the development process, generating animal
models and participating in research with the Company. This effort has resulted
in the identification of a PRIMATIZED antibody lead candidate which is
undergoing preclinical testing, process development and manufacturing of
clinical material.
PRIMATIZED Anti-CD23. In December 1994, the Company entered into a
collaboration with Seikagaku aimed at the development of PRIMATIZED anti-CD23
antibodies for the potential treatment of allergic rhinitis, asthma and other
allergic conditions. Antibodies against the CD23 receptor on certain white blood
cells inhibit the production of immune system molecules called immunoglobulin
class E, or IgE, which are known to trigger allergic conditions. At the same
time, anti-CD23 antibodies do not affect the production of the immunoglobulins
(the patient's own antibodies) responsible for granting protective immunity to
infectious agents. Thus, PRIMATIZED anti-CD23 antibodies may provide a unique
new approach to treating chronic illnesses such as allergic rhinitis and asthma.
This effort has resulted in the identification of a PRIMATIZED antibody lead
candidate which is expected to undergo preclinical testing, process development
and manufacturing of clinical material during 1998.
Humanized and PRIMATIZED Anti-MIF. MIF (macrophage migration inhibitory
factor) is the body's natural counter-regulatory cytokine which serves to
override the anti-inflammatory activities of natural and administered steroids.
Inhibition of MIF may represent a novel approach to the management of a variety
of acute and chronic inflammatory diseases, including steroid-resistant
rheumatoid arthritis and asthma. In September 1997, IDEC Pharmaceuticals
licensed from CNI, a privately-held biopharmaceutical company, development
rights to CNI's Anti-MIF antibody technology. Under the terms of the licensing
and development agreement, the Company became the exclusive licensee of CNI's
rights to the Anti-MIF antibody technology for therapeutic and diagnostic
applications. In return for these rights, the Company made a $3.0 million
preferred equity investment in CNI, which will also receive milestone payments
and royalties on the sales by the Company of approved products resulting from
the collaboration.
STRATEGIC ALLIANCES
The Company has entered into one or more strategic partnering arrangements
for each of its principal product development programs. Through these strategic
partners, the Company is funding a significant portion of its product
development costs and is capitalizing on the production, development,
regulatory, marketing and sales capabilities of its partners. Unless otherwise
indicated, the amounts shown below as potential payments
37
<PAGE> 39
include license fees, research and development fees and, with respect to
Genentech, SmithKline Beecham and Zenyaku, equity investments, but do not
include potential royalties. The Company's entitlement to such payments depends
on achieving milestones related to development, clinical trials results and
regulatory approvals and other factors. These arrangements include:
Genentech, Inc. In March 1995, the Company and Genentech entered into a
collaborative agreement for the clinical development and commercialization of
the Company's anti-CD20 monoclonal antibody, Rituxan, for the treatment of
B-cell non-Hodgkin's lymphomas. In November 1995, the Company, Zenyaku and
Genentech entered into a joint development, supply and license agreement
pursuant to which Zenyaku received exclusive rights to develop, market and sell
Rituxan in Japan and the Company will receive royalties on sales of Rituxan in
Japan. Concurrent with the collaborative agreement, the Company and Genentech
also entered into an expression technology license agreement for a proprietary
gene expression technology developed by the Company and a preferred stock
purchase agreement providing for certain equity investments in the Company by
Genentech. Under the terms of the Genentech agreements, the Company may receive
payments totaling $58.5 million, subject to the attainment of certain
milestones, of which $48.5 million has been recognized through December 31,
1997. In addition, the Company and Genentech are co-promoting Rituxan in the
United States. Genentech retained commercialization rights throughout the rest
of the world, except in Japan. Genentech has granted Hoffmann-LaRoche marketing
rights outside of the United States, and Hoffmann-LaRoche has elected to market
Rituximab under the trade name Mabthera. The Company and Hoffmann-LaRoche are
currently discussing an arrangement for commercialization of Rituxan in Canada,
but no assurance can be given that an arrangement will be found which will be
satisfactory to the Company, Hoffmann-LaRoche and Genentech, which previously
held co-promotion rights to Canada along with IDEC Pharmaceuticals. The Company
will receive royalties on sales outside the United States and Canada. The
collaborative agreement between the Company and Genentech provides two
independent mechanisms by which either party may purchase or sell its rights in
the co-promotion territory from/to the other party. Upon the occurrence of
certain events that constitute a change of control of the Company, Genentech may
elect to present an offer to the Company to purchase the Company's co-promotion
rights. The Company must then accept Genentech's offer or purchase Genentech's
co-promotion rights for an amount scaled (using the profit sharing ratio between
the parties) to Genentech's offer. Under a second mechanism, after a specified
period of commercial sales and (i) upon a certain number of years of declining
co-promotion profits or (ii) if Genentech files for U.S. regulatory approval on
a competitive product during a limited period of time, either party may offer to
purchase the other party's co-promotion rights. The offeree may either accept
the offer price or purchase the offeror's co-promotion rights at the offer price
scaled to the offeror's share of co-promotion profits. See "Description of
Capital Stock."
SmithKline Beecham, p.1.c. In October 1992, the Company and SmithKline
Beecham entered into an exclusive worldwide collaborative research and license
agreement limited to the development and commercialization of therapeutic
products based on the Company's PRIMATIZED anti-CD4 antibodies. Under the terms
of this agreement, the Company may receive payments in excess of $60.0 million,
subject to the attainment of certain milestones, of which $32.6 million has been
recognized through December 31, 1997. The Company will receive funding for
anti-CD4 related research and development programs, as well as royalties and a
share of co-promotion profits in the United States and Canada on sales of
products which may be commercialized as a result of the collaboration. At any
time, SmithKline Beecham may terminate this agreement by giving the Company 30
days' written notice based on a reasonable determination that the products do
not justify continued development or marketing. In connection with the
collaboration, SmithKline Beecham purchased shares of the Company's Common Stock
and warrants exercisable into Common Stock.
Mitsubishi Chemical Corporation. In November 1993, the Company entered into
a three-year collaborative agreement and an ongoing license agreement with
Mitsubishi for the development of a PRIMATIZED anti-B7 antibody. Under the terms
of the agreement, the Company may receive payments totaling $12.2 million to
fund research of the PRIMATIZED anti-B7 antibody, subject to the attainment of
certain milestones, of which $7.2 million has been recognized through December
31, 1997. Under the agreement, the Company has granted Mitsubishi an exclusive
license in Asia to make, use and sell PRIMATIZED anti-B7 antibody products. The
Company will receive royalties on sales by Mitsubishi of the
38
<PAGE> 40
developed products. At any time, Mitsubishi may terminate this agreement by
giving the Company 30 days' written notice based on a reasonable determination
that the products do not justify continued development or marketing or based on
failure to reach milestones.
Seikagaku Corporation. In December 1994, the Company and Seikagaku entered
into a collaborative development agreement and a license agreement aimed at the
development and commercialization of therapeutic products based on the Company's
PRIMATIZED anti-CD23 antibodies. Under the terms of these agreements, Seikagaku
may provide up to $26.0 million in milestone payments and support for research
and development, subject to the attainment of certain milestones, of which $14.5
million has been recognized through December 31, 1997. Under the agreement,
Seikagaku has received exclusive rights in Europe and Asia to all products
emerging from the collaboration. The Company will receive royalties on eventual
product sales by Seikagaku. At any time, Seikagaku may terminate this agreement
by giving the Company 60 days' written notice based on a reasonable
determination that the products do not justify continued development or
marketing.
Eisai Co., Ltd. In December 1995, the Company and Eisai entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies. Under the terms of these agreements, Eisai may provide up to $37.5
million in milestone payments and support for research and development, subject
to the attainment of certain milestones and satisfaction of other criteria to be
agreed upon between the parties, of which $15.6 million has been recognized
through December 31, 1997. Eisai will receive exclusive rights in Asia and
Europe to develop and market resulting products emerging from the collaboration,
with the Company receiving royalties on eventual product sales by Eisai. At any
time, Eisai may terminate this agreement by giving the Company 60 days' written
notice based on a reasonable determination that the products do not justify
continued development or marketing.
Chugai Pharmaceutical Co., Ltd. In March 1996, the Company and Chugai
entered into a worldwide license agreement (co-exclusive with IDEC
Pharmaceuticals, Genentech and up to two additional companies) for the Company's
proprietary vector technology for high expression of recombinant proteins in
mammalian cells. As part of the agreement, Chugai paid an up-front licensing fee
of $4.5 million to the Company and will pay royalties on sales of Chugai
products manufactured using the technology.
Boehringer Ingleheim GmbH. In December 1996, the Company and Boehringer
Ingleheim GmbH ("BI") entered into a worldwide license agreement (co-exclusive
with IDEC Pharmaceuticals, Genentech and up to two additional companies) for the
Company's proprietary gene expression technology (its "vector technology") for
high expression of recombinant proteins in mammalian cells. As part of the
agreement, BI paid an up-front licensing fee of $5.1 million to the Company and
will pay royalties on sales of BI products manufactured using the technology.
Kirin Brewery Co., Ltd., Pharmaceutical Division. In December 1997, the
Company and Kirin Brewery Co., Ltd., Pharmaceutical Division ("Kirin") entered
into a worldwide license agreement (co-exclusive with IDEC Pharmaceuticals,
Genentech and up to two additional companies) for the Company's proprietary
vector technology for high expression of recombinant proteins in mammalian
cells. As part of the agreement, Kirin paid an up-front licensing fee of $6.3
million to the Company, which will be recognized in the first quarter of 1998,
and will pay royalties to the Company on sales of Kirin products manufactured
using the technology.
MANUFACTURING
From its inception, the Company has focused on establishing and maintaining
a leadership position in cell culture techniques for antibody manufacturing.
Cell culture provides a method for manufacturing of clinical and commercial
grade protein products by reproducible techniques at various scales, up to many
kilograms of antibody. The Company's manufacturing facility is based on the
suspension culture of mammalian cells in stainless steel vessels. Suspension
culture fermentation provides greater flexibility and more rapid production of
the large amounts of antibodies required for pivotal trials than the bench-scale
systems that were previously utilized by the Company. During 1995, the Company
doubled the cell culture manufacturing capacity of its facility with the
installation of a second 2,750-liter production vessel that is supported by
existing upstream
39
<PAGE> 41
and downstream equipment. The Company's manufacturing facility has been approved
by the FDA only for the commercial manufacture of Rituxan and may not be used
for the commercial manufacture of other products. Additionally, the Company is
contractually required to manufacture Rituxan to capacity through the end of
1999, and may not produce other products except in a separate small-scale
manufacturing area dedicated to the manufacture of clinical materials (see "CMA"
below). The Company estimates that, at full capacity, it can produce within its
facility enough Rituxan to treat approximately 25,000 patients per year at the
approved dosage regime. See "-- Government Regulation."
During 1997, the Company completed construction of a new clinical cell
culture manufacturing area ("CMA") within the Company's Torreyana facility. The
CMA should allow for the manufacture under cGMP regulations of proteins by the
Company to meet its current projected Phase I and Phase II requirements, but the
CMA will not allow for the clinical manufacture of the drug 9-AC.
Because the Company's capacity is committed to the manufacture of Rituxan
for two years, it will not have the cell culture capacity to manufacture
commercial material for the Company's IDEC-Y2B8 and In2B8 products during such
period. The Company is currently accepting proposals for a qualified commercial
contractor to meet the long term manufacturing demands for IDEC-Y2B8 and In2B8.
In addition, as the Company does not have expertise or facilities for small
molecule chemical manufacturing, the Company will need to establish a long term
manufacturing arrangement for 9-AC with an appropriate contract manufacturer.
The Company's 9-AC clinical materials requirements will be met over the next two
years by Pharmacia, as part of the product in-license agreement. Additionally,
as the Company does not have fill/finish expertise, the Company will be
dependent on outside contractors to meet its current and future requirements for
fill/finish. See "Risk Factors -- Limited Manufacturing Experience."
During 1998, the Company plans to manufacture Rituxan at its manufacturing
facility in San Diego, California. The Company anticipates that its facility in
San Diego should provide sufficient production capacity to meet clinical and
early commercial requirements of Rituxan. The Company is dependent upon
Genentech to fill/finish and meet long-term manufacturing demands for Rituxan
and SmithKline Beecham to fulfill all of the manufacturing requirements for
IDEC-151 and/or IDEC-CE9.1. Genentech is currently constructing additional
manufacturing capacity in part to satisfy long-term demands for Rituxan and
SmithKline Beecham has constructed a larger manufacturing plant for IDEC-151
and/or IDEC-CE9.1. The Company is considering the addition of another
manufacturing facility to meet its long-term requirements for additional
products under development.
The Company has made its vector technology platform available for licensing
to a small number of other biopharmaceutical and pharmaceutical companies. In
March 1995, Genentech, one of the premier companies in recombinant DNA-based
production, became the first to license the Company's gene expression technology
for its own product development efforts. This technology has also been licensed
to Chugai, BI and Kirin.
SALES AND MARKETING
During 1998, the Company will depend on the successful marketing and sales
of Rituxan for much of its anticipated revenue. Rituxan will be marketed and
sold in the United States pursuant to a co-promotion agreement with Genentech,
which currently has a sales and marketing staff of approximately 50
professionals that is largely dedicated to the commercialization of Rituxan. To
fulfill its duties under the co-promotion agreement, the Company has recently
created a marketing staff and a sales organization of 32 professionals with
experience primarily in the oncology therapeutic category, who will be dedicated
exclusively to the commercialization of Rituxan. The Company expects to add two
more employees to this staff in 1998. The Company will rely heavily on Genentech
to supply related marketing support services including customer service, order
entry, shipping and billing, customer reimbursement assistance, managed-care
sales support, medical information, and sales training. There can be no
assurance that the Company's sales and marketing staff will successfully
transition the Company into long-term profitability. Furthermore, there can be
no assurance that Genentech will successfully perform its role in the
co-promotion relationship.
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
40
<PAGE> 42
of certain of the Company's products. To the extent that the Company elects to
participate in co-promotion efforts in the United States or Canada, and in those
instances where the Company retains exclusive marketing rights in specified
territories, the Company will need to maintain and expand its sales and
marketing effort in order to establish a successful direct sales capability in
the targeted markets. The Company will also need to build marketing support
services including customer service, order entry, shipping and billing, customer
reimbursement assistance, managed-care sales support, medical information and
sales training. 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 has entered or in the future 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. Failure to establish a sales
capability either in the United States or outside the United States may have a
material adverse effect on the Company. See "-- Sales and Marketing."
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. See
"Risk Factors -- Patents and Proprietary Rights."
PATENTS AND PROPRIETARY TECHNOLOGY
The biopharmaceutical field is characterized by a large number of patent
filings. 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 may 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 breadth of claims allowed
in biopharmaceutical patents. Moreover, United States and foreign country patent
laws are distinct and the interpretations thereunder unique to each country.
Thus, patentability, validity and infringement issues for the same technology or
inventions may be resolved differently in different jurisdictions. There can be
no assurance that patents do not exist in the United States or in foreign
countries or that patents will not be issued that would have an adverse effect
on the Company's ability to market 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 the field.
There can be no assurance that the licenses, which might be required for the
Company's processes or products, would be available on commercially acceptable
terms, if at all. The ability to license any such patents and the likelihood of
successfully contesting the scope 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.
IDEC Pharmaceuticals is the assignee of seven issued and 14 allowed U.S.
patents, 16 U.S. patent applications and numerous corresponding foreign patent
applications. Certain other patents and/or applications owned by third parties
have been exclusively licensed, as in the case of anti-gp39 core technology
licensed from Dartmouth College, or non-exclusively licensed by IDEC
Pharmaceuticals. The Company has filed trademark applications in the United
States, Canada and in certain international markets for the trademarks
"PRIMATIZED," "PROVAX," "Rituxan" and "IDEC Pharmaceuticals." "IDEC
Pharmaceuticals" and "PRIMATIZED" have been registered as trademarks in the
United States.
The Company has allowed and pending U.S. patent applications and pending
foreign counterparts broadly directed to its pan-B antibody technology,
including Rituxan, and the radioimmunoconjugates, IDEC-Y2B8 and IDEC-In2B8. The
Company's radioimmunoconjugate products include a chelating agent covered by a
U.S. patent that is non-exclusively sublicensed to the Company. The Company has
been granted by the European Patent Office a patent covering Rituxan. Genentech,
IDEC Pharmaceuticals' collaborative partner for Rituxan, has secured an
exclusive license to a U.S. patent and counterpart foreign patent applications
assigned to Xoma Corporation ("Xoma"), that relate to chimeric antibodies
against the CD20
41
<PAGE> 43
antigen. Genentech has granted IDEC Pharmaceuticals a non-exclusive sublicense
to make, have made, use and sell certain products, including Rituxan, under such
patents and patent applications. Genentech and the Company will share any
royalties due to Xoma in the Genentech/IDEC Pharmaceuticals co-promotion
territory.
The Company has filed for worldwide patent protection on its PRIMATIZED
antibody technology. In August 1997, the Company received U.S. Patent No.
5,658,570 claiming the Company's PRIMATIZED antibodies. Three additional U.S.
patents claiming the PRIMATIZED antibody technology were allowed in 1997. These
patents and applications generically and specifically cover the Company's
PRIMATIZED antibody technology.
PROVAX, the Company's antigen formulation, is the subject matter of two
issued U.S. patents, two allowed U.S. patents, one pending U.S. application and
pending foreign counterparts. In addition, U.S. and foreign patent applications
have been filed on aspects of the Company's proprietary high-yield gene
expression technology, including the Company's homologous recombination system.
The Company has been granted U.S. Patent No. 5,648,267 and has received a notice
of allowance on a U.S. patent claiming the high-yield gene expression
technology. In early 1998, the Company also received a Notice of Allowance for a
U.S. patent directed to its homologous recombination technology.
In late 1997, the Company received Notices of Allowance for six U.S.
patents. The first is directed to a patent claiming the Company's anti-gp39
patent, IDEC-131, and the remaining five broadly claim the Company's anti-RSV
antibody technology. Foreign counterparts of these allowed patents are pending.
The Company is aware of several third-party patents and patent applications
that, if successfully asserted against the Company, would affect the Company's
ability to make, use, offer to sell, sell and import its products. These
third-party patents and, patent applications include:
(i) U.S. patent applications and foreign counterparts filed by
Bristol-Myers Company that disclose antibodies to a B7 antigen;
(ii) a U.S. patent assigned to Columbia University, which the Company
believes has been exclusively licensed to Biogen, related to monoclonal
antibodies to the 5C8 antigen found on T cells. The Company believes the
5C8 antigen and gp39, the target for the Company's anti-gp39 antibodies and
its collaboration with Eisai, may be the same protein expressed on the
surface of T cells;
(iii) a number of issued patents that relate to various aspects of
radioimmunotherapy of cancer and to methods of treating patients with
anti-CD4 antibodies; and
(iv) three U.S. patents, assigned to Burroughs Wellcome, relating to
therapeutic uses of CHO glycosylated antibodies.
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. Specifically, 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 using such technology.
An inability to commercialize such products would have a material adverse effect
on the Company's business, results of operations and financial condition.
If the Company is required to enforce any of its patents, such enforcement
may require the use of substantial financial and human resources of the Company.
The Company may also have to participate in interference proceedings if declared
by the PTO to determine priority of invention, which typically take years to
resolve and could also result in substantial costs to the Company. Moreover,
should the Company need to defend against a patent lawsuit circumvent existing
patents, substantial delays and expense in product redesign and development or
significant legal expense and uncertainty in asserting non-infringement,
invalidity and/or unenforceability of any patent may also result. The Company
also relies upon unpatented trade secrets, and no
42
<PAGE> 44
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect such rights.
IDEC Pharmaceuticals requires its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisers to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with IDEC Pharmaceuticals is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees of the Company, the agreement provides that all inventions
conceived by such employees shall be the exclusive property of the Company.
There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secrets in
the event of unauthorized use or disclosure of such information.
COMPETITION
The development of therapeutic agents for human disease is intensely
competitive. Many different approaches are being developed or have already been
adopted into routine use for the management of diseases targeted by the Company.
Competitive approaches to the Company's products include radioimmunotherapies
and antibody-drug and antibody-toxin conjugates for cancers, and
chemotherapeutic agents and various immunologically based agents for cancers and
autoimmune disorders. Ultimately, the Company believes that its products will be
competitive or complementary to existing products and other products still in
development. In some cases, the Company's products may be used along with other
agents in "combination therapies."
Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these companies have extensive experience in preclinical testing and human
clinical trials. These companies may develop and introduce products and
processes competitive with or superior to those of the Company. The Company is
aware that certain other companies are in the process of clinical testing of
potentially competitive biotechnology-based products. If approved for the same
indications for which the Company is developing products, such products may make
it more difficult for the Company to obtain approval of its own products or
reduce the potential market shares for the Company's products.
The Company's competition will be determined in part by the potential
indications for which the Company's antibodies are developed and ultimately
approved by regulatory authorities. For certain of the Company's potential
products, an important factor in competition may be the timing of market
introduction versus that of competitive products. Accordingly, the relative
speed with which the Company develops its products, completes the required
approval processes and generates and markets commercial product quantities are
expected to be important competitive factors. The Company expects that
competition among products approved for sale will be based, among other factors,
on product activity, safety, reliability, availability, price, patent position
and new usage and purchasing patterns established by managed care and other
group purchasing organizations.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes, secure sufficient capital resources to
complete product development and regulatory processes, to build a marketing and
sales organization, and to build or obtain large-scale manufacturing facilities,
if required, beyond its facility in San Diego.
GOVERNMENT REGULATION
The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's product and proposed 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 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-AC, the Company
43
<PAGE> 45
believes that its products will be regulated by the FDA as biologics. Biologics
require the submission of a BLA and approval by the FDA prior to being marketed
in the United States. 9-AC, which the Company believes will be regulated by the
FDA as a drug, will require the submission of an NDA and approval by the FDA
prior to being marketed in the United States. The regulatory approval process
for an NDA is similar to the approval process for a BLA. Manufacturers of
biologics and drugs may also be subject to state regulation.
The steps required before a product 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 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 BLA or NDA, (v) FDA
review of the the BLA or NDA, and (vi) satisfactory completion of an FDA
inspection of the manufacturing facility or facilities at which the product is
made to assess compliance with 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.
Preclinical tests include laboratory evaluation of the product, as well as
animal studies to assess the potential safety and efficacy of the product. The
results of the preclinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND, which must become
effective before human clinical trials may be commenced. The IND will
automatically become effective 30 days after receipt by the FDA, unless the FDA
before that time raises concerns or questions about the conduct of the trials as
outlined in the IND. In such a case, the IND sponsor and the FDA must resolve
any outstanding concerns before clinical trials can proceed. There can be no
assurance that submission of an IND will result in FDA authorization to commence
clinical trials.
Clinical trials involve the administration of the investigational product
to healthy volunteers or patients under the supervision of qualified principal
investigators. Further, each clinical study must be reviewed and approved by an
independent Institutional Review Board.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety (adverse effects), dosage
tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase II usually involves studies in a limited patient population to (i)
evaluate preliminarily the efficacy of the drug for specific, targeted
indications, (ii) determine dosage tolerance and optimal dosage and (iii)
identify possible adverse effects and safety risks. Phase III trials generally
further evaluate clinical efficacy and test further for safety within an
expanded patient population.
In the case of products for severe or life-threatening diseases, the
initial human testing is sometimes done in patients rather than in healthy
volunteers. Since these patients are already afflicted with the target disease,
it is possible that such studies may provide evidence of efficacy traditionally
obtained in Phase II trials. These trials are frequently referred to as "Phase
I/II" trials. 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 product candidates. Furthermore, 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
health 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 or BLA or NDA requesting approval to
market the product. Before approving a BLA or NDA, 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 or NDA if
applicable regulatory criteria are not satisfied, require additional testing or
information, and/or 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 or NDA submitted by the Company will be granted on a timely basis or
at all. Also, if regulatory approval of a product is granted, such approval may
entail limitations on the indicated uses for which it may be marketed.
As a general matter, data regarding, for example, partial tumor shrinkage,
can be developed in less time than survival data or recurrence data in clinical
trials of cancer therapies. In 1996, the FDA adopted a policy
44
<PAGE> 46
under which BLAs or NDAs for cancer therapies may be submitted and considered
for approval on the basis of data from clinical trials showing, for example,
partial tumor shrinkage. Additionally, in November 1997, the Federal Food, Drug,
and Cosmetic Act was amended to codify certain FDA programs intended to expedite
approval of new drugs and biologics for the treatment of serious and
life-threatening diseases (the "FDCA Amendment"). In the past, the FDA has
deemed cancer a serious and life-threatening disease. It may therefore be
possible under the statutory amendments and the FDA's policy to submit a BLA or
NDA for cancer therapies on the basis of, for example, partial tumor shrinkage
earlier than for certain other types of drugs or biologics. There can be no
assurance, however, that the statutory amendments and the FDA's policy will be
deemed to apply to IDEC-Y2B8, 9-AC or any of the Company's other products, or
that, if applicable, the approval process will, in fact, be accelerated.
Moreover, the accelerated approval process does not necessarily increase the
likelihood that any of the Company's product candidates will be approved by the
FDA.
Additionally, the FDCA Amendment clarified that the FDA may, in certain
circumstances, approve a new drug or biologic on the basis of data from one
clinical study together with confirmatory scientific evidence obtained before or
after approval, rather than on the basis of data from two or more clinical
studies, as is ordinarily the case. It may therefore be possible, with the FDA's
concurrence, to submit a BLA or NDA for FDA approval on the basis of data from
one clinical study. There can be no assurance, however, that the FDA will apply
the statutory amendment to any BLA or NDA for IDEC-Y2B8, 9-AC or any of the
Company's other products, or that the FDA would approve such a BLA or NDA.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the BLA or
NDA review process, or thereafter (including after approval) 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 BLA or NDA
holder. For example, BLA and NDA 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 BLA or NDA 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 to obtain regulatory approval for marketing its
products in foreign countries.
Orphan Drug Designation. 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 or NDA. 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 which 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 Rituxan,
IDEC-Y2B8 and IDEC-In2B8 from the FDA to treat certain B-cell non-Hodgkin's
lymphomas (as defined on page 3). In connection with its
45
<PAGE> 47
approval by the FDA, Rituxan has received orphan drug exclusivity in the United
States. However, there can be no assurance that IDEC-Y2B8 or IDEC-In2B8 will
receive orphan drug exclusivity for the B-cell non-Hodgkin's lymphoma
indication, and it is possible that competitors of the Company could obtain
approval, and attendant orphan drug exclusivity, for IDEC-Y2B8 or IDEC-In2B8 for
the B-cell non-Hodgkin's lymphoma indication, thus precluding the Company from
marketing IDEC-Y2B8 or IDEC-In2B8 for that indication in the United States. In
addition, even if the Company does obtain orphan exclusivity for any of its
compounds for B-cell non-Hodgkin's lymphoma, there can be no assurance that
competitors will not receive approval of other, different drugs or biologics for
B-cell non-Hodgkin's 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.
PHARMACEUTICAL PRICING AND REIMBURSEMENT
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. 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 governmental control on pharmaceutical pricing. While the Company
cannot predict whether any such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
the Company's business, financial condition or prospects. In addition, the
Company's ability to commercialize its products successfully will depend in part
on the extent 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 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 adversely affect the
Company's ability to sell its products and may have a material adverse effect on
the Company.
EMPLOYEES
As of December 31, 1997, the Company employed 339 persons. The Company has
128 employees in research and development and 139 in manufacturing. In addition,
the Company retains approximately 100 independent contractors. None of the
Company's employees are represented by a labor union or bound by a collective
bargaining agreement. Management believes that its overall relations with its
employees are good.
ENVIRONMENTAL REGULATION
The Company's business involves the controlled use of hazardous materials,
chemicals and various 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 be held liable
for any damages that result and any such liability could exceed the resources of
the Company. The Company may incur substantial cost to comply with environmental
regulations. The Company anticipates no material capital expenditures to be
incurred for environmental compliance in fiscal year 1998. 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.
46
<PAGE> 48
MANAGEMENT
Certain information about the Company's executive officers and directors as
of January 31, 1998 is set forth below:
<TABLE>
<CAPTION>
NAME AGE TITLE
- --------------------------------- ---- --------------------------------------------
<S> <C> <C>
William H. Rastetter, Ph.D....... 49 President, Chief Executive Officer and
Chairman of the Board of Directors
Christopher J. Burman............ 48 Senior Vice President, Manufacturing and
Process Sciences
Antonio J. Grillo-Lopez, M.D..... 58 Senior Vice President, Medical and
Regulatory Affairs
Nabil Hanna, Ph.D................ 54 Senior Vice President, Research and
Preclinical Development
William R. Rohn.................. 54 Senior Vice President, Commercial Operations
John Geigert, Ph.D............... 48 Vice President, Quality
Connie L. Matsui................. 44 Vice President, Planning and Resource
Development
Phillip M. Schneider............. 41 Vice President and Chief Financial Officer
Kenneth J. Woolcott.............. 39 Vice President, Secretary, General Counsel
and Licensing Executive
Charles C. Edwards, M.D.......... 74 Director
Alan Burnett Glassberg........... 61 Director
John Groom....................... 59 Director
Kazuhiro Hashimoto............... 57 Director
Franklin P. Johnson, Jr.......... 69 Director
Robert W. Pangia................. 46 Director
Bruce R. Ross.................... 56 Director
The Honorable Lynn Schenk........ 53 Director
William D. Young................. 53 Director
</TABLE>
DR. RASTETTER was appointed Chairman of the Board of Directors of the
Company on May 22, 1996. He has served as President and Chief Executive Officer
of the Company since December 1986 and Chief Financial Officer from 1988 to
1993. Dr. Rastetter has served as a Director of the Company since 1986. From
1984 to 1986, he was Director of Corporate Ventures at Genentech. From 1982 to
1984, Dr. Rastetter served in a scientific capacity at Genentech, directing the
Biocatalysis and Chemical Sciences groups. From 1975 to 1982, he held various
faculty positions at the Massachusetts Institute of Technology. Dr. Rastetter
received his Ph.D. in chemistry from Harvard University in 1975.
MR. BURMAN joined the Company in May 1992 as Vice President, Manufacturing
Sciences and has served as Senior Vice President, Manufacturing and Process
Sciences since December 1997. He previously served from 1989 to 1992 as Director
of Manufacturing Technology at Life Sciences International. From 1985 to 1989,
he was t-PA Operations and Technical Services Manager at Genentech, where he was
responsible for the start-up of the t-PA manufacturing facility and
commercial-scale manufacturing operations. From 1967 to 1985, he held a series
of positions at Wellcome Biotech Ltd., culminating in responsibility for
worldwide cell culture manufacturing operations. Mr. Burman holds a B.Sc. with
honors in Applied Biology from the Council for National Academic Awards in the
United Kingdom. He also holds graduate qualifications in Industrial
Microbiology.
DR. GRILLO-LOPEZ joined the Company as Vice President, Medical and
Regulatory Affairs in November 1992 from Du Pont Merck Pharmaceutical Company
("Du Pont Merck"). In January 1996, he was promoted to Senior Vice President,
Medical and Regulatory Affairs. He was employed by Du Pont Merck from 1987 to
1992, where he most recently was Executive Medical Director for International
Clinical Research and Development and previously held various clinical and
medical director positions at Du Pont Merck. From 1980 to 1987, Dr. Grillo-Lopez
was a Vice President in charge of clinical therapeutics and Director of Clinical
Oncology Research at Warner Lambert Company's Parke Davis Pharmaceutical
Research Division. He
47
<PAGE> 49
trained as a hematologist and oncologist at the University of Puerto Rico School
of Medicine, San Juan, where he received his M.D. and subsequently held faculty
appointments. He has been an adjunct associate professor in the Department of
Medicine (Hematology and Medical Oncology) at the University of Michigan Medical
School, was a founder of the Puerto Rico Society of Hematology and the Latin
American Society of Hematology, and is a fellow of the International Society of
Hematology and the Royal Society of Medicine (London).
DR. HANNA joined the Company in February 1990 as Vice President, Research
and Preclinical Development. In 1993, Dr. Hanna was promoted to Senior Vice
President, Research and Preclinical Development. From 1981 to 1990, Dr. Hanna
served as Associate Director and then Director of the Department of Immunology
at SmithKline Beecham focusing on autoimmune and chronic inflammatory diseases.
From 1978 to 1981, he was a research scientist at the NCI-Frederick Cancer
Research Center, where he studied the role of immune system cells in host
defenses against cancer. From 1973 to 1978, Dr. Hanna was a lecturer in the
Department of Immunology at the Hebrew University Medical School in Israel,
where he received his Ph.D. in Immunology. Pursuant to the Company's agreement
with CNI, Dr. Hanna is a director of CNI.
MR. ROHN joined the Company in August 1993 as Senior Vice President,
Commercial and Corporate Development. Prior to joining the Company, Mr. Rohn was
employed by Adria Laboratories ("Adria"), from 1984 until August 1993, most
recently as Senior Vice President of Sales and Marketing with responsibilities
for strategic and commercial partnerships as well as all sales and marketing
functions in the United States. Prior to Adria, Mr. Rohn held marketing and
sales management positions at Abbott Laboratories, Warren-Teed Pharmaceuticals,
Miles Laboratories and Mead Johnson Laboratories. Mr. Rohn received a B.A. in
Marketing from Michigan State University.
DR. GEIGERT joined the Company in May 1996 as Vice President, Quality. He
previously served from 1991 to May 1996 as Vice President, Quality Control at
Immunex Corporation, a biotechnology company. From 1973 to 1991, he was employed
by Cetus Corporation where he served most recently as Director of Quality
Control and Product Evaluation. Dr. Geigert holds a B.S. degree in Chemistry
from Washington State University and a Ph.D. in Organic Chemistry/Analytical
Chemistry from Colorado State University.
MS. MATSUI joined the Company in November 1992 as Senior Director, Planning
and Resource Development with primary responsibility for strategic planning and
human resources. In December 1994, Ms. Matsui was promoted to Vice President,
Planning and Resource Development. Ms. Matsui's current responsibilities include
investor relations, corporate communications, human resources, project
management and strategic planning. As a consultant during 1992, Ms. Matsui
assisted in the planning and implementation of the Company's unification from
sites in Northern and Southern California to its present site in San Diego. From
1977 to 1991, she served in a variety of marketing and general management
positions at Wells Fargo Bank including Vice President and Manager responsible
for Consumer Retirement Programs and Vice President and Manager in charge of
company-wide Employee Relations and Communications. Ms. Matsui received her B.A.
and M.B.A. from Stanford University.
MR. SCHNEIDER joined the Company in February 1987 as Director, Finance and
Administration and served as Senior Director, Finance and Administration from
1990 to 1991. In 1991, he became Vice President, Finance and Administration and
in 1996 he was appointed Vice President and Chief Financial Officer. From 1984
to 1987, Mr. Schneider served as the Manager of Financial Reporting and as a
Senior Analyst for Syntex Laboratories. He received a B.S. in biochemistry from
University of California, Davis, received his M.B.A. at the University of
Southern California and earned his C.P.A. qualifications while working for KPMG
Peat Marwick LLP as a Senior Accountant.
MR. WOOLCOTT joined the Company in March 1989 as Intellectual Property
Counsel. In 1990, he became Intellectual Property and Licensing Counsel. Mr.
Woolcott was promoted to Deputy General Counsel in 1991 and General Counsel in
1992. In 1993, Mr. Woolcott was appointed Secretary of the Company. In 1994, he
was promoted to Vice President, Secretary, General Counsel & Licensing
Executive. From 1985 to 1987, he served as Patent Counsel and Associate Counsel
at Hybritech, Inc. From 1987 to 1989, he was engaged in the private practice of
law in Seattle, Washington. Mr. Woolcott received a B.S. in Biochemistry from
Pacific Lutheran University and his J.D. from George Washington University.
48
<PAGE> 50
DR. EDWARDS is the retired President and Chief Executive Officer of Scripps
Institution of Medicine and Science (the "Institute"). Dr. Edwards joined the
Institution in 1991 and retired in 1994. Dr. Edwards served as the President and
Chief Executive Officer of Scripps Clinic and Research Foundation from 1977 to
1991. Previously, Dr. Edwards held a number of positions with private, public
and governmental entities including Commissioner of the FDA and several
positions with the American Medical Association. Dr. Edwards is director of
three other publicly traded companies, Bergen Brunswig Corporation, Molecular
Biosystems, Inc., Northern Trust of California and various privately held
companies. He received his B.S., M.D. and Honorary Degree, Doctor of Science
from the University of Colorado and received his M.S. in Surgery from the
University of Minnesota. Dr. Edwards has served as a Director of the Company
since May 1995.
DR. GLASSBERG is Associate Director of Clinical Care and Director of
General Oncology at the University of California San Francisco Cancer Center,
and also serves as Director of Hematology and Medical Oncology at Mount Zion
Medical Center in San Francisco, California. Dr. Glassberg has been associated
with the University of California, San Francisco since 1970 and is currently a
Clinical Professor of Medicine. He received his M.D. from the Medical University
of South Carolina in Charleston. Dr. Glassberg has served as a Director of the
Company since February 1997.
MR. GROOM has been President, Chief Executive Officer, and a Director of
Elan Corporation plc, a public company registered in Ireland, since July 1996.
Mr. Groom served as the President and Chief Executive Officer of Athena
Neurosciences, Inc., a biotechnology company ("Athena"), from 1987 to June 1996
prior to Athena's acquisition by Elan Corporation. From 1960 to 1985, Mr. Groom
was employed by Smith Kline & French Laboratories ("SK&F"), the pharmaceutical
division of the former SmithKline Beckman Corporation. He held a number of
positions at SK&F, including: President of SK&F International from 1980 to 1985.
Mr. Groom has served as Chairman of the International Section of the
Pharmaceutical Manufacturers Association. He serves as a Director of Ligand
Pharmaceuticals Incorporated and as a public trustee to the Research Foundation
of the American Academy of Neurology. Mr. Groom is a Fellow of the Association
of Certified Accountants (U.K.) and has served as a Director of the Company
since September 1992.
MR. HASHIMOTO has been, since 1981, Director of Research and Development of
Zenyaku, a private pharmaceutical company in Tokyo, Japan, and an investor in
the Company. Mr. Hashimoto was promoted to President of Zenyaku in July 1994. He
has served on Zenyaku's board of directors since 1977, is a director of various
privately held companies and sits on the Board of Trustees of Tamagawa Gakuen
University. Mr. Hashimoto received his B.A. in Commerce from Tamagawa Gakuen
University and his B.A. in Business Administration from Lewis & Clark College.
Mr. Hashimoto has served as a Director of the Company since July 1991.
MR. JOHNSON has been, since 1967, the general partner of Asset Management
Partners, an investor in the Company. Mr. Johnson is also Chairman of the Board
of Boole and Babbage, Inc., and a director of Amgen, Inc. and various privately
held companies. Mr. Johnson received his B.S. in Mechanical Engineering from
Stanford University and received his M.B.A. from Harvard University. Mr. Johnson
has served as a Director of the Company since 1986.
MR. PANGIA has worked in investment banking for 20 years and is currently
self-employed in that capacity. Most recently, he served as Executive Vice
President and Director of Investment Banking for PaineWebber Incorporated of New
York ("PaineWebber"). He held other various senior management positions at
PaineWebber including member of the board of directors of PaineWebber, Inc.,
Chairman of the board of directors of PaineWebber Properties, Inc., member of
PaineWebber's executive and operating committees, chairman of the equity
commitment committee and member of the debt commitment committee. Prior to his
positions at PaineWebber, Mr. Pangia held other senior positions including
Managing Director in Investment Banking for Drexel Burnham Lambert of New York
and Vice President of Investment Banking for Kidder, Peabody & Co. of New York.
Mr. Pangia is a director of two other publicly traded companies, ICOS
Corporation and Ryan, Beck & Co. He received his A.B. from Brown University and
his M.B.A. from Columbia University. Mr. Pangia has served as a Director of the
Company since September 1997.
49
<PAGE> 51
MR. ROSS is currently President of Cancer Rx, a health care consulting
firm. Immediately prior to launching Cancer Rx, Mr. Ross was Chief Executive
Officer of the National Comprehensive Cancer Network, an association of fifteen
of the largest cancer centers in the United States. He previously held senior
management positions, during a 27-year career, at Bristol-Myers Squibb,
including Senior Vice President, Policy, Planning and Development, Bristol-Myers
Squibb Pharmaceutical Group and President, Bristol-Myers Squibb U.S.
Pharmaceutical Group. Mr. Ross currently serves as a director for Fox Chase
Cancer Center and Sugen, Inc. He received his B.S. from Syracuse University and
later was a Bristol-Myers Scholar at the Yale School of Organization and
Management. Mr. Ross has served as a Director of the Company since July 1997.
MS. SCHENK is currently an attorney in private practice and previously
served as the U.S. Congresswoman for the 49th District of the State of
California from 1993 to 1995. She worked as an attorney in private practice from
1983 to 1993 and served as the California Secretary of Business, Transportation
and Housing from 1980 to 1983. Ms. Schenk is also a director of Cal Fed Bank.
She received her B.A. in Political Science from the University of California at
Los Angeles, earned her J.D. from the University of San Diego and attended the
London School of Economics. Ms. Schenk has served as a Director of the Company
since May 1995.
MR. YOUNG is currently Chief Operating Officer of Genentech. Mr. Young
joined Genentech in 1980 as Director of Manufacturing and Process Sciences and
became Vice President in 1983. He was promoted to Senior Vice President in 1989
where he was responsible for Process Sciences, Manufacturing, Engineering,
Quality, Regulatory Affairs, Product Development and Pharmacological Sciences.
In 1986, Mr. Young was promoted to Executive Vice President. He became Chief
Operating Officer in 1997, taking on the additional responsibilities Medical
Affairs and Business Development and Sales and Marketing. Prior to joining
Genentech, Mr. Young was with Eli Lilly & Co., where he held several positions
in pharmaceutical engineering, antibiotic process development and manufacturing
management. Mr. Young holds a B.S. in Chemical Engineering from Purdue
University and an M.B.A. from Indiana University. He was elected to the National
Academy of Engineering in 1993 for his contributions to biotechnology. Mr. Young
is also a director of Energy Biosystems, Inc. Mr. Young has served as a Director
of the Company since May 1997.
50
<PAGE> 52
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company
with respect to the beneficial ownership of the Company's Common Stock as of
January 31, 1998, by (i) all persons who are beneficial owners of five percent
or more of the Company's Common Stock, (ii) each director; (iii) certain
executive officers and (iv) all current directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES ----------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Oracle Partners, L.P......................................... 1,647,700 8.4% 7.6%
712 Fifth Avenue, 45 Floor
New York, New York 10019
Genentech, Inc. (2).......................................... 1,490,793 7.1% 6.4%
One DNA Way
South San Francisco, California 94080
American Century Investment Management, Inc.................. 1,418,800 7.2% 6.6%
4500 Main Street, 15th Floor
Kansas City, MO 64111
Dean Witter InterCapital Inc. (3)............................ 1,048,000 5.3% 4.8%
Two World Trade Center, 71st Floor
New York, NY 10048
Charles C. Edwards, M.D. (4)................................. 33,500 * *
John Geigert, Ph.D. (5)...................................... 28,224 * *
Alan B. Glassberg, M.D. (6).................................. 22,500 * *
Antonio J. Grillo-Lopez, M.D. (7)............................ 171,946 * *
John Groom (8)............................................... 42,500 * *
Nabil Hanna, Ph.D. (9)....................................... 293,507 1.5% 1.3%
Kazuhiro Hashimoto (10)...................................... 691,667 3.5% 3.2%
Franklin P. Johnson, Jr. (11)................................ 81,737 * *
Robert W. Pangia (12)........................................ 18,500 * *
William H. Rastetter, Ph.D. (13)............................. 513,371 2.6% 2.3%
William R. Rohn (14)......................................... 173,491 * *
Bruce R. Ross (15)........................................... 17,500 * *
The Honorable Lynn Schenk (16)............................... 34,500 * *
William D. Young (17)........................................ 1,490,793 7.1% 6.4%
All directors and executive officers as a group (18 persons)
(3 through 18)............................................. 4,177,141 18.3% 16.8%
</TABLE>
- ---------------
* Less than 1%.
(1) Percentage of beneficial ownership is calculated assuming 19,630,694 shares
of Common Stock were outstanding on January 31, 1998. Beneficial ownership
is determined in accordance with the rules of the Commission and generally
includes voting or investment power with respect to securities. Shares of
Common Stock subject to options and warrants currently exercisable or
exercisable within 60 days after January 31, 1998, as well as Nonvoting
Convertible Preferred Stock, are deemed outstanding for computing the
percentage of the person holding such options but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them.
(2) Includes Nonvoting Convertible Preferred Stock convertible into 1,490,793
shares held by Genentech. Mr. Young, a director of the Company, disclaims
beneficial ownership of the Nonvoting Convertible Preferred Stock held by
Genentech. See "Description of Capital Stock -- Preferred Stock."
51
<PAGE> 53
(3) Dean Witter InterCapital Inc. is a wholly-owned subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., an affiliate of one of the
Underwriters of this offering.
(4) Includes options to purchase 32,500 shares held by Dr. Edwards.
(5) Includes options to purchase 27,968 shares held by Dr. Geigert.
(6) Includes options to purchase 22,500 shares held by Dr. Glassberg.
(7) Includes options to purchase 161,998 shares held by Dr. Grillo-Lopez.
(8) Includes options to purchase 42,500 shares held by Mr. Groom.
(9) Includes options to purchase 281,095 shares held by Dr. Hanna.
(10) Includes 666,667 shares held by Zenyaku. Mr. Hashimoto, a director of the
Company, disclaims beneficial ownership of such shares. Includes options to
purchase 25,000 shares held by Mr. Hashimoto.
(11) Includes 34,303 shares beneficially owned by Asset Management Partners. Mr.
Johnson, a director of the Company, is the General Partner of Asset
Management Partners. Mr. Johnson disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest arising from his
interest in Asset Management Partners. Includes options to purchase 25,000
shares held by Mr. Johnson.
(12) Includes options to purchase 18,500 shares held by Mr. Pangia.
(13) Includes options to purchase 415,719 shares held by Dr. Rastetter.
(14) Includes options to purchase 146,266 shares held by Mr. Rohn.
(15) Includes options to purchase 17,500 shares held by Mr. Ross.
(16) Includes options to purchase 32,500 shares held by Ms. Schenk.
(17) Includes Nonvoting Convertible Preferred Stock convertible into
approximately 1,490,793 shares held by Genentech. Mr. Young, a director of
the Company, disclaims beneficial ownership of the Nonvoting Convertible
Stock held by Genentech.
(18) Includes options to purchase 1,699,280 shares and Nonvoting Convertible
Preferred Stock convertible into 1,490,793 shares of Common Stock.
52
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock and 8,000,000 shares of Preferred Stock.
COMMON STOCK
As of January 31, 1998, there were 19,630,694 shares of Common Stock
outstanding. See "Capitalization." The stock is held by 425 stockholders of
record. There will be 21,630,694 shares of Common Stock outstanding after giving
effect to the sale of the shares of Common Stock offered hereby (assuming no
exercise of the Underwriters' over-allotment option). The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the stockholders. Subject to preferential rights with
respect to any outstanding Preferred Stock, holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and satisfaction of preemptive rights. The Common Stock has no
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. The outstanding shares
of Common Stock are, and the Common Stock to be outstanding upon completion of
the offering will be, fully paid and nonassessable.
PREFERRED STOCK
As of January 31, 1998, there were 227,514 shares of Preferred Stock
outstanding. Pursuant to the Company's Certificate of Incorporation, the Board
of Directors is authorized to issue up to an aggregate of 8,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend rights, conversion rights,
voting rights, rights and terms of redemption, redemption price or prices,
liquidation preferences and the number of shares constituting any series or the
designations of such series, without any further vote or action by the
stockholders. The issuance of Preferred Stock in certain circumstances may have
the effect of delaying, deferring, or preventing a change in control of the
Company without further actions of the stockholders. The issuance of Preferred
Stock with voting and conversion rights may adversely affect the voting power of
the holders of Common Stock, including the loss of voting control to others.
The Company issued 100,000 shares of its Series A-1 Nonvoting Convertible
Preferred Stock ("Series A-1 Preferred Stock") in April 1995, 37,521 shares of
its Series A-2 Nonvoting Convertible Preferred Stock ("Series A-2 Preferred
Stock") in August 1995 and 22,993 shares of its Series A-3 Nonvoting Convertible
Preferred Stock ("Series A-3 Preferred Stock") in March 1996, to Genentech
pursuant to the terms of a preferred stock purchase agreement. Each share of
Series A-1, A-2 and A-3 Preferred Stock is convertible at any time into 10
shares of Common Stock. In December 1997 and January 1998, Genentech converted
15,500 shares and 17,500 shares of Series A-1 Preferred Stock, respectively,
into 330,000 shares of the Company's Common Stock.
In May 1996, the Company issued 100,000 shares of its Series A-6 Nonvoting
Convertible Preferred Stock ("Series A-6 Preferred Stock") to Genentech pursuant
to the terms of a preferred stock purchase agreement. Each share of Series A-6
Preferred Stock is convertible into approximately 2.16 shares of Common Stock.
OPTIONS
As of January 31, 1998, options to purchase 3,705,119 and 197,500 shares of
Common Stock were outstanding under its 1988 Employee Stock Option Plan and its
1993 Non-Employee Directors Stock Option Plan, respectively, 2,336,477 of which
were exercisable in total on that date.
In September 1997, the Company entered into an agreement with a financial
institution under which the Company purchased in a private transaction a capped
call option, exercisable only at maturity, representing the Company's right to
purchase from the financial institution up to 600,000 shares of the Company's
53
<PAGE> 55
Common Stock. The Company has the right to settle the capped call option by
receiving cash or stock. The capped call option which the Company purchased is
expected to be settled, if exercised, with cash paid to the Company in an amount
equal to the difference between the strike price and the market price, subject
to caps which will limit the total amount of cash the Company could receive.
Simultaneously, the Company sold to the same financial institution a call
option, exercisable only at maturity, entitling the financial institution to
purchase from the Company up to 900,000 shares of the Company's Common Stock at
a certain strike price per share. The Company has the right to settle the call
option with cash or stock and, if exercised, the Company expects to settle the
call option by issuing up to 900,000 shares of the Company's Common Stock to the
financial institution. The financial institution has advised the Company that it
has engaged, and may continue to engage, in transactions, including buying and
selling shares of the Company's Common Stock, to offset its risk relating to the
call option, which could affect the market price of the Company's Common Stock.
STOCKHOLDER RIGHTS AGREEMENT
In July 1997, the Company's Board of Directors declared a dividend of one
preferred stock purchase right ("Right") for each outstanding share of the
Company's Common Stock. Each Right represents the right to purchase one
one-thousandth of a share of Series X Junior Participating Preferred Stock at an
exercise price of $200, subject to adjustment, and will be exercisable only if a
person or group acquires 15% or more of the Company's Common Stock or announces
a tender offer for 15% or more of the Company's Common Stock. If a person
acquires 15% or more of Company's Common Stock all Rightsholders, except the
acquiring person, will be entitled to buy shares of the Company's Common Stock
at a discount. Each Series X Junior Participating Preferred Share will be
entitled to an aggregate dividend of 1,000 times the dividend declared per share
of Common Stock. The Board of Directors may terminate the Rights Plan at any
time or redeem the Rights at $.001 per Right, prior to the time a person
acquires more than 15% of the Company's common stock. The Rights will expire in
July 2007.
REGISTRATION RIGHTS
Under the terms of the 1992 Amended and Restated Registration Rights
Agreement among the Company and the holders of the securities registrable
thereunder (the "1992 Registrable Securities"), if the Company proposes to
register any of its securities under the Act, either for its own account or for
the account of other security holders exercising registration rights, such
holders are entitled to notice of such registration and are entitled to include
1992 Registrable Securities therein. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering subject to the registration to limit the number of shares included in
such registration. Following this offering, the holders of approximately 666,667
shares of Common Stock, or their transferees, will be entitled to certain rights
with respect to the registration of their 1992 Registrable Securities under the
Securities Act. The holders of the 1992 Registrable Securities may also require
the Company on not more than two occasions to file a registration statement
under the Act at its expense with respect to their shares of Common Stock (and
on not more than one occasion to file a registration statement under the Act at
its expense with respect to shares issuable upon the exercise of certain
warrants), and the Company is required to use its best efforts to effect such
registration, subject to certain conditions and limitations. Further, certain of
such holders may require the Company to file additional registration statements
on Form S-3, subject to certain conditions and limitations. The holders of the
1992 Registrable Securities have waived their registration rights in connection
with the offering made hereby.
Under the terms of the 1995 Registration Rights Agreement among the Company
and Genentech, if the Company proposes to register any of its securities under
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, Genentech is entitled to notice
of such registration and is entitled to include 1995 Registrable Securities
therein. These rights are subject to certain conditions and limitations, among
them the right of the underwriters of an offering subject to the registration to
limit the number of shares included in such registration. Genentech has waived
its piggyback registration rights in connection with the offering made hereby.
Genentech may also require the Company to file a registration statement under
the Act at its expense with respect to its 1995 Registrable Securities, and the
54
<PAGE> 56
Company is required to use its best efforts to effect such registration, subject
to certain conditions and limitations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, LLC 400 S. Hope Street, Fourth Floor, Los
Angeles, CA 90071.
55
<PAGE> 57
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters") have severally agreed to purchase, and the
Company has agreed to sell to them, severally, the respective number of shares
of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Morgan Stanley & Co. Incorporated ........................................
NationsBanc Montgomery Securities LLC.....................................
---------
Total...................................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel, and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
taken.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public offering
price. Any Underwriter may allow, and such dealers may reallow, a concession not
in excess of $ per share to other Underwriters or to certain other dealers.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 300,000 additional
shares of Common Stock at the public offering price set forth on the cover page
hereof, less underwriting discounts and commission. The Underwriters may
exercise such option to purchase solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
Common Stock offered hereby. To the extent such option is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares of Common Stock as
the number set forth next to such Underwriter's name in the preceding table
bears to the total number of shares of Common Stock offered by the Underwriters
hereby.
The Underwriters have informed the Company that they do not intend to
confirm sales to accounts over which they exercise discretionary authority.
The Company and its executive officers and directors and certain
stockholders of the Company have agreed not to (a) offer, pledge, lend, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (b) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Common Stock, whether any such transaction described in clause (a) or (b)
above is to be settled by delivery of Common Stock or such other securities, in
cash or otherwise for a 90-day period after the date of this Prospectus, without
the prior written
56
<PAGE> 58
consent of Morgan Stanley & Co. Incorporated, except that the Company may,
without such consent, grant options or issue stock upon the exercise of
outstanding stock options, pursuant to the Company's stock option plans, and
issue stock upon exercise of the warrants.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time. The Underwriters and dealers may engage
in passive market making transactions in the Common Stock in accordance with
Rule 103 of Regulation M promulgated by the Commission. In general, a passive
market maker may not bid for, or purchase, the Common Stock at a price that
exceeds the highest independent bid. In addition, the net daily purchases made
by any passive market maker generally may not exceed 30% of its average daily
trading volume in the Common Stock during a specified two month prior period, or
200 shares, whichever is greater. A passive market maker must identify passive
market making bids as such on the Nasdaq electronic inter-dealer reporting
system. Passive market marking may stabilize or maintain the market price of the
Common Stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
Dean Witter Intercapital Inc., the beneficial owner of 1,048,000 shares of
the Company's Common Stock, is a wholly-owned subsidiary of Morgan Stanley, Dean
Witter, Discover & Co., an affiliate of one of the Underwriters in this
offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby are being passed upon for the Company by Brobeck, Phleger &
Harrison LLP, Palo Alto, California. Members of the firm Brobeck, Phleger &
Harrison LLP beneficially own an aggregate of approximately 3,000 shares of the
Company's Common Stock. Certain legal matters are being passed upon for the
Underwriters by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP,
Menlo Park, California.
EXPERTS
The consolidated financial statements and schedule of IDEC Pharmaceuticals
Corporation and subsidiary as of December 31, 1996 and 1997, and for each of the
years in the three-year period ended December 31, 1997, have been included
herein and incorporated by reference in the Registration Statement in reliance
upon the reports of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and incorporated by reference upon the
authority of said firm as experts in accounting and auditing.
57
<PAGE> 59
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-3 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act, omits certain of the information set forth in the
Registration Statement. Reference is hereby made to the Registration Statement
and to the exhibits thereto for further information with respect to the Company
and the securities offered hereby. Copies of the Registration Statement and the
exhibits thereto are on file at the offices of the Commission and may be
obtained upon payment of the prescribed fee or may be examined without charge at
the public reference facilities of the Commission described below.
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company with the Commission can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
the Commission's regional offices located at Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The Commission maintains an Internet
website that contains reports, proxy statements and information statement and
other information regarding registrants that file electronically with the
Commission. The address of such website is http://www.sec.gov. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of
prescribed rates. The Company's Common Stock is quoted on the Nasdaq National
Market. Reports, proxy statements and other information concerning the Company
may be inspected at the National Association of Securities Dealers, Inc. at 1735
K Street, N.W., Washington, D.C. 20006.
58
<PAGE> 60
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of KPMG Peat Marwick LLP....................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 61
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
IDEC Pharmaceuticals Corporation:
We have audited the accompanying consolidated balance sheets of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEC
Pharmaceuticals Corporation and subsidiary as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
San Diego, California
February 6, 1998
F-2
<PAGE> 62
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 25,337 $ 34,847
Securities available-for-sale.......................................... 53,390 34,810
Contract revenue receivables, net...................................... 3,635 3,971
Due from related party, net............................................ 732 -
Inventories............................................................ 4,384 4,134
Prepaid expenses and other current assets.............................. 3,337 1,431
-------- --------
Total current assets................................................ 90,815 79,193
Property and equipment, net.............................................. 21,453 23,449
Investment and other assets.............................................. 761 3,371
-------- --------
$113,029 $106,013
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable....................................... $ 3,830 $ 3,908
Accounts payable....................................................... 3,106 1,626
Accrued expenses....................................................... 5,951 6,382
Due to related party, net.............................................. - 870
Deferred revenue....................................................... - 6,646
-------- --------
Total current liabilities........................................... 12,887 19,432
-------- --------
Notes payable, less current portion...................................... 5,015 3,886
Deferred rent............................................................ 1,513 2,016
Due to related party, noncurrent......................................... 1,000 -
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value, 8,000 shares authorized;
330 shares and 245 shares issued and outstanding at December 31,
1996 and 1997, respectively; $26,938 and $19,225 liquidation value
at December 31, 1996 and 1997, respectively......................... - -
Common stock, $.001 par value, 50,000 shares authorized; 18,059 shares
and 19,356 shares issued and outstanding at December 31, 1996 and
1997, respectively.................................................. 18 19
Additional paid-in capital............................................. 176,448 179,956
Unrealized gains (losses) on securities available-for-sale............. (37) 57
Accumulated deficit.................................................... (83,815) (99,353)
-------- --------
Total stockholders' equity.......................................... 92,614 80,679
-------- --------
$113,029 $106,013
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 63
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
Revenues:
Revenues from unconsolidated joint business............... $ -- $ -- $ 9,266
Contract revenues......................................... 12,136 15,759 11,840
License fees.............................................. 11,500 14,250 23,500
-------- ------- --------
Total revenues (including related party revenues
of $5,500 and $27,373 in 1996 and 1997,
respectively)................................... 23,636 30,009 44,606
Operating expenses:
Manufacturing costs....................................... -- -- 18,875
Research and development.................................. 22,488 28,147 32,407
Selling, general and administrative....................... 6,112 7,298 11,320
Acquired technology rights................................ 11,437 -- --
-------- ------- --------
Total operating expenses.......................... 40,037 35,445 62,602
-------- ------- --------
Loss from operations........................................ (16,401) (5,436) (17,996)
-------- ------- --------
Other income (expense):
Interest income........................................... 1,387 3,178 3,489
Interest expense.......................................... (2,278) (2,697) (917)
Other..................................................... -- -- (114)
-------- ------- --------
Total other income (expense)...................... (891) 481 2,458
-------- ------- --------
Net loss.................................................... (17,292) (4,955) (15,538)
Convertible preferred stock dividends....................... -- (696) --
-------- ------- --------
Net loss applicable to common stock......................... $(17,292) (5,651) $(15,538)
======== ======= ========
Net loss per common share................................... $ (1.18) $ (0.34) $ (0.83)
Shares used in computing net loss per common share.......... 14,650 16,573 18,739
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 64
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL UNREALIZED GAINS TOTAL
--------------- --------------- PAID-IN (LOSSES) ON SECURITIES ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL AVAILABLE-FOR-SALE DEFICIT EQUITY
------ ------ ------- ------ ---------- ---------------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994.................... -- $ -- 13,728 $ 14 $ 89,464 $(14) $ (61,568) $ 27,896
Issuance of common stock
under stock option and
employee stock purchase
plans................... -- -- 230 -- 953 -- -- 953
Issuance of series A-1 and
A-2 convertible
preferred stock pursuant
to terms of a
collaborative
agreement............... 138 -- -- -- 7,149 -- -- 7,149
Issuance of common stock
and series B convertible
preferred stock to
acquire technology
rights.................. 69 -- 1,000 1 11,436 -- -- 11,437
Issuance of common stock
for services............ -- -- 103 -- 322 -- -- 322
Amortization of fair value
change in common stock
warrants................ -- -- -- -- 680 -- -- 680
Change in unrealized gains
(losses) on securities
available-for-sale...... -- -- -- -- -- 24 -- 24
Net loss.................. -- -- -- -- -- -- (17,292) (17,292)
--- --- ------ --- -------- ---- ------- -------
Balance at December 31,
1995.................... 207 -- 15,061 15 110,004 10 (78,860) 31,169
Issuance of common stock
under stock option and
employee stock purchase
plans................... -- -- 342 -- 1,304 -- -- 1,304
Issuance of common stock
in public offering...... -- -- 2,070 2 46,275 -- -- 46,277
Issuance of common stock
for services............ -- -- 17 -- 359 -- -- 359
Issuance of common stock
from exercise of stock
warrants................ -- -- 569 1 4,754 -- -- 4,755
Issuance of series A-3 and
series A-6 convertible
preferred stock pursuant
to terms of a
collaborative
agreement............... 123 -- -- -- 12,500 -- -- 12,500
Amortization of fair value
change in common stock
warrants................ -- -- -- -- 1,252 -- -- 1,252
Change in unrealized gains
(losses) on securities
available-for-sale...... -- -- -- -- -- (47) -- (47)
Net loss.................. -- -- -- -- -- -- (4,955) (4,955)
--- --- ------ --- -------- ---- ------- -------
Balance at December 31,
1996.................... 330 -- 18,059 18 176,448 (37) (83,815) 92,614
Issuance of common stock
under stock option and
employee stock purchase
plans................... -- -- 670 1 3,508 -- -- 3,509
Issuance of common stock
from exercise of stock
warrants................ -- -- 105 -- -- -- -- --
Issuance of common stock
from conversion of
series A-1 and B
convertible preferred
stock................... (85) -- 522 -- -- -- -- --
Change in unrealized gains
(losses) on securities
available-for-sale...... -- -- -- -- -- 94 -- 94
Net loss.................. -- -- -- -- -- -- (15,538) (15,538)
--- --- ------ --- -------- ---- ------- -------
Balance at December 31,
1997.................... 245 $ -- 19,356 $ 19 $ 179,956 $ 57 $ (99,353) $ 80,679
=== === ====== === ======== ==== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 65
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(17,292) $ (4,955) $(15,538)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................... 2,401 2,643 4,010
Deferred rent......................................... 450 390 503
Other non-cash expenses............................... -- (104) (131)
Gains (losses) on sales of securities
available-for-sale.................................. 5 -- (12)
Acquired technology rights............................ 11,437 -- --
Issuance of common stock for services................. 322 359 --
Amortization of fair value change in common stock
warrants............................................ 680 1,252 --
Change in assets and liabilities:
Contract revenue receivables, net................... (621) (3,712) (336)
Due from related party, net......................... -- (732) 732
Inventories......................................... -- (4,384) 250
Prepaid expenses and other assets................... 403..... 890 2,296
Accounts payable, accrued expenses and other
liabilities...................................... 1,650 3,570 (1,049)
Due to related party................................ -- 1,000 (130)
Deferred revenue.................................... (2,024) -- 6,646
-------- -------- --------
Net cash used in operating activities............ (2,589) (3,783) (2,759)
-------- -------- --------
Cash flows from investing activities:
Purchase of marketable securities and securities
available-for-sale.................................... (8,218) (72,771) (39,538)
Sales and maturities of marketable securities and
securities available-for-sale......................... 10,715 25,265 58,224
Purchase of property and equipment....................... (1,315) (6,301) (5,875)
Investment in Cytokine Networks, Inc..................... -- -- (3,000)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 1,182 (53,807) 9,811
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable.............................. 2,500 2,475 3,003
Payments on notes payable................................ (4,058) (3,440) (4,054)
Proceeds from issuance of common stock, net.............. 953 52,564 3,509
Proceeds from issuance of convertible preferred stock,
net................................................... 7,149 12,500 --
-------- -------- --------
Net cash provided by financing activities........ 6,544 64,099 2,458
-------- -------- --------
Net increase in cash and cash equivalents.................. 5,137 6,509 9,510
Cash and cash equivalents, beginning of year............... 13,691 18,828 25,337
-------- -------- --------
Cash and cash equivalents, end of year..................... $ 18,828 $ 25,337 $ 34,847
======== ======== ========
Supplemental disclosure of cash flow information --
Cash paid during the year for interest................... $ 1,518 $ 1,469 $ 952
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 66
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business: IDEC Pharmaceuticals Corporation (the "Company") is primarily
engaged in the commercialization and research and development of targeted
therapies for the treatment of cancer and autoimmune and inflammatory diseases.
Principles of Consolidation: The consolidated financial statements include
the financial statements of IDEC Pharmaceuticals Corporation and its wholly
owned subsidiary IDEC Seiyaku. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents: For the purposes of financial statement
presentation, the Company considers all highly liquid investments in debt
securities with original maturities of three months or less to be cash
equivalents.
Securities Available-for-Sale: Securities available-for-sale are carried at
fair value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The cost of securities sold is based on the
specific identification method.
Inventories: Inventories are stated at the lower of cost or market. Cost is
determined in a manner which approximates the first-in, first-out ("FIFO")
method. Inventories at December 31, 1997 and 1996 consists of the following
(table in thousands):
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Raw materials...................................... $ 366 $1,204
Work in process.................................... - 486
Finished goods..................................... 4,018 2,444
------ ------
$4,384 $4,134
====== ======
</TABLE>
Property and Equipment: Property and equipment are stated at cost.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years. Amortization of leasehold improvements is calculated using
the straight-line method over the shorter of the lease term or the estimated
useful lives of the assets.
Fair Value of Financial Instruments: The carrying amount of cash and cash
equivalents, securities available-for-sale, contract revenue receivables,
accounts payable, accrued expenses and notes payable are considered to be
representative of their respective fair values because of the short-term nature
of those investments. A reasonable estimate of fair value is not practicable for
the liability, due to related party, at December 31, 1997, because of the
inherent difficulty of evaluating the timing of the payments.
Research and Development: All research and development expenses, including
purchased research and development, are expensed in the period incurred.
Clinical grant expenses are fully accrued upon patient enrollment.
Revenues from Unconsolidated Joint Business: Revenues from unconsolidated
joint business consists of the Company's share of the pretax operating results
generated from its joint business arrangement with Genentech, Inc.
("Genentech"), revenue from bulk Rituxan sales to Genentech, reimbursement from
Genentech of the Company's sales force and development expenses and royalty
income from F. Hoffmann-La Roche Ltd. ("Hoffmann-La Roche") and Zenyaku Kogyo
Co., Ltd. ("Zenyaku") on sales of Rituxan outside the United States and Canada.
Revenue from bulk Rituxan sales is recognized when accepted by Genentech. Under
the joint business arrangement, all U.S. sales of Rituxan and associated
expenses will be recorded in the books and accounts of Genentech with the
Company recording it's share of the pretax operating results on a quarterly
basis, as defined in the Company's collaborative agreement with Genentech (Note
7). Pretax operating results under the joint business arrangement are derived by
taking the net U.S. sales of Rituxan to
F-7
<PAGE> 67
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
third-party customers less cost of sales, third party royalty expenses,
distribution, selling and marketing expenses and joint development expenses by
the Company and Genentech.
Contract Revenues: Contract revenues consist of non-refundable research and
development funding under collaborative agreements with the Company's various
strategic partners and other funding under contractual arrangements with other
parties. Contract research and development funding generally compensates the
Company for discovery, preclinical and clinical expenses related to the
collaborative development programs for certain products of the Company and is
recognized at the time research and development activities are performed under
the terms of the collaborative agreements. Contract revenues earned in excess of
contract payments received are classified as contract revenue receivables.
License Fees: License fees consist of non-refundable fees from product
development milestone payments, the sale of license rights to the Company's
propriety gene expression technology and non-refundable fees from the sale of
product rights under collaborative development and license agreements with the
Company's strategic partners. Revenues from product development milestone
payments are recognized when the results or events stipulated in the agreement
have been achieved. License fee payments received in excess of amounts earned
are classified as deferred revenue.
Manufacturing Costs: Manufacturing costs consist of manufacturing costs
related to the production of bulk Rituxan sold to Genentech.
Stock Based Compensation: The Company's stock option and purchase plans are
accounted for under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25"), and the Company makes pro
forma footnote disclosures of the Company's operating results as if the Company
had adopted the fair value method under Financial Accounting standards Board
Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement No.
123").
Income Taxes: Income taxes are accounted for under the asset and liability
method where deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and net operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Net Loss Per Common Share: In December 1997, the Company adopted 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. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of the Company, similar to fully
diluted EPS. The adoption of Statement No. 128 did not have a material effect on
the Company's net loss per common share for the prior years presented. Options,
warrants and other convertible securities totaling 2,855,000 shares, 4,538,000
shares and 4,181,000 shares were excluded from the computations of net loss per
common share for the years ended December 31, 1995, 1996 and 1997, respectively,
as their effect is antidilutive.
Use of Estimates: Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
F-8
<PAGE> 68
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications: The prior year balances in preferred stock, common stock
and additional paid-in capital have been reclassified to effect the change in
par value to $.001 per share resulting from stockholder approval in May 1997, of
a change in the state of incorporation of the Company from the State of
California to the State of Delaware. Certain other balances in 1996 and 1995
have been reclassified to conform with the presentation in 1997.
NOTE 2: SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale at December 31, 1996 and 1997 consist of the
following (tables in thousands):
<TABLE>
<CAPTION>
1996
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COSTS GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Corporate securities.............................. $40,227 $ 3 $(38) $40,192
Commercial paper.................................. 9,979 -- -- 9,979
Certificates of deposit........................... 1,499 -- -- 1,499
U.S. government agencies.......................... 1,722 -- (2) 1,720
------- ---- ---- -------
$53,427 $ 3 $(40) $53,390
======= ==== ==== =======
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COSTS GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Corporate securities.............................. $13,672 $ 3 $(18) $13,657
Commercial paper.................................. 4,707 44 -- 4,751
Certificates of deposit........................... 5,699 -- -- 5,699
U.S. government agencies.......................... 10,675 29 (1) 10,703
------- ---- ---- -------
$34,753 $ 76 $(19) $34,810
======= ==== ==== =======
</TABLE>
The net unrealized holding gain (loss) on securities available-for-sale
included as a separate component of stockholders' equity at December 31, 1996
and 1997 totaled $(37,000) and $57,000, respectively. The gross realized gains
on sales of securities available-for-sale for the year ended December 31, 1997
totaled $12,000.
The amortized cost and estimated fair value of securities
available-for-sale at December 31, 1997, by contractual maturity are shown below
(table in thousands):
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less................................ $30,105 $ 30,170
Due after one year through two years................... 2,648 2,640
Due after ten years.................................... 2,000 2,000
------- -------
$34,753 $ 34,810
======= =======
</TABLE>
F-9
<PAGE> 69
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 consists of the
following (table in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Furniture and fixtures................................... $ 1,158 $ 1,226
Machinery and equipment.................................. 11,061 13,118
Leasehold improvements................................... 16,359 18,922
Construction in progress................................. 1,480 2,667
------- -------
30,058 35,933
Accumulated depreciation and amortization................ (8,605) (12,484)
------- -------
$21,453 $23,449
======= =======
</TABLE>
NOTE 4: NOTES PAYABLE
Notes payable at December 31, 1996 and 1997, consist of the following
(table in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Prime plus 1% note (9.5% at December 31, 1997), due in monthly
installments with a final payment of $750 due at maturity in 1998,
secured by equipment, lease deed of trust, and a patent and trademark
collateral assignment.................................................. $ 2,710 $ 1,361
17.74% note, due in monthly installments with a final payment of $375 due
at maturity in 1998, secured by equipment, lease deed of trust, and a
patent and trademark collateral assignment............................. 1,355 682
17.53% note, due in monthly installments with a final payment of $375 due
at maturity in 1999, secured by equipment, lease deed of trust, and a
patent and trademark collateral assignment............................. 1,745 1,149
9.32% to 10.62% capital lease obligations, due in monthly installments,
maturing 2000.......................................................... 2,263 1,831
8.94% note, due in monthly installments, maturing 2001, secured by
equipment.............................................................. -- 2,771
Other notes, due in monthly installments, maturing through 1997, secured
by equipment........................................................... 772 --
------- -------
8,845 7,794
Current portion.......................................................... (3,830) (3,908)
------- -------
$ 5,015 $ 3,886
======= =======
</TABLE>
Machinery and equipment recorded under capital leases was $2,698,000, net
of accumulated depreciation of $1,188,000 at December 31, 1997.
The aggregate maturities of notes payable for each of the three years
subsequent to December 31, 1997, are as follows: 1998, $3,908,000; 1999,
$1,709,000; 2000, $1,470,000; and 2001, $707,000.
NOTE 5: 401(k) EMPLOYEE SAVINGS PLAN
The Company has a qualified 401(k) Employee Savings Plan ("401(k) Plan"),
available to substantially all employees over the age of 21. The Company may
make discretionary contributions to the 401(k) Plan, which fully vest after four
years of service by the employee. There were no discretionary contributions for
the years ended December 31, 1997, 1996 and 1995.
F-10
<PAGE> 70
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: RESEARCH AND DEVELOPMENT
In December 1995, the Company and Eisai Co. Ltd. ("Eisai") entered into a
collaborative development agreement and a license agreement aimed at the
development and commercialization of humanized and PRIMATIZED anti-gp39
antibodies. Under the terms of these agreements, Eisai may provide up to
$37,500,000 in product development milestone payments and support for research
and development. Eisai will receive exclusive rights in Asia and Europe to
develop and market resulting products emerging from the collaboration, with the
Company receiving royalties on eventual product sales by Eisai. Eisai may
terminate these agreements based on a reasonable determination that the products
do not justify continued product development or marketing. Included in contract
revenues for 1995, 1996 and 1997 is $2,500,000, $5,500,000 and $2,750,000,
respectively, to fund product development, which approximates the research and
development expenses incurred under the program. Included in license fees for
the years ended December 31, 1995, 1996 and 1997, is $2,000,000, $750,000 and
$2,000,000, respectively, earned under these agreements.
In December 1994, the Company and Seikagaku Corporation ("Seikagaku")
entered into a collaborative development agreement and a license agreement aimed
at the development and commercialization of a PRIMATIZED anti-CD23 antibody.
Under the terms of these agreements, Seikagaku may provide up to $26,000,000 in
product development milestone payments and support for research and development.
The Company and Seikagaku will share co-exclusive, worldwide rights to all
products emerging from the collaboration, with the Company receiving royalties
on eventual product sales by Seikagaku. Seikagaku may terminate these agreements
based on a reasonable determination that the products do not justify continued
product development or marketing. Included in contract revenues for 1995, 1996
and 1997 is $2,500,000, $3,500,000 and $3,500,000, respectively, to fund product
development, which approximates the research and development expenses incurred
under the program. Included in license fees for the years ended December 31,
1995, 1996 and 1997, is $1,000,000, $1,000,000 and $1,500,000, respectively,
earned under these agreements.
In November 1993, the Company entered into a collaborative development
agreement and a license agreement with Mitsubishi Chemical Corporation
("Mitsubishi Chemical"), for the development of a PRIMATIZED anti-B7 antibody.
Under the terms of the collaboration, Mitsubishi may provide up to $12,185,000
in product development milestone payments and support for research and
development. The Company retained certain marketing rights and will receive
royalties on sales of any products commercialized by Mitsubishi Chemical
emerging from the collaboration. Mitsubishi Chemical may terminate the license
agreement if certain development objectives are not attained. The development
agreement with Mitsubishi expired on December 31, 1996. Included in contract
revenues for 1995 and 1996 is $2,047,000, and $2,000,000, respectively, to fund
product development, which approximates the research and development expenses
incurred under the program. Included in license fees for the year ended December
31, 1995 is $1,000,000 earned under these agreements.
In October 1992, the Company and SmithKline Beecham p.1.c. ("SmithKline
Beecham") entered into a collaborative research and license agreement aimed at
the development and commercialization of therapeutic products based on the
Company's PRIMATIZED anti-CD4 antibodies. Under the terms of the agreement, the
Company will receive aggregate payments that have the potential of reaching in
excess of $60,000,000, subject to the attainment of certain product development
milestone events. The Company will receive funding for anti-CD4 related research
and development programs, royalties and a share of co-promotion profits (in
North America) on sales of products which may be commercialized as a result of
the agreement. SmithKline Beecham may terminate this agreement based on a
reasonable determination that the products do not justify continued development
or marketing. Included in contract revenues for 1995, 1996 and 1997 is
$3,488,000, $416,000 and $867,000 to fund product development, which
approximates the research and development expenses incurred under the program.
Included in license fees for the year ended December 31, 1996 is $4,000,000
earned under the agreement.
F-11
<PAGE> 71
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company performed research under certain other contracts and,
accordingly, realized revenues and recognized expenses in the accompanying
consolidated statements of operations.
NOTE 7: RELATED PARTY ARRANGEMENTS
In March 1995, the Company and Genentech entered into a collaborative
agreement for the clinical development and commercialization of the Company's
anti-CD20 monoclonal antibody, Rituxan, for the treatment of non-Hodgkin's
B-cell lymphomas. Concurrent with the collaborative agreement the Company and
Genentech also entered into an expression technology license agreement for a
proprietary gene expression technology developed by the Company and a preferred
stock purchase agreement providing for certain equity investments in the Company
by Genentech (Note 8). Under the terms of these agreements, the Company may
receive payments totaling $58,500,000, subject to the attainment of certain
product development milestone events. Additionally, the Company may be
reimbursed by Genentech for certain other development and regulatory approval
expenses under the terms of the collaborative agreement. Genentech may terminate
this agreement for any reason. Included in contract revenues for 1995, 1996 and
1997 is $1,083,000, $1,500,000 and $2,389,000, respectively, to fund specific
product development, which approximates the research and development expenses
incurred under the program. Included in license fees for the years ended
December 31, 1995, 1996 and 1997, is $5,500,000, $4,000,000 and $15,000,000,
respectively, earned under these agreements.
In addition, the Company and Genentech are co-promoting Rituxan in the
United States under a joint business arrangement, with the Company receiving a
share of the pretax operating results. During 1997, the joint business recorded
an operating loss due to significant shared expenses related to the product
launch of Rituxan in the United States in December 1997. Additionally, the
Company has a contractual obligation to manufacture and supply Rituxan through
the end of 1999 with an option to continue supplying Rituxan thereafter. Under
the Company's collaborative agreement with Genentech, the sales price of bulk
Rituxan sold to Genentech is capped at a price which is currently less than the
Company's cost to manufacture bulk Rituxan. Included in inventories at December
31, 1997, is $2,444,000 of bulk Rituxan inventory that will be sold to
Genentech. Revenues from unconsolidated joint business, as described in Note 1,
for the year ended December 31, 1997, consist of the following (table in
thousands):
<TABLE>
<S> <C>
Bulk Rituxan sales......................................... $10,631
Reimbursement of selling and development expenses.......... 2,985
Co-promotion operating loss................................ (4,350)
-------
$ 9,266
=======
</TABLE>
Under the terms of separate agreements with Genentech, commercialization of
Rituxan outside the United States will be the responsibility of Hoffmann-La
Roche, except in Japan where Zenyaku will be responsible for product
development, marketing and sales. The Company will receive royalties on sales
outside the United States. Additionally, the Company will receive royalties on
sales of Genentech products manufactured using the Company's proprietary gene
expression system.
In June 1991, the Company and Zenyaku entered into a product rights
agreement and a stock purchase agreement under which the Company granted Zenyaku
a license to manufacture, use and sell certain products for cancer and
autoimmune therapeutic applications. In November 1995, the Company and Zenyaku
terminated the product rights agreement and concurrently the Company, Zenyaku
and Genentech entered into a joint development, supply and license agreement
where Zenyaku received exclusive rights to develop, market and sell Rituxan in
Japan which resulted in the Company recognizing $2,000,000 in license fees from
Zenyaku.
F-12
<PAGE> 72
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: STOCKHOLDERS' EQUITY
Convertible Preferred Stock: In March 1995, the Company issued 1,000,000
shares of its common stock and 69,375 shares of its ten percent Series B
Nonvoting Cumulative Convertible Preferred Stock ("Series B Preferred Stock")
for the repurchase of all Merrill Lynch/Morgan Stanley, L.P. ("ML/MS") rights in
the Company's lymphoma products. The stock issuances resulted in a non-cash
charge to operating expenses in 1995 of $11,437,000, representing the purchase
of the acquired technology rights. In March 1997, the Series B Preferred Stock
and accrued dividends were converted into 367,000 shares of the Company's common
stock.
Additionally, the Company issued 100,000 shares of its Series A-1 Nonvoting
Convertible Preferred Stock ("Series A-1 Preferred Stock") in April 1995, and
37,521 shares of its Series A-2 Nonvoting Convertible Preferred Stock ("Series
A-2 Preferred Stock") in August 1995, 22,993 shares of its Series A-3 Nonvoting
Convertible Preferred Stock ("Series A-3 Preferred Stock") in March 1996,
100,000 shares of its Series A-6 Nonvoting Convertible Preferred Stock ("Series
A-6 Preferred Stock") in May 1996, to Genentech pursuant to the terms of a
preferred stock purchase agreement. The preferred stock purchase agreement was
entered into concurrently with a collaboration agreement as described in Note 7.
The Series A-1 Preferred Stock, Series A-2 Preferred Stock, Series A-3 Preferred
Stock and Series A-6 Preferred Stock have a liquidation preference per share of
$50, $67, $217 and $75, respectively, net of issuance costs. Each share of
Series A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-3 Preferred
Stock is convertible at any time into ten shares of the Company's common stock
and each share of Series A-6 Preferred Stock is convertible at any time into
approximately 2.16 shares of the Company's common stock. In December 1997,
16,000 shares of Series A-1 Preferred Stock were converted into 155,000 shares
of the Company's common stock.
Common Stock: In May 1996, the stockholders approved an increase in the
number of authorized common shares to 50,000,000 shares. In June 1996, the
Company completed a public offering of 2,070,000 shares of its common stock
resulting in net proceeds of $46,277,000. In March 1995, the Company issued
1,000,000 shares of its common stock for the repurchase of all ML/MS rights in
the Company's lymphoma products, see "Convertible Preferred Stock" above.
In September 1997, the Company entered into an agreement with a financial
institution under which the Company purchased in a private transaction a capped
call option, exercisable only at maturity, representing the Company's right to
purchase from the financial institution up to 600,000 shares of the Company's
common stock. The Company has the right to settle the capped call option by
receiving cash or stock. The capped call option which the Company purchased is
expected to be settled, if exercised, with cash paid to the Company in an amount
equal to the difference between the strike price and the market price, subject
to caps which will limit the total amount of cash the Company could receive.
Simultaneously, with its purchase of the capped call option, the Company
sold to the same financial institution a call option, exercisable only at
maturity, entitling the financial institution to purchase from the Company up to
900,000 shares of the Company's common stock at a certain strike price per
share. The Company has the right to settle the call option with cash or stock
and, if exercised, the Company expects to settle the call option by issuing up
to 900,000 shares of the Company's common stock to the financial institution.
The financial institution has advised the Company that it has engaged, and may
further engage, in transactions, including buying and selling shares of the
Company's common stock, to offset its risk relating to the call option, which
could affect the market price of the Company's common stock.
Stockholder Rights Agreement: In July 1997, the Company's Board of
Directors declared a dividend of one preferred stock purchase right ("Right")
for each outstanding share of the Company's common stock. Each Right represents
the right to purchase one one-thousandth of a share of Series X Junior
Participating Preferred Stock at an exercise price of $200, subject to
adjustment, and will be exercisable only if a person or group acquires 15% or
more of the Company's common stock or announces a tender offer for 15% or more
of the Company's common stock. If a person acquires 15% or more of Company's
common stock all
F-13
<PAGE> 73
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Rightsholders, except the acquiring person, will be entitled to buy shares of
the Company's common stock at a discount. Each Series X Junior Participating
Preferred share will be entitled to an aggregate dividend of 1,000 times the
dividend declared per share of common stock. The Board of Directors may
terminate the Rights Plan at any time or redeem the Rights at $.001 per Right,
prior to the time a person acquires more than 15% of the Company's common stock.
The Rights will expire in July 2007.
Stock Option Plans: The Company has two active stock option plans.
The 1988 Employee Stock Option Plan (the "Option Plan") was approved by the
stockholders in 1988 and has been subsequently amended. Under the Option Plan,
options for the purchase of the Company's common stock may be granted to key
employees (including officers), directors and outside consultants. Options may
be designated as incentive stock options or as nonqualified stock options and
generally vest over four years, except under a provision of the Option Plan
which allows accelerated vesting under certain conditions. Options under the
Option Plan, which have a term of up to ten years, are exercisable at a price
per share not less than the fair market value (85 percent of fair market value
for nonqualified options) on the date of grant. The aggregate number of shares
authorized for issuance under the Option Plan is 5,480,000.
In September 1993, the Company adopted the 1993 Non-Employee Directors
Stock Option Plan (the "Directors Plan"), which was approved by the stockholders
in May 1994 and was subsequently amended. A total of 250,000 shares of common
stock are reserved for issuance to individuals who serve as non-employee members
of the Board of Directors. Options under the Directors Plan, which have a term
of up to ten years, are exercisable at a price per share not less than the fair
market value on the date or grant.
A summary of the status of the Company's two active stock option plans as
of December 31, 1995, 1996 and 1997 and changes during the years ended on those
dates is presented below (table in thousands, except per share amounts):
<TABLE>
<CAPTION>
DIRECTORS PLAN OPTION PLAN
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994... 35 $ 5.63 2,346 $ 2.96
Granted.......................... 70 3.38 311 3.90
Exercised........................ (10) 5.63 (157) 4.07
Canceled......................... (10) 2.38 (33) 5.58
--- ------ ----- ------
Outstanding at December 31, 1995... 85 4.15 2,467 2.97
Granted.......................... 35 19.13 1,443 20.79
Exercised........................ (10) 4.00 (172) 2.43
Canceled......................... (5) 19.13 (196) 10.10
--- ------ ----- ------
Outstanding at December 31, 1996... 105 8.45 3,542 9.86
Granted.......................... 83 27.41 815 26.27
Exercised........................ (15) 9.04 (533) 4.26
Canceled......................... (5) 22.50 (43) 18.74
--- ------ ----- ------
Outstanding at December 31, 1997... 168 $17.31 3,781 $14.09
=== ====== ===== ======
</TABLE>
F-14
<PAGE> 74
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the Directors Plan and the
Option Plan options outstanding as of December 31, 1997 (table in thousands,
except year and per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED AVERAGE --------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Directors Plan:
$ 2.38 -- $19.13 90,000 7.26 $ 8.35 90,000 $ 8.35
22.50 -- 38.25 77,500 9.32 27.72 77,500 27.72
Option Plan:
$ 0.88 -- $ 2.56 663,917 5.55 $ 2.35 567,494 $ 2.32
3.00 -- 3.00 699,116 6.70 3.00 647,081 3.00
3.25 -- 18.00 488,291 7.35 8.87 226,785 6.30
20.13 -- 20.50 953,904 8.10 20.14 432,327 20.13
21.00 -- 37.88 975,373 9.21 26.73 86,870 25.55
</TABLE>
Employee Stock Purchase Plan: In May 1993, the stockholders adopted the
Company's Employee Stock Purchase Plan (the "Purchase Plan"), which was
subsequently amended. A total of 495,000 shares of common stock are reserved for
issuance. Under the terms of the Purchase Plan, employees can choose to have up
to ten percent of their annual compensation withheld to purchase shares of
common stock. The purchase price of the common stock is at 85 percent of the
lower of the fair market value of the common stock at the enrollment or purchase
date. During 1995, 1996 and 1997, 63,000 shares, 160,000 shares and 122,000
shares, respectively, were issued under the Purchase Plan.
Pro Forma Information: The Company has retained the approach under APB
Opinion No. 25 and related interpretations in accounting for its stock option
and purchase plans. Accordingly, no compensation expense has been recognized for
its Option Plan, Directors Plan and Purchase Plan. Had compensation expense for
the Company's stock option and purchase plans been determined consistent with
Statement No. 123, the Company's net loss per share applicable to common stock
would have been increased to the pro forma amounts indicated below (table in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Net loss applicable to common stock.......... As reported $(17,292) $ (5,651) $(15,538)
Pro forma (17,608) (10,152) (23,746)
Net loss per common share.................... As reported $ (1.18) $ (0.34) $ (0.83)
Pro forma (1.20) (0.61) (1.27)
</TABLE>
Pro forma net loss applicable to common stock reflects only stock option
and purchase rights granted in 1995, 1996 and 1997. Therefore, the full impact
of calculating compensation expense for stock options and stock purchase rights
under Statement No. 123 is not reflected in the pro forma net loss amounts
presented above since compensation expense is reflected over the stock option
vesting and stock purchase subscription periods and compensation expense for
stock options and stock purchase rights granted prior to January 1, 1995 are not
considered. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995: dividend
yield of zero percent; expected volatility of 61.4 percent; risk-free interest
rate of 6.3 percent; and an expected option life of 5.7 years for 1997; and a
dividend yield of zero percent; expected volatility of 66.8 percent; risk-free
interest rate of 6.2 percent; and an expected option life of 5.5 years for 1996
and 1995. The per share weighted-average fair value of stock options granted
during 1995, 1996 and 1997 at an exercise price equal to the fair market value
on the date of grant was $2.42, $13.25 and $16.09, respectively, on the date of
grant using the Black-Scholes option-pricing model. The fair value of each
purchase right is
F-15
<PAGE> 75
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
estimated on the date of enrollment using the Black-Scholes option-pricing model
with the following assumptions used in 1997, 1996 and 1995: dividend yield of
zero percent; expected volatility of 61.4 percent; risk-free interest rates
between 5.5 percent and 6.0 percent; and an expected life between 0.3 year and
2.0 years for 1997; and a dividend yield of zero percent; expected volatility of
66.8 percent; risk-free interest rates between 5.6 percent and 5.9 percent; and
an expected life between 0.3 year and 2.0 years for 1996 and 1995. The per share
weighted-average fair value of stock purchase rights granted during 1995, 1996
and 1997 was $2.65, $9.05 and $10.50, respectively, on the subscription date
using the Black-Scholes option-pricing model.
Stock Warrants: Under an investment agreement and in part subject to the
Company's accomplishments of certain research and development objectives, SR One
Limited, SmithKline Beecham's venture capital subsidiary, purchased 200,000
common stock warrants in each 1993 and 1992. In October 1996, these warrants
were exercised for 400,000 shares of the Company's common stock resulting in net
proceeds of $4,755,000.
In December 1994 and August 1995, concurrent with the completion of a debt
financing, the Company issued warrants for the purchase of 294,000 shares and
46,000 shares, respectively, of common stock. The holders of the warrants have
the option to exchange their warrants, without the payment of cash or
consideration, for a number of common shares equal to the difference between the
number of shares resulting by dividing the aggregate exercise price of the
warrants by the fair market value of the common stock on the date of exercise
and the number of shares that would have been otherwise issued under the
exercise. In 1996 and 1997, 196,000 warrants and 114,000 warrants, respectively,
were exchanged for 169,000 shares and 105,000 shares, respectively, of the
Company's common stock. At December 31, 1997, 30,000 warrants to purchase common
stock were outstanding. Such warrants have a six-year term and are immediately
exercisable at $6.22 per share.
NOTE 9: INCOME TAXES
The following table summarizes the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities at December 31, 1996 and 1997 (table in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued expenses............................................. $ 531 $ 609
Property and equipment, principally due to difference in
depreciation.............................................. 448 1,194
Deferred rent expense........................................ 607 803
Amortization of fair value change in common stock warrants... 776 770
Deferred revenue............................................. -- 2,372
Capitalized state research and experimentation costs......... 2,090 2,189
Acquired technology rights................................... 4,336 3,695
Research and experimentation credit.......................... 5,078 6,070
Net operating loss carryforwards............................. 24,247 29,601
Other tax assets............................................. 333 696
-------- --------
Total gross deferred tax assets...................... 38,446 47,999
Valuation allowance............................................ (38,446) (47,737)
Deferred tax liabilities....................................... -- (262)
-------- --------
Net deferred taxes............................................. $ -- $ --
======== ========
</TABLE>
In 1995, 1996 and 1997, the Company recognized an increase in the valuation
allowance of $7,652,000, $3,882,000 and $9,291,000, respectively.
F-16
<PAGE> 76
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1997, the Company had net operating loss and research
and experimentation tax credit carryforwards for Federal income tax purposes of
approximately $82,000,000 and $4,000,000, respectively, which expire beginning
in 1999. Net operating loss carryforwards and research and experimentation tax
credit carryforwards as of December 31, 1997 for state income tax purposes are
approximately $21,000,000 and $2,000,000, respectively, which expire beginning
in 1998 and 1999, respectively.
The utilization of net operating losses and tax credits incurred prior to
the Company's initial public offering in 1991, may be subject to an annual
limitation under the Internal Revenue Code, due to a cumulative change in
ownership of more than fifty percent. However, the Company believes that such
limitations will not have a material impact upon the utilization of such net
operating loss carryforwards.
NOTE 10: COMMITMENTS
Lease Commitments: In July 1992, the Company entered into a 15-year
operating lease for its headquarters, which commenced in 1993. The Company has
the option to extend the term of the lease for two additional periods of five
years each. In August 1996, the Company entered into a 7-year lease for
additional office and warehouse facilities. The Company has the option to extend
the term of this lease for two additional years. In addition to the monthly
lease payments, both lease agreements provide for the Company to pay all
operating expenses associated with the facilities. The lease agreements provide
for scheduled rental increases; accordingly lease expense is recognized on a
straight-line basis over the term of the leases.
Future minimum lease payments under all operating leases as of December 31,
1997, are as follows (table in thousands):
<TABLE>
<S> <C>
1998....................................................... $ 3,158
1999....................................................... 3,422
2000....................................................... 3,559
2001....................................................... 3,702
2002....................................................... 3,850
2003 and thereafter........................................ 18,445
-------
Total minimum lease payments..................... $36,136
=======
</TABLE>
Lease expense under all operating leases totaled $3,097,000, $3,011,000 and
$3,677,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
License Agreements: In September 1997, the Company and Cytokine Networks,
Inc. ("CNI") entered into a development and license agreement for the
development of inflammatory and autoimmune disease products based upon CNI's
Anti-MIF antibody technology. Concurrent with the development and license
agreement the Company and CNI entered into a stock purchase agreement providing
for certain equity investments in CNI by the Company. Under the terms of these
agreements, the Company may make payments totaling up to $10,500,000, subject to
the attainment of certain product development milestone events. Additionally,
the Company will pay CNI royalties on sales by the Company of any products
emerging from the collaboration. In 1997, the Company made a $3,000,000
preferred equity investment in CNI.
In February 1997, the Company acquired exclusive rights from Pharmacia &
Upjohn S.p.A. ("Pharmacia") to 9-aminocamptothecin ("9-AC"), a broad spectrum,
anti-cancer agent for the treatment of cancer. Under the terms of the asset
transfer agreement, the Company may make payments totaling up to $16,000,000,
subject to the attainment of certain product development milestone events. No
royalties are payable to Pharmacia on sales of any products commercialized by
the Company emerging from the agreement. In 1997, the Company made an up-front
licensing payment of $3,000,000 to Pharmacia. The
F-17
<PAGE> 77
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company anticipates achieving a product development milestone event in 1999 that
would result in the Company making a $6,000,000 payment to Pharmacia.
In connection with its research and development efforts, the Company has
entered into various license agreements which provide the Company with rights to
develop, produce and market products using certain know-how, technology and
patent rights maintained by the parties. Terms of the various license agreements
require the Company to pay royalties from future sales, if any, on specified
products using the resulting technology. Third-party royalty liabilities
resulting from sales of Rituxan are being paid by Genentech and recorded under
the joint business arrangement as described under "Revenues from Unconsolidated
Joint Business" in Notes 1 and 7. As of December 31, 1997, such other royalties,
other than annual minimum royalties payments, have not commenced on the
aforementioned license agreements.
F-18
<PAGE> 78
LOGO
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the SEC registration fee, the Nasdaq listing fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 30,711
Listing fee............................................................... 17,500
NASD filing fee........................................................... 1,513
Blue sky fees and expenses................................................ 10,000
Printing and engraving expenses........................................... 60,000
Legal fees and expenses................................................... 100,000
Accounting fees and expenses.............................................. 50,000
Transfer agent and registrar fees......................................... 2,500
Miscellaneous expenses.................................................... 2,776
--------
Total........................................................... $275,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any such
person serving in any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
such other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and unlawful stock purchase and redemption) or
(iv) for any transaction from which the director derived an improper personal
benefit.
II-1
<PAGE> 80
The Registrant's Certificate of Incorporation provides that the
Registrant's directors shall not be liable to the Registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director, except to the
extent that exculpation from liabilities is not permitted under the DGCL as in
effect at the time such liability is determined. The Registrant has entered into
indemnification agreements with all of its officers and directors, as permitted
by the DGCL. Reference is also made to Section 7 of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Registrant against certain liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<C> <S>
1.1* Form of Underwriting Agreement.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
24.1* Power of Attorney (included in Page II-4 of this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Prospectus, to deliver, or
cause to be delivered to each person to whom the Prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon
II-2
<PAGE> 81
Rule 430A and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on the 1st day of
March, 1998.
IDEC PHARMACEUTICALS CORPORATION
By: /s/ WILLIAM H. RASTETTER
------------------------------------
William H. Rastetter, Ph.D.
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------ ---------------
<S> <C> <C>
/s/ WILLIAM H. RASTETTER Chairman, President, and Chief March 1, 1998
- --------------------------------------------- Executive Officer (Principal
William H. Rastetter, Ph.D. Executive Officer)
* Vice President, and Chief Financial March 1, 1998
- --------------------------------------------- Officer (Principal Financial and
Phillip M. Schneider Accounting Officer)
* Director March 1, 1998
- ---------------------------------------------
Charles C. Edwards, M.D.
* Director March 1, 1998
- ---------------------------------------------
Alan B. Glassberg, M.D.
* Director March 1, 1998
- ---------------------------------------------
John Groom
* Director March 1, 1998
- ---------------------------------------------
Kazuhiro Hashimoto
* Director March 1, 1998
- ---------------------------------------------
Franklin P. Johnson, Jr.
* Director March 1, 1998
- ---------------------------------------------
Robert W. Pangia
* Director March 1, 1998
- ---------------------------------------------
Bruce R. Ross
* Director March 1, 1998
- ---------------------------------------------
The Honorable Lynn Schenk
* Director March 1, 1998
- ---------------------------------------------
William D. Young
*By: /s/ WILLIAM H. RASTETTER
- ---------------------------------------------
William H. Rastetter, Ph.D.
(Attorney-in-Fact)
</TABLE>
II-4
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ------------------------------------------------------------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
23.1* Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP.
24.1* Power of Attorney (included in Page II-4 of this Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
IDEC Pharmaceuticals Corporation:
We consent to the use of our report included herein and our reports
incorporated herein by reference and to the reference to our firm under the
headings "Experts" and "Selected Consolidated Financial Data" in the prospectus.
KPMG PEAT MARWICK LLP
San Diego, California
February 27, 1998
<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 ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED DECEMBER 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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,847
<SECURITIES> 34,810
<RECEIVABLES> 3,971
<ALLOWANCES> 0
<INVENTORY> 4,134
<CURRENT-ASSETS> 79,193
<PP&E> 35,933
<DEPRECIATION> 12,484
<TOTAL-ASSETS> 106,013
<CURRENT-LIABILITIES> 19,432
<BONDS> 0
0
0
<COMMON> 19
<OTHER-SE> 80,660
<TOTAL-LIABILITY-AND-EQUITY> 106,013
<SALES> 0
<TOTAL-REVENUES> 44,606
<CGS> 0
<TOTAL-COSTS> 51,282
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 917
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,538)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> 0
</TABLE>
