<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-19311
IDEC PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0112644
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Torreyana Road, San Diego, CA 92121
(Address of principal executive offices)(Zip code)
(619) 550-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 1999 the Registrant had 20,479,476 shares of its common stock,
$.001 par value, issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998 .................. 1
Condensed Consolidated Statements of Operations -- Three months ended March 31, 1999
and 1998 .................................................................................. 2
Condensed Consolidated Statements of Cash Flows -- Three months ended March 31, 1999 and 1998 .. 3
Notes to Condensed Consolidated Financial Statements ........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................. 19
Item 2. Changes in Securities .......................................................................... 19
Item 3. Defaults upon Senior Securities ................................................................ 19
Item 4. Submission of Matters to a Vote of Stockholders ................................................ 19
Item 5. Other Information .............................................................................. 19
Item 6. Exhibits and Reports on Form 8-K ............................................................... 19
</TABLE>
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 100,847 $ 26,929
Securities available-for-sale 95,213 46,573
Contract revenue receivables, net 1,354 2,345
Due from related party, net 15,403 17,473
Inventories 5,405 5,346
Prepaid expenses and other current assets 3,449 2,361
--------- ---------
Total current assets 221,671 101,027
Property and equipment, net 20,452 20,897
Investment and other assets 7,229 3,349
--------- ---------
$ 249,352 $ 125,273
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,450 $ 1,910
Accounts payable 1,469 1,989
Accrued expenses 9,401 10,238
Deferred revenue 346 346
--------- ---------
Total current liabilities 12,666 14,483
Notes payable, less current portion 119,158 2,095
Deferred rent and other long-term liabilities 2,709 2,267
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.001 par value 20 20
Additional paid-in capital 188,061 184,282
Accumulated other comprehensive income - net unrealized
gains (losses) on securities available-for-sale (196) 1
Accumulated deficit (73,066) (77,875)
--------- ---------
Total stockholders' equity 114,819 106,428
--------- ---------
$ 249,352 $ 125,273
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1999 1998
------- -------
<S> <C> <C>
Revenues:
Revenues from unconsolidated joint business $19,279 $ 9,189
Contract revenues 1,232 2,645
License fees -- 6,300
------- -------
20,511 18,134
Operating costs and expenses:
Manufacturing costs 4,007 4,075
Research and development 7,819 7,037
Selling, general and administrative 4,394 3,899
------- -------
16,220 15,011
------- -------
Income from operations 4,291 3,123
Interest income, net 709 745
------- -------
Income before taxes 5,000 3,868
Income tax provision 191 --
------- -------
Net income $ 4,809 $ 3,868
======= =======
Earnings per share:
Basic $ 0.24 $ 0.20
Diluted $ 0.20 $ 0.16
Shares used in calculation of earnings per share:
Basic 20,277 19,637
Diluted 24,124 23,676
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in) operating activities $ 7,728 $ (6,173)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (617) (441)
Purchase of securities available-for-sale (68,372) (20,961)
Sales and maturities of securities available-for-sale 19,535 13,968
--------- ---------
Net cash used in investing activities (49,454) (7,434)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes payable, net 112,895 --
Payments on notes payable (757) (990)
Proceeds from issuance of common stock 3,506 1,385
--------- ---------
Net cash provided by financing activities 115,644 395
--------- ---------
Net increase (decrease) in cash and cash equivalents 73,918 (13,212)
Cash and cash equivalents, beginning of period 26,929 34,847
--------- ---------
Cash and cash equivalents, end of period $ 100,847 $ 21,635
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The information at March 31, 1999, and for the
three-month periods ended March 31, 1999 and 1998, is unaudited. In the opinion
of management, these financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year or for any subsequent interim period. These financial
statements should be read in conjunction with IDEC Pharmaceuticals Corporation's
(the "Company") Annual Report on Form 10-K for the year ended December 31, 1998.
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 consist of the following (table in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------ ------
<S> <C> <C>
Raw materials $2,070 $2,273
Work in process 2,511 273
Finished goods 824 2,800
------ ------
$5,405 $5,346
====== ======
</TABLE>
Revenues from Unconsolidated Joint Business: Revenues from unconsolidated
joint business consist of the Company's share of the pretax copromotion profits
generated from its joint business arrangement with Genentech, Inc.
("Genentech"), revenue from bulk Rituxan(R) sales to Genentech, reimbursement
from Genentech of the Company's sales force and development expenses and royalty
income from F. Hoffmann-La Roche Ltd. ("Roche") on sales of Rituximab outside
the United States. Rituxan is the trade name in the United States for the
compound Rituximab. Outside the United States, Rituximab is marketed as MabThera
(Rituximab, Rituxan and MabThera are collectively referred to herein as Rituxan,
except where otherwise indicated). Under the joint business arrangement, all
U.S. sales of Rituxan and associated costs and expenses will be recognized by
Genentech, with the Company recording its share of the pretax copromotion
profits on a quarterly basis, as defined in the Company's collaborative
agreement with Genentech (Note 2). Pretax copromotion profits under the joint
business arrangement are derived by taking U.S. net sales of Rituxan to
third-party customers less cost of sales, third-party royalty expenses,
distribution, selling and marketing expenses and joint development expenses
incurred by the Company and Genentech. Revenue from bulk Rituxan sales is
recognized when bulk Rituxan is accepted by Genentech. The Company's
profit-sharing formula with Genentech has two tiers; the higher tier applies
once a certain copromotion profit level is met. The profit-sharing formula
resets to the lower tier on an annual basis, at the beginning of each year. The
Company expects the higher tier to come into effect in the middle of 1999.
Contract Revenues: Contract revenues consist of nonrefundable 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 and product candidates
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, and contract research and development funding received in
excess of amounts earned are classified as deferred revenue. Contract revenue
receivables at March 31, 1999 and December 31, 1998 are net of an allowance of
$162,000 and $775,000, respectively.
License Fees: License fees consist of nonrefundable fees from product
development milestone payments, the sale of license rights to the Company's
propriety gene expression technology and nonrefundable 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.
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Manufacturing Costs: Manufacturing costs consist of manufacturing costs
related to the production of bulk Rituxan sold to Genentech.
Earnings Per Share: Earnings per share are calculated in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings per Share." Basic
earnings per share excludes the dilutive effects of options, warrants and other
convertible securities compared to diluted earnings per share which reflects the
potential dilution of options, warrants and other convertible securities that
could share in the earnings of the Company. Calculations of basic and diluted
earnings per share use the weighted average number of shares outstanding during
the period. Diluted earnings per share for the three months ended March 31, 1999
includes the dilutive effect of 3,847,000 shares of potentially issuable common
stock from options and convertible preferred stock and excludes 1,244,000
quarterly weighted average shares of common stock from the assumed conversion of
20-year convertible zero coupon subordinated notes ("Notes") because their
effect was antidilutive. Diluted earnings per share for the period ended March
31, 1998 includes the dilutive effect of 4,039,000 shares of potentially
issuable common stock from options, warrants and convertible preferred stock and
excludes 901,000 shares of common stock from options because the options'
exercise price was greater than the average market price of the Company's common
stock for that period.
Comprehensive Income: Comprehensive income for the three months ended March
31, 1999 and 1998 was $4,612,000 and $3,842,000, respectively.
NOTE 2. 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 relapsed or
refractory, low-grade or follicular, CD20-positive, B-cell non-Hodgkin's
lymphomas ("B-cell non-Hodgkin's 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. Under the terms of these agreements,
the Company has received payments totaling $58,500,000. 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, which would result in a
loss of Genentech's Rituxan product rights.
In addition, the Company and Genentech are copromoting Rituxan in the United
States under a joint business arrangement, with the Company receiving a share of
the pretax copromotion profits. Although the Company has a contractual
obligation to manufacture and supply bulk Rituxan through the end of 1999, the
Company and Genentech are in the process of completing a modification to its
collaborative agreement to transfer all manufacturing activities for Rituxan to
Genentech by the end of the third quarter of 1999. Under the Company's
collaborative agreement with Genentech, the sales price of bulk Rituxan sold to
Genentech is capped at a price that is currently less than the Company's cost to
manufacture bulk Rituxan. Included in inventories at March 31, 1999, is $824,000
of bulk Rituxan inventory that is expected to be sold to Genentech.
Under the terms of separate agreements with Genentech, commercialization of
Rituxan outside the United States is the responsibility of Roche, except in
Japan, where Zenyaku Kogyo Co., Ltd. ("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.
NOTE 3. NOTES PAYABLE
In February 1999, the Company raised approximately $112,895,000, net of
underwriting commissions and expenses of $3,663,000, through the private sale of
Notes. Upon maturity, the Notes will have an aggregate principal face value of
$345,000,000. The Notes were priced with a yield to maturity of 5.5 percent
annually. Each $1,000 aggregate principal face value Note is convertible at the
holders' option at any time through maturity into 6.734 shares of the Company's
common stock at an initial conversion price of $50.17. The Company is required
under the terms of the Notes, as of 35 business days after a change in control
occurring on or before February 16, 2004, to purchase any Note at the option of
its holder at a price equal to the issue price plus accrued original issue
discount to the date of purchase. Additionally, the holders of the Notes may
require the Company to purchase the Notes on February 16,
5
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2004, 2009 or 2014 at a price equal to the issue price plus the accrued
original issue discount to the date of purchase, with the Company having the
option to repay the Notes plus the accrued original issue discount in cash, the
Company's common stock or a combination thereof. The Company has the option to
redeem the Notes any time on or after February 16, 2004.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
IDEC Pharmaceuticals Corporation is primarily engaged in the
commercialization, research and development of targeted therapies for the
treatment of cancer and autoimmune diseases. In November 1997, the Company
received approval from the U.S. Food and Drug Administration ("FDA") to market
its first product, Rituxan, in the United States, and in June 1998, Roche, the
Company's European marketing partner was granted marketing authorization for
Rituximab in all European Union countries. Rituxan is the trade name in the
United States for the compound Rituximab. Outside the United States, Rituximab
is marketed as MabThera (Rituximab, Rituxan and MabThera are collectively
referred to herein as Rituxan, except where otherwise indicated). Rituxan is
being copromoted in the United States under a joint business arrangement with
Genentech, with the Company receiving a share of the pretax copromotion profits.
Under the terms of separate agreements with Genentech, commercialization of
Rituxan outside the United States is the responsibility of Roche, except in
Japan where Zenyaku will be responsible for product development, marketing and
sales. The Company receives royalties on Rituxan sales outside the United
States.
Revenues for the Company include revenues from unconsolidated joint
business, contract revenues and license fees. Until the commercialization of
Rituxan, a substantial portion of the Company's revenues had been derived from
contract revenues and license fees. However, since the commercialization of
Rituxan in November 1997, the Company's revenues have depended primarily upon
the sale of Rituxan.
Revenues from unconsolidated joint business consist of the Company's share
of the pretax copromotion profits 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
from unconsolidated joint business also include royalty income 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 copromotion profits on a
quarterly basis, as defined in the Company's collaborative agreement with
Genentech. Pretax copromotion profits under the joint business arrangement are
derived by taking U.S. net sales of Rituxan to 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. The
Company's profit-sharing formula with Genentech has two tiers; the higher tier
applies once a certain copromotion profit level is met. The profit-sharing
formula resets to the lower tier on an annual basis, at the beginning of each
year. The Company expects the higher tier to come into effect in the middle of
1999.
Contract revenues include nonrefundable 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 include nonrefundable fees from product development milestone
payments, the sale of license rights to the Company's proprietary gene
expression technology and nonrefundable fees from the sale of product rights
under collaborative development and license agreements with the Company's
strategic partners.
Contract revenues and license fees may vary from period to period and are in
part dependent upon achievement of certain research and development objectives
or the consummation of new corporate alliances. The magnitude and timing of
contract revenues and license fees may influence the achievement and level of
profitability for the Company.
The Company is in the process of completing a modification to its
collaborative agreement with Genentech that will allow the Company to terminate
early its obligation to supply to Genentech bulk Rituxan manufactured at the
Company's facility. Rather than supplying bulk Rituxan to Genentech through
November 1999, the Company now anticipates transferring all manufacturing
responsibilities for bulk Rituxan to Genentech at the end of the third quarter
of 1999. The cost of bulk Rituxan sold to Genentech is recorded as manufacturing
costs in the Company's condensed consolidated statements of operations. Under
the Company's collaborative agreement with Genentech, the sales price of bulk
Rituxan sold to Genentech is capped at a price that is currently less than the
Company's cost to manufacture bulk Rituxan. The Company anticipates using its
available capacity for production
7
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of specification setting lots and commercial inventory of IDEC-Y2B8, production
of clinical material and some third-party contract manufacturing.
The Company has incurred increasing annual operating expenses and, with the
commercialization of Rituxan, the Company expects such trends to continue. The
Company has until 1998 incurred annual operating losses since its inception
in 1985 and the sustained profitability of the Company will be dependent upon
the continued commercial success of Rituxan, product development, revenues from
the achievement of product development objectives and licensing transactions. As
of March 31, 1999, the Company had an accumulated deficit of $73.1 million.
RESULTS OF OPERATIONS
Revenues from unconsolidated joint business for the three months ended March
31, 1999 totaled $19.3 million compared to $9.2 million for the comparable
period in 1998. Revenues from unconsolidated joint business for the three months
ended March 31, 1999 and 1998 reflect the financial results from the
commercialization of Rituxan through the Company's collaboration with Genentech.
Included in these revenues are the Company's share of pretax copromotion
profits, bulk Rituxan sales to Genentech, reimbursement from Genentech of the
Company's Rituxan sales force and development expenses and royalty income on
sales of Rituxan outside the United States. Under its agreement with Genentech,
the Company's pretax copromotion profit-sharing formula has two tiers. The
higher tier applies once a certain copromotion profit level is met and will
reset to the lower tier on an annual basis, at the beginning of each year. The
Company expects the higher tier to come into effect in the middle of 1999.
Rituxan net sales to third-party customers in the United States by Genentech
for the three months ended March 31, 1999 amounted to $52.0 million compared to
$35.2 million for the comparable period in 1998. The Company believes that the
growth in sales is being driven, in part, by increased prescribing for the
approved indication and by the re-treatment of patients who responded to Rituxan
therapy early in 1998.
Contract revenues for the three months ended March 31, 1999 totaled $1.2
million compared to $2.6 million for the comparable period in 1998. The decrease
in contract research revenues for the three months ended March 31, 1999 resulted
primarily from decreased funding under collaborative development agreements with
SmithKline Beecham p.l.c. ("SmithKline Beecham") and Seikagaku Corporation
("Seikagaku) that was offset by increased research and development funding from
Eisai Co. Ltd. ("Eisai").
License fees for the three months ended March 31, 1998 of $6.3 million were
the result of a license of the Company's proprietary gene expression technology.
Contract revenues and license fees may vary from period to period and are, in
part, dependent upon achievement of certain research and development objectives.
The magnitude and timing of contract revenues and license fees may influence the
achievement and level of profitability for the Company. The Company continues to
pursue other collaborative and license arrangements, however, no assurance can
be given that any such arrangements will be realized.
Manufacturing costs totaled $4.0 million for the three months ended March
31, 1999 compared to $4.1 million for the comparable period in 1998.
Manufacturing costs for 1999 and 1998 relate to production of bulk Rituxan sold
to Genentech. Manufacturing costs are recognized when Genentech accepts bulk
Rituxan inventory. The Company is in the process of completing a modification to
its collaborative agreement with Genentech that will allow the Company to
terminate early its obligation to supply to Genentech bulk Rituxan manufactured
at the Company's facility. Rather than supplying bulk Rituxan to Genentech
through November 1999, the Company anticipates transferring all manufacturing
responsibilities for bulk Rituxan to Genentech at the end of the third quarter
of 1999. The Company expects to continue incurring substantial manufacturing
related costs and expenses as it anticipates using its available capacity for
production of specification setting lots and commercial inventory of IDEC-Y2B8,
production of clinical material and some third-party contract manufacturing.
Research and development expenses totaled $7.8 million for the three months
ended March 31, 1999 compared to $7.0 million for the comparable period in 1998.
Research and development expenses consist of basic research and development,
preclinical and clinical testing of the Company's various products under
development, and production scale-up and manufacturing of products used in
clinical trials. The Company expects to continue incurring substantial
additional research and development expenses in the future, due to expansion or
addition of research and development programs; technology in-licensing and
regulatory-related expenses; preclinical and clinical testing of
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the Company's various products under development; and production scale-up and
manufacturing of products used in clinical trials.
Selling, general and administrative expenses totaled $4.4 million for the
three months ended March 31, 1999 compared to $3.9 million for the comparable
period in 1998. Selling, general and administrative expenses increased in 1999
due to increased sales and marketing expenses resulting from the
commercialization of Rituxan. Selling, general and administrative expenses
necessary to support sales and administration, 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.
The Company's income tax provision totaled $0.2 million for the three months
ended March 31, 1999 and was the result of an alternative minimum tax system
that only allows the utilization of net operating loss carry forwards to offset
90% of taxable income. At December 31, 1998, the Company had a valuation
allowance equal to its deferred tax assets of $47.6 million since the Company
has not established a pattern of profitable operations for tax purposes. Should
the Company continue to have profitable operations for tax purposes, the Company
believes that its deferred tax assets (comprised primarily of net operating loss
carryforwards and research and experimentation credits) may become recoverable,
and therefore, the Company would record the tax benefits of its deferred tax
asset. The Company's net operating loss carryforwards available to offset future
taxable income at December 31, 1998 were approximately $72.0 million for federal
income tax purposes and begin to expire in 1999. The future utilization of net
operating loss carryforwards may be limited under the Internal Revenue Code (the
"IRC") due to IRC defined ownership changes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital expenditures since
inception principally through the sale of equity securities, commercialization
of Rituxan, license fees, contract revenues, lease financing transactions and
debt and interest income. The Company expects to finance its current and planned
operating requirements principally through cash on hand, proceeds from the
completed Notes offering, 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. Existing collaborative research 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 will be
obtained through these sources on acceptable terms, if at all. Should the
Company not enter into any such arrangements, the Company anticipates its cash,
cash equivalents and securities available-for-sale, together with the existing
agreements and contracts and cash generated from its Notes offering and joint
business arrangement, will be sufficient to finance the Company's currently
anticipated needs for operating and capital expenditures for the foreseeable
future. 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 continued commercial success of Rituxan;
progress of the Company's preclinical and clinical testing; fluctuating or
increasing manufacturing requirements and research and development programs;
timing and expense 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 March 31, 1999, the Company had $196.1 million in cash, cash equivalents
and securities available-for-sale compared to $73.5 million at December 31,
1998. Sources of cash, cash equivalents and securities available-for-sale during
the three months ended March 31, 1999, include $112.9 million from the Notes
offering discussed below, $7.7 million from operations and $3.5 million from the
issuance of common stock issued under employee stock option and purchase plans.
Uses of cash, cash equivalents and securities available-for-sale during the
three months ended March 31, 1999, included $0.6 million used to purchase
capital equipment and $0.8 million used to pay notes payable.
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In February 1999, the Company raised approximately $112.9 million, net of
underwriting commissions and expenses of $3.7 million, through the private sale
of the Notes. The Notes were priced with a yield to maturity of 5.5 percent
annually. Upon maturity, the notes will have an aggregate principal face value
of $345.0 million. Each $1,000 aggregate principal face value Note is
convertible at the holders' option at any time through maturity into 6.734
shares of the Company's common stock at an initial conversion price of $50.17.
The Company is required under the terms of the Notes, as of 35 business days
after a change in control occurring on or before February 16, 2004, to purchase
any Note at the option of its holder at a price equal to the issue price plus
accrued original issue discount to the date of purchase. Additionally, the
holders of the Notes may require the Company to purchase the Notes on February
16, 2004, 2009 or 2014 at a price equal to the issue price plus accrued original
issue discount to the date of purchase with the Company having the option to
repay the Notes plus accrued original issue discount in cash, the Company's
common stock or a combination thereof. The Company has the right to redeem the
Notes on or after February 16, 2004.
In February 1997, the Company acquired worldwide rights from Pharmacia &
Upjohn S.p.A. ("Pharmacia & Upjohn") to 9-aminocamptothecin ("9-AC"), a broad
spectrum anti-cancer agent. Under the terms of the 9-AC asset transfer
agreement, the Company may make payments to Pharmacia & Upjohn totaling up to
$16.0 million, subject to the attainment of certain product development
objectives. Depending on the results of the Company's Phase II study of solid
tumors, it may achieve a product development objective in 1999 (commencement of
a Phase III trial) that would result in the Company being obligated to make a
$6.0 million payment to Pharmacia & Upjohn. In the event the Company commences
Phase III trials, it may seek a strategic partner for development, marketing,
distribution and sale of 9-AC in Europe, however, no assurances can be given
that any such arrangement will result. In September 1997, the Company and
Cytokine Networks, Inc. ("CNI") entered into a development and license
agreement. Under the terms of the development and license agreement with CNI,
the Company may make payments to CNI totaling up to $10.5 million, subject to
attainment of certain product development milestone events, of which $3.0
million has been paid through March 31, 1999.
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 year 2000 dates from earlier 20th century dates. As a result,
computer systems and/or software used by many companies may need to be upgraded
to comply with such "Year 2000" requirements.
The Company has several information system improvement initiatives underway
and has appointed a program manager for its Year 2000 Program. The Company has
completed an initial inventory and review of all system hardware, operating
systems (including manufacturing and laboratory control systems) and application
software in order to identify potential Year 2000 problems and has begun
implementing planned upgrades and testing in many systems. The Company's plan
includes sending inquiries to its major third-party suppliers and partners
seeking assurance that they are Year 2000 compliant. The Company does not know
yet the financial impact of making the required system and software
modification, but the Company currently expects such costs to be less than $2.0
million. The actual financial cost of correcting Year 2000 problems could,
however, exceed this estimate if third-party suppliers, manufacturer, service
providers and other do not adequately address their Year 2000 issues or if the
Company fails to successfully complete its initiatives.
The Company is currently relying upon Genentech to provide for all Year
2000-related contingency plans relating to the manufacture, distribution and
sale of Rituxan; however, the Company has not received such contingency plans
from Genentech. Genentech initiated contingency planning in March 1999, and
these plans are scheduled for completion in September 1999. Any failure by
Genentech to address issues which could result in their inability to timely
produce, distribute and sell Rituxan would have a material adverse impact on the
Company's business. The Company has begun to put into place contingency plans to
deal with non-Rituxan related failures resulting from the Year 2000 issue. The
Company expects to complete its contingency plans during the third quarter of
1999.
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RISK FACTORS
This Form 10-Q contains forward-looking statements that involve a number of
risks and uncertainties. You should be aware that such statements are
projections or estimates as to future events, which may or may not occur.
In addition to the other information in this Form 10-Q, you should carefully
consider the following risk factors. If any of these risks actually occur, our
business, financial condition and results of operations could be materially
adversely affected. The risks and uncertainties described below are not the only
ones facing our company, and additional risks and uncertainties may also impair
our business operations.
OUR REVENUES RELY SIGNIFICANTLY ON RITUXAN SALES
Our revenues currently depend largely upon continued U.S. sales of a single
commercialized product, Rituxan. We cannot be certain that Rituxan will continue
to be accepted in the United States or in any foreign markets. A number of
factors may affect the rate and level of market acceptance of Rituxan,
including:
- the perception by physicians and other members of the health care
community of its safety and efficacy or that of competing products, if
any;
- the effectiveness of our and Genentech's sales and marketing efforts
in the United States and the effectiveness of Roche's sales and
marketing efforts in Europe;
- unfavorable publicity concerning Rituxan or comparable drugs;
- its price relative to other drugs or competing treatments;
- the availability of third party reimbursement; and
- regulatory developments related to the manufacture or continued use of
Rituxan.
We incurred annual operating losses from our inception in 1985 through fiscal
1997. Given our current reliance upon Rituxan as the principal source of our
revenue, any material adverse developments with respect to the commercialization
of Rituxan may cause us to incur losses in the future.
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our quarterly revenues, expenses and operating results have fluctuated in the
past and are likely to fluctuate significantly in the future. Fluctuation may
result from a variety of factors, including:
- our achievement of product development objectives and milestones;
- demand and pricing for our commercialized products, such as Rituxan;
- our ability to utilize excess manufacturing capacity by obtaining
contract manufacturing relationships;
- timing and nature of contract manufacturing and contract research and
development payments and receipts;
- hospital and pharmacy buying decisions;
- clinical trial enrollment and expenses;
- physician acceptance of our products;
- government or private healthcare reimbursement policies;
- our manufacturing performance and capacity and that of our partners;
- rate and success of product approvals;
- collaboration obligations and copromotion payments we make or receive;
- foreign currency exchange rates; and
- overall economic conditions.
Our operating results during any one quarter do not necessarily suggest those of
future quarters. These results fluctuate periodically because our revenues are
driven by certain events such as achievement of product development
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milestone events and the applicable profit sharing allocation between us and
Genentech, based upon our copromotion arrangement.
VOLATILITY OF OUR STOCK PRICE
The market prices for our common stock and for securities of other companies
engaged primarily in biotechnology and pharmaceutical development, manufacture
and distribution are highly volatile. For example, the market price of our
common stock fluctuated between $17 1/4 per share and $59 1/8 per share during
the twelve months ended April 30, 1999. The market price of our common stock
will likely continue to fluctuate due to a variety of factors, including:
- material public announcements;
- the announcement and timing of new product introductions by us or
others;
- technical innovations or product development by us or our
competitors;
- regulatory approvals or regulatory issues;
- developments relating to patents, proprietary rights and orphan
drug status;
- actual or potential clinical results with respect to our products
under development or those of our competitors;
- political developments or proposed legislation in the
pharmaceutical or healthcare industry;
- hedge and/or arbitrage activities by holders of our Notes;
- period to period fluctuations in our financial results; and
- market trends relating to or effecting stock prices throughout
our industry, whether or not related to results or news regarding
us or our competitors.
WE FACE UNCERTAIN RESULTS OF CLINICAL TRIALS OF OUR POTENTIAL PRODUCTS
Our future success depends in large part upon the results of clinical trials
designed to assess the safety and efficacy of our potential products. The
completion rate of these clinical trials depends significantly upon the rate of
patient enrollment. Factors that affect patient enrollment include:
- size of patient population for the targeted disease;
- eligibility criteria;
- proximity of eligible patients to clinical sites;
- clinical trial protocols; and
- the existence of competing protocols (including competitive
financial incentives for patients and clinicians) and existing
approved drugs (including Rituxan).
Our inability to enroll patients on a timely basis could result in increased
expenses and product development delays, which could have a material adverse
effect on our business, results of operations and financial condition. Even if a
trial is fully enrolled, significant uncertainties remain as to whether it will
prove successful.
The FDA regulates clinical trials. Failure to comply with extensive FDA
regulations may result in delay, suspension or cancellation of a trial and/or
the FDA's refusal to accept test results. The FDA may also suspend our clinical
trials at any time if it concludes that the participants are being exposed to
unacceptable risks. Consequently, we cannot ensure that Phase I, Phase II or
Phase III testing will be completed timely or successfully, if at all, with
respect to any of our potential products. Furthermore, we cannot be certain that
patients enrolled in our clinical trials will respond to our product candidates,
that any product candidate will be safe and effective or that data derived from
the trials will be suitable for submission to the FDA or satisfactorily support
a biologics licensing application ("BLA") or a new drug application ("NDA").
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WE MAY BE UNABLE TO DEVELOP AND COMMERCIALIZE NEW PRODUCTS
Our future results of operations will depend to a large extent upon our
ability to successfully commercialize new products in a timely manner. As a
result, we must continue to develop, test and manufacture new products and then
must meet regulatory standards and obtain regulatory approvals. Our products
currently in development may not receive the regulatory approvals necessary for
marketing in a timely manner, if at all. Additionally, the development and
commercialization process is time-consuming and costly, and we cannot be certain
that any of our products, if and when developed and approved, will be
successfully commercialized. Delays or unanticipated costs in any part of the
process, our inability to obtain regulatory approval for our products or to
maintain manufacturing facilities in compliance with all applicable regulatory
requirements could adversely affect our results of operations.
WE RELY HEAVILY ON CONTRACT MANUFACTURERS
We rely heavily upon third party manufacturers to manufacture significant
portions of our products and product candidates. Our own manufacturing capacity
is limited and we are capable of producing only a limited quantity of bulk
Rituxan and other product candidates. Our manufacturing experience to date has
been limited to the production of preclinical and clinical quantities of product
candidates and to approximately two years of commercial production of bulk
Rituxan. We have no fill/finish experience or capacity and we do not have
experience in the field of chemical manufacturing for small molecule drugs and
therefore, we rely entirely upon third parties for the manufacture of these
drugs. Consequently, we cannot ensure that either our manufacturing facilities
or our ability to sustain ongoing production of our products will be able to
meet our expectations. Nor can we be certain that we will be able to enter into
satisfactory agreements with third party manufacturers. Our failure to enter
into agreements with such manufacturers on reasonable terms, if at all, or poor
manufacturing performance on our part or that of our third party manufacturers
could have a material and adverse effect on our business, financial condition
and results of operations.
We are in the process of completing a modification to our collaborative
agreement with Genentech that will allow us to terminate early our obligations
to supply to Genentech bulk Rituxan manufactured at our facility. Rather than
supplying bulk Rituxan to Genentech through November 1999, we now anticipate
transferring all manufacturing responsibilities for bulk Rituxan to Genentech at
the end of the third quarter of 1999. We currently manufacture bulk Rituxan at a
cost in excess of a fixed price, thereby decreasing our margins on revenue
received under the copromotion arrangement, and we expect this condition to
continue until such time as we transfer all of the manufacturing of bulk Rituxan
to Genentech. We rely upon Genentech to provide a majority of Rituxan
manufacturing in order to meet worldwide requirements and to complete all
fill/finish requirements and we will rely on Genentech for all Rituxan
manufacturing after the transfer is completed. We cannot ensure that Genentech
will manufacture and fill/finish Rituxan in sufficient quantities and on a
timely and cost-effective basis or that Genentech will obtain and maintain all
required manufacturing approvals. Genentech's failure to manufacture and
fill/finish Rituxan or obtain and maintain required manufacturing approvals
could materially and adversely affect our business, results of operations and
financial condition.
We also rely upon SmithKline Beecham to fulfill all our manufacturing
requirements for IDEC-151. Our IDEC-Y2B8 product has multiple components that
require successful coordination among several third party contract
manufacturers. We are currently negotiating with commercial contractors to meet
our long-term manufacturing demands for yttrium and fill/finish of IDEC-Y2B8
bulk product. Upon the completion in 1999 of our obligation to manufacture bulk
Rituxan, we will undertake conversion of our manufacturing facility to a
multi-product facility, where we will initially manufacture IDEC-Y2B8 and
anti-gp39 antibodies. We cannot be certain that this conversion will be
successful, that it will receive all necessary regulatory approvals, or that,
even if it is successful and such approvals are received, it will be completed
within our budgeted time and expense estimations. Our failure to successfully
convert the manufacturing facility in a timely manner could have an adverse
effect on our product development efforts and our ability to timely file our
product license applications and could cause us to incur significant unabsorbed
overhead costs. To the extent we cannot produce our own biologics, we will need
to rely on third party manufacturers, and we believe that there are only a
limited number of manufacturers capable of manufacturing biologics as contract
suppliers.
Because of our lack of experience in and facilities for small molecule
chemical manufacturing, we will need to establish a long-term manufacturing
arrangement for 9-AC with a third party contract manufacturer. We cannot be
certain that we will reach agreement on reasonable terms, if at all, with those
manufacturers or that the integration of our contract manufacturers can be
successfully coordinated.
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WE RELY HEAVILY ON CERTAIN SUPPLIERS
Some materials used in our products and potential products, including Rituxan
and IDEC-Y2B8, are currently available only from sole or limited number of
suppliers. In addition, the suppliers of some materials for our products must be
approved by the FDA and/or by other governmental agencies. Although we have
initiated a program for identifying alternative suppliers for certain materials,
any interruption or delay in our supply of materials or delays in the applicable
governmental approval of new suppliers or any loss of a sole source supplier
could have a material adverse effect on our business, financial condition and
results of operations.
OUR INDUSTRY IS INTENSELY COMPETITIVE
The biotechnology industry is intensely competitive. We compete with
biotechnology and pharmaceutical companies that have been established longer
than we have, have a greater number of products on the market, have greater
financial and other resources and have other technological or competitive
advantages. We also compete in the development of technologies and processes and
in acquiring personnel and technology from academic institutions, government
agencies, and other private and public research organizations. Consequently, we
cannot be certain that we will be able to produce or acquire rights to new
products with commercial potential. In addition, we cannot be certain that one
or more of our competitors will not receive patent protection that dominates,
blocks or adversely affects our product development or business; will benefit
from significantly greater sales and marketing capabilities; or will not develop
products that are accepted more widely than ours. We are aware that a competitor
is in late stage clinical trials with a radiolabeled murine antibody for the
treatment of low-grade non-Hodgkin's lymphomas .
WE HAVE LIMITED SALES AND MARKETING EXPERIENCE
We have limited experience with commercial sales and marketing, based
entirely upon our launch and subsequent sales of Rituxan. Outside the United
States, our strategy is to pursue and to rely solely upon collaborations with
established pharmaceutical companies for marketing, distribution and sale of our
products. We have no plans to directly market outside the United States. Since
we currently rely upon copromotion partners in the United States and rely
exclusively on third parties outside the United States, we cannot be certain
that our products will be marketed and distributed in accordance with our
expectations or that our market research or sales forecasts will be accurate. We
also cannot be certain that we will ever be able to develop our own sales and
marketing capabilities to an extent that we would not need to rely on third
party efforts, or that we will be able to maintain satisfactory arrangements
with the third parties on whom we rely.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS OR SECURE RIGHTS TO THIRD PARTY PATENTS
Our ability to obtain and maintain patent and other protection for our
products will affect their success. We are assigned or have rights to or have
exclusive access to a number of U.S. and foreign patents, patents pending and
patent applications. However, we cannot be certain that such patent applications
will be approved, or that any of our patent rights will be upheld in a court of
law if challenged. We also cannot be certain that our patent rights will provide
competitive advantages for our products or will not be challenged, infringed
upon or circumvented by our competitors.
Because of the large number of patent filings in the biopharmaceutical field,
our competitors may have filed applications or been issued patents and may
obtain additional patents and proprietary rights relating to products or
processes competitive with or similar to ours. We cannot be certain that U.S. or
foreign patents do not exist or will not issue that would materially and
adversely affect our ability to commercialize our products and product
candidates.
In addition to patents, we rely on trade secrets and proprietary know-how
that we seek to protect, in part, through confidentiality agreements with our
partners, employees and consultants. It is possible that such parties will
breach our agreements or that courts may not enforce the agreements, leaving us
without adequate remedies. We also cannot be certain that our trade secrets will
not become known or be independently developed or patented by our competitors.
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We are aware that an opposition has been recently filed in the European
patent office to a granted European application that has been licensed to us,
which application contains claims relating to the use of anti-gp39 antibodies as
a therapeutic. Also, we are aware of an opposition that was recently filed to a
granted European patent application which names us as the applicant and which
relates to PROVAX and therapeutic use thereof. If either or both of the
oppositions is successful, in whole or in part, it could result in the scope of
some or all of the granted claims being limited, some or all of the granted
claims being lost, and/or the granted patent application(s) not proceeding to a
patent.
We are aware of several third party patents and patent applications (to the
extent they issue as patents) that, if successfully asserted against us, may
materially affect our ability to make, use, offer to sell, sell and import our
products. These third party patents and, patent applications may include,
without limitation:
- U.S. patent and patent applications and foreign counterparts
filed by Bristol-Myers Company that relate to antibodies to a B7
antigen;
- a U.S. patent and 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,
are the same protein expressed on the surface of T cells;
- a number of issued U.S. and foreign patents that relate to
various aspects of radioimmunotherapy of cancer and to methods of
treating patients with anti-CD4 antibodies; and
- three U.S. patents and foreign counterparts, assigned to
Burroughs Wellcome, relating to therapeutic uses of CHO
glycosylated antibodies.
The owners, or licensees of the owners, of these patents and patent
applications (to the extent they issue as patents) may assert that one or more
of our products infringe one or more claims of such patents. Such owners or
licensees of foreign counterparts to these patents and any other foreign patents
may assert that one or more of our products infringe one or more claims of such
patents. Specifically, if legal action is commenced against us to enforce any of
these patents and patent applications (to the extent they issue as patents) and
the plaintiff in such action prevails, we could be prevented from practicing the
subject matter claimed in such patents or patent applications.
If our intellectual property rights are challenged, we may be required or may
desire to obtain licenses to patents and other intellectual property held by
third parties to develop, manufacture and market our products. However, we
cannot be certain that we will be able to obtain these licenses on commercially
reasonable terms, if at all, or that any licensed patents or intellectual
property will be valid or enforceable. In addition, the scope of intellectual
property protection is subject to scrutiny and change by courts and other
governmental bodies. Litigation and other proceedings concerning patents and
proprietary technologies can be protracted, expensive and distracting to
management and companies may sue competitors as a way of delaying the
introduction of competitors' products. Any litigation, including any
interference proceeding to determine priority of inventions and oppositions to
patents in foreign countries, may be costly and time-consuming and could have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY BE UNABLE TO MAINTAIN THIRD PARTY RESEARCH AND DEVELOPMENT RELATIONSHIPS
Funding of research and development efforts depends largely upon various
arrangements with strategic partners and others who provide us with funding and
who perform research and development with respect to our products. Such
strategic partners may generally terminate their arrangement with us at any
time. These parties may develop products that compete with ours, and we cannot
be certain that they will perform their contractual obligations or that any
revenues will be derived from such arrangements. If one or more of our strategic
partners fail to achieve certain product development objectives, such failure
could have a material adverse effect on our ability to fund related programs and
develop products.
FAILURE TO OBTAIN PRODUCT APPROVALS OR COMPLY WITH GOVERNMENT REGULATIONS COULD
ADVERSELY AFFECT OUR BUSINESS
As pharmaceutical manufacturers, our partners and we are subject to
extensive, complex, costly and evolving governmental rules, regulations and
restrictions administered by the FDA, by other federal and state agencies, and
by governmental authorities in other countries. In the United States, our
products cannot be marketed until after they are
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approved by the FDA. Obtaining an FDA approval involves the submission, among
other information, of the results of preclinical and clinical studies on the
product, and requires substantial time, effort and financial resources. Rituxan
is our only product that has received FDA approval, and we cannot be certain
that any of our product candidates will be approved either in the United States
or in other countries in a timely fashion, if at all. Both before and after
approval, we are subject to numerous other FDA requirements, and to government
inspection at all times. Our failure to meet or comply with any rules,
regulations or restrictions of the FDA or other agencies could result in fines,
unanticipated expenditures, product delays, non-approval or recall, interruption
of production and even criminal prosecution. Although we have instituted
internal compliance programs, we cannot be certain that such programs will meet
regulatory agency standards or that any lack of compliance will not have a
material adverse effect on our business, financial condition or results of
operations.
OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY CLAIMS
Our design, development and manufacture of products involves an inherent risk
of exposure to product liability claims and related adverse publicity. Insurance
coverage is expensive and difficult to obtain, and we may be unable to obtain
coverage in the future on acceptable terms, if at all. Although we currently
maintain product liability insurance for our products in the amounts we believe
to be commercially reasonable, we cannot be certain that the coverage limits of
our insurance policies or those of our strategic partners will be adequate. If
we are unable to obtain sufficient insurance at an acceptable cost or if a claim
is brought against us, whether fully covered by insurance or not, our business,
results of operations and financial condition could be materially adversely
affected.
FAILURE TO ADEQUATELY ADDRESS THE YEAR 2000 ISSUE COULD ADVERSELY AFFECT OUR
BUSINESS
We have assessed and continue to assess the potential impact of the situation
commonly referred to as the Year 2000 Issue. The Year 2000 Issue concerns the
inability of many information systems and computer software products to properly
recognize and process date sensitive information related to the year 2000 and
beyond. As a result information systems and computer software used by many
companies may need to be modified and upgraded.
We have several information improvement initiatives underway and have
appointed a program manager for our Year 2000 program. We have completed an
initial inventory and review of all system hardware, operating systems
(including manufacturing and laboratory control systems) and application
software in order to identify potential Year 2000 problems and we have begun
implementing planned upgrades and testing in many systems. Our plan includes
sending inquiries to our major third party suppliers and partners seeking
assurance that they are Year 2000 compliant. We do not know the financial impact
of making the required system and software modifications, but we currently
expect the cost to be less than $2.0 million. However, we cannot be certain that
the actual cost of correcting the Year 2000 Issue will not exceed this estimate.
Our business, financial condition and results of operations could be materially
adversely affected if third party suppliers, manufacturers, service providers
and other entities do not adequately address their Year 2000 Issues or if we at
the company fail to successfully complete our initiatives.
We are currently relying upon Genentech to provide for all Year 2000-related
contingency plans relating to the manufacture, distribution and sale of Rituxan;
however, we have not received such contingency plan from Genentech. Genentech
initiated contingency planning in March 1999, and these plans are scheduled for
completion in September 1999. Any failure by Genentech to address issues which
could result in their inability to timely produce, distribute and sell Rituxan
would have a material adverse impact on our business. We have begun to put into
place contingency plans to deal with non-Rituxan related failures resulting from
the Year 2000 issue. We expect to complete our contingency plans during the
third quarter of 1999.
WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL OR TO REPURCHASE THE ZERO COUPON
SUBORDINATED CONVERTIBLE NOTES
We expend and will likely continue to expend substantial funds to complete
the research, development, manufacturing and marketing of our potential future
products. Consequently, we may seek to raise capital through collaborative
arrangements, strategic alliances, and/or equity and debt financings or from
other sources. We may be unable to raise additional capital on commercially
acceptable terms, if at all, and if we raise capital through equity financing
then existing stockholders may have their ownership interests diluted. If we are
unable to generate
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adequate funds from operations or from additional sources, then our business,
results of operations and financial condition may be materially and adversely
affected.
If we undergo certain events constituting a change of control prior to
February 16, 2004, we will be obligated to repurchase all outstanding Notes at
the option of the holder. However, it is possible that we will not have
sufficient funds at that time, will not be able to raise sufficient funds, or
that restrictions in our indebtedness will not allow such repurchases. In
addition, certain major corporate events that would increase our indebtedness,
such as leveraged recapitalizations, would not constitute a change of control
under the Indenture entered into in connection with the offering of the Notes.
FUTURE TRANSACTIONS MAY ADVERSELY AFFECT OUR BUSINESS OR THE MARKET PRICE OF
SECURITIES
We regularly review potential transactions related to technologies, products
or product rights and businesses complementary to our business. Such
transactions could include mergers, acquisitions, strategic alliances,
off-balance sheet financings, licensing agreements or copromotion agreements. We
may choose to enter into one or more of such transactions at any time, which may
cause substantial fluctuations to the market price of securities that we have
issued. Moreover, depending upon the nature of any transaction, we may
experience a charge to earnings, which could also have a material adverse impact
upon the market price of securities that we have issued.
WE RELY UPON CERTAIN KEY PERSONNEL
Our success will depend, to a great extent, upon the experience, abilities
and continued services of our executive officers and key scientific personnel.
We do not carry key-man life insurance on any of our officers or personnel. If
we lose the services of any of these officers or key scientific personnel, we
could suffer a material adverse effect on our business, financial condition and
results of operations. Our success also will depend upon our ability to attract
and retain other highly qualified scientific, managerial, sales and
manufacturing personnel and our ability to develop and maintain relationships
with qualified clinical researchers. Competition for such personnel and
relationships is intense and we compete with numerous pharmaceutical and
biotechnology companies as well as with universities and non-profit research
organizations. We cannot be certain that we will be able to continue to attract
and retain qualified personnel or develop and maintain relationships with
clinical researchers.
WE ARE SUBJECT TO UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
Our ability to commercialize products depends in part on the extent to which
patients are reimbursed by governmental agencies, private health insurers and
other organizations, such as health maintenance organizations, for the cost of
such products and related treatments. Our business, results of operations and
financial condition could be materially adversely affected if health care payers
and providers implement cost-containment measures and governmental agencies
implement healthcare reform.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS
Our business and the business of several of our strategic partners, including
Genentech, involves the controlled use of hazardous materials, chemicals,
biologics and radioactive compounds. Biologics manufacture is extremely
susceptible to product loss due to microbial or viral contamination, material
equipment failure, or vendor or operator error. Although we believe that our
safety procedures for handling and disposing of such materials complies with
state and federal standards, there will always be the risk of accidental
contamination or injury. In addition, certain microbial or viral contamination
may cause the closure of the respective manufacturing facility for an extended
period of time. By law, radioactive materials may only be disposed of at state
approved facilities. We currently store our radioactive materials on-site
because the approval of a disposal site in California for all California-based
companies has been delayed indefinitely. If and when a disposal site is
approved, we may incur substantial costs related to the disposal of such
material. If liable for an accident, or if we suffer an extended facility
shutdown, we could incur significant costs, damages and penalties that could
have a material adverse effect on our business, financial condition and results
of operations.
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THE ZERO COUPON SUBORDINATED CONVERTIBLE NOTES LEVERAGED US CONSIDERABLY
As a result of issuing the Notes in February 1999, we raised approximately
$112.9 million, net of underwriting commissions and expenses of $3.7 million, by
incurring indebtedness of $345.0 million at maturity. As a result of this
indebtedness, our principal and interest obligations will increase
substantially. The degree to which we are leveraged could materially adversely
affect our ability to obtain future financing and could make us more vulnerable
to industry downturns and competitive pressures. Our ability to meet our debt
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. The holders of the Notes may require us to purchase the
Notes on February 16, 2004, 2009, 2014 at a price equal to the issue price plus
accrued original issue discount to the date of purchase. We have the option to
repay the Notes plus accrued original issue discount in cash, our common stock
or a combination thereof. The Company has the right to redeem the Notes on or
after February 16, 2004.
In addition, in the event of our insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up or upon our default in payment with
respect to any indebtedness or an event of default with respect to such
indebtedness resulting in the acceleration thereof, our assets will be available
to pay the amounts due on the Notes only after all our senior indebtedness has
been paid in full. Moreover, holders of common stock would only receive the
assets remaining after payment of all indebtedness and preferred stock, if any.
WE HAVE ADOPTED SEVERAL ANTITAKEOVER MEASURES AND THE ZERO COUPON SUBORDINATED
CONVERTIBLE NOTES MAY HAVE FURTHER ANTITAKEOVER EFFECT
We have 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. For example, we
reincorporated into Delaware, which subjects us to Section 203 of the Delaware
General Corporation Law, providing that the Company may not enter into a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in the manner
prescribed in the code section. In addition, we have adopted a Stockholder
Rights Plan that would cause substantial dilution to a person who attempts to
acquire our company on terms not approved by our Board of Directors. In
addition, our Board of Directors has the authority to issue, without vote or
action of stockholders, up to 8,000,000 shares of preferred stock and to fix the
price, rights, preferences and privileges of those shares. Any such preferred
stock could contain dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences or other rights superior
to the rights of holders of common stock. The Board of Directors has no present
intention of issuing any additional shares of preferred stock (approximately
227,514 shares of non-voting convertible preferred stock were outstanding as of
March 31, 1999), but reserves the right to do so in the future. In addition, our
copromotion arrangement with Genentech provides Genentech with the option to buy
the rights to Rituxan in the event that we undergo a change of control, which
may limit our attractiveness to potential acquirors.
We are required by the terms of the Notes, as of 35 business days after a
change in control occurring on or before February 16, 2004, to purchase any Note
at the option of its holder and at a price equal to the issue price plus accrued
original issue discount to the date of repurchase. This feature of the Notes may
have an antitakeover effect.
WE HAVE NOT PAID AND DO NOT PLAN TO PAY DIVIDENDS
We have never declared or paid cash dividends on our common stock. We
currently plan to retain any earnings for use in our business and therefore do
not anticipate paying any dividends in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to a variety of risks, including changes in interest
rates affecting the return on its investments and the cost of its debt. At March
31, 1999 there have not been any material changes in market risk as reported by
the Company in its Annual Report on Form 10-K for the year ended December 31,
1998 except as to the market risk associated with the Notes issued in February
1999.
Due to the fixed rate nature of these zero coupon Notes, an immediate 10%
change in interest rates would not have a material impact on the Company's
financial condition or the results of its operations
Underlying market risk exists related to an increase in the Company's stock
price or an increase in interest rates which may make conversion of the Notes
to common stock beneficial to the Notes holder. Conversion of the Notes would
have a dilutive effect on the Company's earnings per share and book value per
common share.
18
<PAGE> 21
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES.
As described in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 filed with the Securities and
Exchange Commission on March 31, 1999, in February 1999, the Company
raised approximately $112.9 million in cash from the sale of $345.0
million, aggregate principal at maturity, of its Notes. The Notes were
issued through a private offering exempt from registration under
Section 4(2) of the Act and Rule 144A thereto, to the initial
purchaser at a discount of $10.14 per $1,000 aggregate principal
amount at maturity of the Notes, for resale to certain qualified
institutional buyers (as defined in Rule 144A) and institutional
"accredited investors" (as defined in Rule 501 (a) (1), (2), (3) and
(7) under the Act.) Each $1,000 Note is convertible at the holder's
option at any time through maturity into 6.734 shares of the Company's
common stock at an initial conversion price of $50.17. The Company may
redeem the Notes for cash at any time on or after February 16, 2004
through maturity. The holders of the Notes may require the Company to
purchase the Notes on February 16, 2004. 2009. 2014 at a price equal
to the issue price plus accrued original issue discount to the date of
purchase with the Company having the option to repay the Notes plus
accrued original issue discount in cash, the Company's common stock or
a combination thereof.
The Company expects that the proceeds from the Notes will be used for
general corporate purposes, including, but not limited to, funding
U.S. licensing applications for IDEC-Y2B8 and if approved,
commercialization of IDEC-Y2B8 in the United States; financial
strategic acquisitions of products, product candidates, technologies
or other business; financing the expansion of its facilities,
including but not limited to design and engineering costs for
expansion of the Company's manufacturing facility; potentially funding
research and development activities through off-balance sheet
transactions and funding general working capital requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are referenced.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
1.1 (1) Purchase Agreement for $300,000,000 Liquid Yield Option(TM)Notes due
2019 (Zero Coupon - Subordinated) dated as of February 9, 1999
between the Registrant and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
4.10 (1) Indenture dated as of February 16, 1999 between the Registrant and
Chase Manhattan Bank and Trust Company, National Association.
4.11 (1) Reference is made to Exhibit 1.1.
27.1 Financial Data Schedule.
</TABLE>
- ----------
(1) Incorporated by reference to exhibit filed with the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 filed on March
31, 1999.
19
<PAGE> 22
(b) Reports on Form 8-K.
On January 4, 1999, the Company filed a current report on Form
8-K amending its Rights Agreement, dated as of July 22, 1997, between
the Company and Chase Mellon Shareholder Services LLC, to delete
"continuing director" provisions throughout the Agreement as of
September 17, 1998.
On February 3, 1999, the Company filed a current report on Form
8-K reporting its financial results for the fourth quarter ended
December 31, 1998, along with the Company's press release to raise
approximately $100 million through an offering of 20-year convertible
zero coupon subordinated notes due 2019.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEC Pharmaceuticals Corporation
Date: May 17, 1999 By: /s/ William H. Rastetter
----------------------- -------------------------
William H. Rastetter
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ Phillip M. Schneider
----------------------- -------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS CONTAINED IN THE COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIALS STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 100,847
<SECURITIES> 95,213
<RECEIVABLES> 1,354
<ALLOWANCES> 162
<INVENTORY> 5,405
<CURRENT-ASSETS> 231,671
<PP&E> 38,038
<DEPRECIATION> 17,586
<TOTAL-ASSETS> 249,352
<CURRENT-LIABILITIES> 12,666
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 114,799
<TOTAL-LIABILITY-AND-EQUITY> 114,819
<SALES> 0
<TOTAL-REVENUES> 20,511
<CGS> 0
<TOTAL-COSTS> 11,826
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 905
<INCOME-PRETAX> 5,000
<INCOME-TAX> 191
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,809
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.20
</TABLE>
