<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 June 30, 2000
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.)
3030 Callan Road, San Diego, CA 92121
---------------------------------------------------
(Address of principal executive offices) (Zip code)
(858) 431-8500
----------------------------------------------------
(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 July 31, 2000 the Registrant had 44,852,882 shares of its common stock,
$.0005 par value, issued and outstanding.
<PAGE> 2
IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Statements of Operations -- Three months ended June 30, 2000
and 1999 and six months ended June 30, 2000 and 1999 ......................................... 1
Condensed Consolidated Balance Sheets -- June 30, 2000 and December 31, 1999 ....................... 2
Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 2000 and 1999 ......... 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 ......................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 20
Item 2. Changes in Securities .............................................................................. 20
Item 3. Defaults upon Senior Securities .................................................................... 20
Item 4. Submission of Matters to a Vote of Stockholders .................................................... 20
Item 5. Other Information................................................................................... 21
Item 6. Exhibits and Reports on Form 8-K ................................................................... 21
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30.
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Revenues from unconsolidated joint business $ 31,302 $ 21,045 $ 53,195 $ 40,324
Contract revenues 6,088 1,249 9,592 2,481
License fees -- 13,000 -- 13,000
-------- -------- -------- --------
Total revenues 37,390 35,294 62,787 55,805
Operating costs and expenses:
Manufacturing costs -- 879 2,134 4,886
Research and development 17,038 9,535 31,760 17,354
Selling, general and administrative 6,600 4,859 12,677 9,253
-------- -------- -------- --------
Total operating costs and expenses 23,638 15,273 46,571 31,493
-------- -------- -------- --------
Income from operations 13,752 20,021 16,216 24,312
Interest income, net 2,389 930 4,265 1,639
-------- -------- -------- --------
Income before income tax provision 16,141 20,951 20,481 25,951
Income tax provision (2,816) (1,043) (3,557) (1,234)
-------- -------- -------- --------
Net income $ 13,325 $ 19,908 $ 16,924 $ 24,717
======== ======== ======== ========
Earnings per share (1):
Basic $ 0.30 $ 0.49 $ 0.38 $ 0.61
Diluted $ 0.26 $ 0.40 $ 0.32 $ 0.51
Shares used in calculation of earnings per share (1):
Basic 44,508 41,034 43,979 40,798
Diluted 52,042 53,788 52,301 48,750
</TABLE>
(1) Per share data for the three and six months ended June 30, 1999 have been
restated to reflect a two-for-one stock split in December 1999.
See accompanying notes to condensed consolidated financial statements.
1
<PAGE> 4
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 111,983 $ 61,404
Securities available-for-sale 162,274 184,882
Contract revenue receivables, net 1,534 1,310
Due from related parties, net 32,901 23,654
Inventories 778 2,400
Prepaid expenses and other current assets 4,109 4,869
--------- ---------
Total current assets 313,579 278,519
Property and equipment, net 25,433 20,822
Investment and other assets 13,121 7,733
--------- ---------
$ 352,133 $ 307,074
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,274 $ 1,513
Accounts payable 1,437 1,269
Accrued expenses 12,236 12,834
Deferred revenue 4,368 --
--------- ---------
Total current liabilities 19,315 15,616
Notes payable, less current portion 125,664 122,910
Deferred taxes and other long-term liabilities 9,392 8,570
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.0005 par value 22 21
Additional paid-in capital 215,979 195,218
Accumulated other comprehensive loss - net unrealized losses
on securities available-for-sale (445) (543)
Accumulated deficit (17,794) (34,718)
--------- ---------
Total stockholders' equity 197,762 159,978
--------- ---------
$ 352,133 $ 307,074
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 5
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 21,367 $ 24,267
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (6,832) (1,532)
Purchase of securities available-for-sale (81,219) (142,106)
Sales and maturities of securities available-for-sale 105,716 43,358
--------- ---------
Net cash provided by (used in) investing activities 17,665 (100,280)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net -- 112,792
Payments on notes payable (823) (1,080)
Proceeds from issuance of common stock 12,370 5,877
--------- ---------
Net cash provided by financing activities 11,547 117,589
--------- ---------
Net increase in cash and cash equivalents 50,579 41,576
Cash and cash equivalents, beginning of period 61,404 26,929
--------- ---------
Cash and cash equivalents, end of period $ 111,983 $ 68,505
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 6
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 June 30, 2000, and for the
three and six months ended June 30, 2000 and 1999, is unaudited. In the opinion
of management, these condensed consolidated 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 condensed consolidated financial statements should be read
in conjunction with IDEC Pharmaceuticals Corporation's ("we", "our" and "us")
Annual Report on Form 10-K for the year ended December 31, 1999.
Inventories: Inventories are stated at the lower of cost or market.
Cost is determined in a manner that approximates the first-in, first-out (FIFO)
method. Under our collaborative agreement with Genentech, Inc. ("Genentech"),
the sales price of bulk Rituxan(R) sold to Genentech (see Note 2) was capped at
a price that was less than our cost to manufacture bulk Rituxan and as such,
finished goods inventory was written down to its net realizable value. Such
write-downs were recorded in manufacturing costs. All manufacturing
responsibilities for bulk Rituxan were transferred to Genentech in September
1999. The last sale of bulk Rituxan to Genentech occurred during the first
quarter of 2000. Inventories for the six months ended June 30, 2000 and
December 31, 1999 consist of the following (table in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Raw materials $778 $1,005
Work in process -- --
Finished goods -- 1,395
---- ------
$778 $2,400
==== ======
</TABLE>
Revenues from Unconsolidated Joint Business: Revenues from
unconsolidated joint business consist of our share of the pretax copromotion
profits generated from our joint business arrangement with Genentech, revenue
from bulk Rituxan sales to Genentech through March 2000, reimbursement from
Genentech of our Rituxan-related sales force and development expenses and
royalty income from F. Hoffmann-La Roche Ltd. ("Roche"), on sales of Rituximab
outside the United States. Revenue from bulk Rituxan sales was recognized when
Genentech accepted the bulk Rituxan. Upon acceptance of bulk Rituxan by
Genentech the right to return no longer exists and there are no further
performance obligations related to bulk Rituxan. We record our royalty income
from Roche with a one-quarter lag. 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, we share responsibility with Genentech for selling and
continued development of Rituxan in the United States. Continued development of
Rituxan includes conducting supportive research on Rituxan, post approval
clinical studies and obtaining potential approval of Rituxan for additional
indications. Genentech provides the support functions for the commercialization
of Rituxan in the United States including, marketing, customer service, order
entry, distribution, shipping and billing and as of September 1999, all
manufacturing responsibilities for Rituxan. Under the joint business
arrangement, all U.S. sales of Rituxan and associated costs and expenses are
recognized by Genentech and we record our share of the pretax copromotion
profits on a quarterly basis, as defined in our collaborative agreement with
Genentech (see Note 2). Pretax copromotion profits under the joint business
arrangement are derived by taking the 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
Genentech and us. Our profit-sharing formula with Genentech has two tiers; we
earn a higher percentage of the pretax copromotion profits at the upper tier
once a fixed pretax copromotion profit level is met. The profit-sharing formula
resets to the lower tier on an annual basis, at the beginning of each year. We
began recording our profit share at the higher percentage at the beginning
of the second quarter of 2000. In 1999, we began recording our profit share at
the higher percentage during the second quarter.
Contract Revenues: Contract revenues consist of nonrefundable research
and development funding under collaborative agreements with our strategic
partners and other funding under contractual arrangements with other parties.
Contract research and development funding generally compensates us for
discovery, preclinical and clinical expenses related to the collaborative
development programs for certain of our products and product candidates and is
4
<PAGE> 7
recognized at the time research and development activities are performed under
the terms of the collaborative agreements. Amounts received under the
collaborative agreements are nonrefundable even if the research and development
efforts performed by us do not eventually result in a commercial product.
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 June 30, 2000 and December 31,1999 are net of an
allowance of $283,000 and $292,000, respectively.
License Fees: License fees consist of nonrefundable fees from product
development milestone payments, the sale of license rights to our proprietary
gene expression technology and nonrefundable fees from the sale of product
rights under collaborative development and license agreements with our strategic
partners. Included in license fees are nonrefundable product development
milestone payments which are recognized upon the achievement of product
development milestone objectives as stipulated in agreements with our strategic
partners. Product development milestone objectives vary in each of our
agreements. The achievement of product development milestone objectives that may
lead to the recognition of license fees may include but are not limited to: the
achievement of preclinical research and development objectives; the initiation
of various phases of clinical trials; the filing of an Investigational New Drug
("IND"), Biologics Licensing Application ("BLA") or New Drug Application
("NDA"); the filing of drug license applications in foreign territories; and
obtaining United States and/or foreign regulatory product approvals. Revenues
from nonrefundable product development milestone payments are recognized when
the results or objectives stipulated in the agreement have been achieved.
License fees recognized are nonrefundable even if the achievement of the product
development objective by us does not eventually result in a commercial product.
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 our earnings. Calculations of basic and diluted earnings per
share use the weighted average number of shares outstanding during the period.
<TABLE>
<CAPTION>
(In thousands, except per share data) Three months Six months
ended June 30, ended June 30.
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Net income $13,325 $19,908 $16,924 $24,717
Adjustments for interest, net of income tax effect -- 1,568 -- --
------- ------- ------- -------
Net income, adjusted 13,325 21,476 16,924 24,717
Denominator:
Weighted-average shares outstanding 44,508 41,034 43,979 40,798
Effect of dilutive securities:
Dilutive options 5,282 5,126 5,909 4,970
Convertible preferred 2,252 2,982 2,413 2,982
Convertible zero-coupon notes due 2019 -- 4,646 -- --
------- ------- ------- -------
Dilutive potential common shares 7,534 12,754 8,322 7,952
------- ------- ------- -------
Weighted-average shares and dilutive potential
common shares 52,042 53,788 52,301 48,750
------- ------- ------- -------
Basic earnings per share $ 0.30 $ 0.49 $ 0.38 $ 0.61
Diluted earnings per share $ 0.26 $ 0.40 $ 0.32 $ 0.51
</TABLE>
Excluded from the calculation of diluted earnings per share for the
three and six months ended June 30, 2000 was 4,646,000 shares of common stock
from the assumed conversion of our 20-year zero coupon subordinated convertible
notes ("Notes") and 798,000 shares and 678,000 shares, respectively, of common
stock from options because their effect is antidilutive. Excluded from the
calculation of diluted earnings per share for the six months ended June 30, 1999
was 3,572,000 weighted average shares of common stock from the assumed
conversion of our Notes because their effect was antidilutive. All share and
earnings per share amounts for the three and six months ended June 30, 1999 have
been restated to reflect our two-for-one stock split effected in December 1999.
5
<PAGE> 8
Comprehensive Income: Other comprehensive income consist of net income and net
unrealized losses of securities available for sale. Comprehensive income for
the three and six months ended June 30, 2000 was $13,382,000 and $17,005,000,
respectively, compared to $19,483,000 and $24,104,000 for the comparable periods
in 1999.
NOTE 2. RELATED PARTY ARRANGEMENTS
In March 1995, we entered into a collaborative agreement for the
clinical development and commercialization of our anti-CD20 monoclonal antibody,
Rituxan, for the treatment of certain B-cell non-Hodgkin's lymphomas with
Genentech. Concurrent with the collaborative agreement we also entered into an
expression technology license agreement with Genentech for a proprietary gene
expression technology developed by us and a preferred stock purchase agreement
providing for certain equity investments by Genentech in us. Under the terms of
these agreements, we have received payments totaling $58,500,000 for the
attainment of product development objectives, product license rights and equity
investments in us. Additionally, we 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, we are copromoting Rituxan in the United States with
Genentech under a joint business arrangement, with us receiving a share of the
pretax copromotion profits. Under our collaborative agreement with Genentech,
the sales price of bulk Rituxan sold to Genentech was capped at a price that was
less than our cost to manufacture bulk Rituxan. In September 1999 we transferred
all manufacturing responsibilities for bulk Rituxan to Genentech.
Revenues from unconsolidated joint business for the three and six months
ended June 30, 2000 and 1999 consist of the following (table in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30.
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Copromotion profit $26,670 $18,130 $42,218 $30,775
Bulk Rituxan sales -- -- 2,078 3,867
Reimbursement of selling and development expenses 2,590 2,041 5,019 3,817
Royalty income on sales of Rituximab outside the U.S. 2,042 874 3,880 1,865
------- ------- ------- -------
Total revenues from unconsolidated joint business $31,302 $21,045 $53,195 $40,324
======= ======= ======= =======
</TABLE>
Amounts due from related parties, net at June 30, 2000 and December 31,
1999 consist of the following (table in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Due from Genentech, copromotion profits $25,839 $17,869
Due from Genentech, bulk Rituxan sales 4,512 3,291
Due from Genentech, selling and development expenses 2,524 2,467
Due from Roche 26 27
------- -------
Total due from related parties, net $32,901 $23,654
======= =======
</TABLE>
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. We receive royalties on sales outside the
United States.
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We are primarily engaged in the commercialization, research and
development of targeted therapies for the treatment of cancer and autoimmune
diseases. In November 1997, we received approval from the United States Food and
Drug Administration (" FDA") to market our first product, Rituxan, in the United
States, and in June 1998, Roche, our European marketing partner was granted
marketing authorization for Rituximab in all European Union countries. In
September 1999, Zenyaku filed a BLA for Rituxan with the Tokyo Government and
the Ministry of Health and Welfare and Rituxan is pending approval in Japan.
Rituxan is the trade name in the United States and Japan for the compound
Rituximab. Outside the United States, Rituximab is marketed as MabThera
(Rituximab, Rituxan and MabThera are collectively referred to as Rituxan, except
where otherwise indicated). Rituxan is being copromoted in the United States
under a joint business arrangement with Genentech, where we receive a share of
the pretax copromotion profits. Under the joint business arrangement we share
responsibility with Genentech for selling and continued development of Rituxan
in the United States. Continued development of Rituxan includes conducting
supportive research on Rituxan, post approval clinical studies and obtaining
potential approval of Rituxan for additional indications. Genentech provides the
support functions for the commercialization of Rituxan in the United States
including marketing, customer service, order entry, distribution, shipping and
billing and, as of September 1999, all manufacturing responsibilities for
Rituxan. 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. We receive royalties on Rituxan sales outside
the United States.
Our revenues include revenues from unconsolidated joint business,
contract revenues and license fees. Until the commercialization of Rituxan, a
substantial portion of our revenues had been derived from contract revenues and
license fees. However, since the commercialization of Rituxan in November 1997,
our revenues have depended primarily upon the sale of Rituxan.
Revenues from unconsolidated joint business include our share of the
pretax copromotion profits generated from our joint business arrangement with
Genentech, revenue from bulk Rituxan sales to Genentech through March 2000,
reimbursement from Genentech of our Rituxan-related sales force and development
expenses and royalty income from Roche on sales of Rituximab outside the United
States. Revenue from bulk Rituxan sales was recognized when Genentech accepted
the bulk Rituxan. We record our royalty income from Roche with a one-quarter
lag. Under the joint business arrangement, all U.S. sales of Rituxan and
associated costs and expenses are recognized by Genentech and we record our
share of the pretax copromotion profits on a quarterly basis, as defined in our
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
incurred by Genentech and us. Our profit-sharing formula with Genentech has two
tiers; we earn a higher percentage of the pretax copromotion profits at the
upper tier once a fixed pretax copromotion profit level is met. The
profit-sharing formula resets to the lower tier on an annual basis, at the
beginning of each year. We began recording our profit share at the higher
percentage at the beginning of the second quarter of 2000. In 1999, we began
recording our profit share at the higher percentage during the second quarter.
Contract revenues include nonrefundable research and development funding
under collaborative agreements with our strategic partners and other funding
under contractual arrangements with other parties. Contract research and
development funding generally compensates us for discovery, preclinical and
clinical expenses related to our collaborative development programs for certain
of our products and is recognized at the time research and development
activities are performed under the terms of the collaborative agreements.
License fees include nonrefundable fees from product development
milestone payments, the sale of license rights to our proprietary gene
expression technology and nonrefundable fees from the sale of product rights
under collaborative development and license agreements with our strategic
partners. Included in license fees are nonrefundable product development
milestone payments which are recognized upon the achievement of product
development milestone objectives as stipulated in agreements with our strategic
partners. Product development milestone objectives vary in each of our
agreements. The achievement of product development milestone objectives that may
lead to the recognition of license fees may include, but are not limited to: the
achievement of preclinical research and development objectives; the initiation
of various phases of clinical trials; the filing of an IND, BLA or NDA; the
filing of drug license applications in foreign territories; and obtaining United
States and/or foreign regulatory product approvals.
7
<PAGE> 10
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 our achievement and
level of profitability.
The cost of bulk Rituxan sold to Genentech was recorded as
manufacturing costs in our condensed consolidated statements of operations.
Under our agreement with Genentech, the sales price of bulk Rituxan sold to
Genentech was capped at a price that was less than our cost to manufacture bulk
Rituxan. In September 1999 we transferred all manufacturing responsibilities for
bulk Rituxan to Genentech. Since the transfer of bulk Rituxan manufacturing to
Genentech in September 1999, we have been using our manufacturing capacity for
production of specification-setting lots and pre-commercial inventory of
ZEVALIN(TM) antibodies and production of clinical antibodies. During the first
quarter of 2000 we completed the BLA-enabling bulk manufacturing runs of the
antibody component for ZEVALIN.
We have incurred increasing annual operating expenses and, with the
commercialization of Rituxan and preparation for potential commercialization of
ZEVALIN, we expect such trends to continue. Since our inception in 1985, through
1997, we incurred annual operating losses. Our ongoing profitability will be
dependent upon the continued commercial success of Rituxan, product development
and revenues from the achievement of product development objectives and
licensing transactions. As of June 30, 2000, we had an accumulated deficit of
$17.8 million.
In April 2000 we announced that we recently completed a preliminary
analysis of an 85-patient Phase II multi-center randomized, placebo-controlled,
multi-dose clinical trial with IDEC-131. The trial was designed to assess the
antibody's safety and potential efficacy in patients with active systemic lupus
erythematous (SLE) who remained on background therapy for SLE. IDEC-131
demonstrated a favorable safety profile at repeat doses as high as 10 mg/kg.
Additionally, significant improvement in global disease activity as compared to
baseline was seen in all IDEC-131 treatment groups as determined by SLE Disease
Activity Index scores. However, the improvement noted was not significantly
different from that observed in the control group where a marked placebo effect
was noted. We intend to expand our clinical development efforts for IDEC-131
into other indications during the year.
RESULTS OF OPERATIONS
Revenues from unconsolidated joint business for the three and six months
ended June 30, 2000 totaled $31.3 million and $53.2 million, respectively,
compared to $21.0 million and $40.3 million for the comparable periods in 1999.
Revenues from unconsolidated joint business for the three and six months ended
June 30, 2000 and 1999 reflect the financial results from the commercialization
of Rituxan through our collaboration with Genentech. Revenues from
unconsolidated joint business for the three and six months ended June 30, 2000
and 1999, consist of the following (table in thousands):
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------------- --------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Copromotion profit $26,670 $18,130 $42,218 $30,775
Bulk Rituxan sales -- -- 2,078 3,867
Reimbursement of selling and development expenses 2,590 2,041 5,019 3,817
Royalty income on sales of Rituximab outside the U.S. 2,042 874 3,880 1,865
------- ------- ------- -------
Total revenues from unconsolidated joint business $31,302 $21,045 $53,195 $40,324
======= ======= ======= =======
</TABLE>
During the first quarter of 2000 we recognized the remaining revenues
from bulk Rituxan sales to Genentech. Going forward, the transfer of all
manufacturing responsibilities to Genentech will result in the loss of revenues
to
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<PAGE> 11
offset our manufacturing costs. The loss of bulk Rituxan revenues may be offset
by the potential financial and development timeline benefits of manufacturing
ZEVALIN and other clinical antibodies in our manufacturing facility. Under our
agreement with Genentech, our pretax copromotion profit-sharing formula has two
tiers. We earn a higher percentage of the pretax copromotion profits at the
upper tier once a fixed copromotion profit level is met. The profit-sharing
formula resets to the lower tier on an annual basis, at the beginning of each
year. We began recording our profit share at the higher percentage at the
beginning of the second quarter of 2000. In 1999, we began recording our profit
share at the higher percentage during the second quarter.
Rituxan net sales to third-party customers in the United States recorded
by Genentech for the three and six months ended June 30, 2000 amounted to $96.7
million and $174.7 million, respectively, compared to $68.3 million and $120.3
million for the comparable periods in 1999. This increase was primarily due to
increased market penetration in treatments of B-cell non-Hodgkin's lymphoma and
a 5 percent increase in the wholesale price of Rituxan which was effected on
September 1, 1999.
Our royalty revenue on sales of Rituximab outside the U.S. is based on
Roche's end-user sales and is recorded with a one-quarter lag. For the three and
six months ended June 30, 2000 we recognized $2.1 million and $3.9 million,
respectively, in royalties from Roche's end-users sales compared to $0.9 million
and $1.9 million for the comparable periods in 1999.
Contract revenues for the three and six months ended June 30, 2000
totaled $6.1 million and $9.6 million, respectively, compared to $1.2 million
and $2.5 million for the comparable periods in 1999. The increase in contract
research revenues for the three and six months ended June 30, 2000 is primarily
the result of funding under a collaboration and license agreement with Schering
Aktiengesellschaft ("Schering AG") and a collaborative research and development
agreement with Taisho Pharmaceuticals Co. Ltd. of Tokyo ("Taisho") offset by
decreased funding under a collaborative agreement with Eisai Co, Ltd. ("Eisai").
License fees for the three and six months ended June 30, 1999 totaled
$13.0 million which is the result of a non-recurring $13.0 million upfront
licensing free from Schering AG for the exclusive marketing and distribution
rights of ZEVALIN outside the United States.
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 our achievement and level of profitability. We continue to pursue
other collaborative and license arrangements, however, no assurance can be given
that any such arrangements will be realized.
There were no manufacturing costs for the three months ended June 30,
2000 compared to $0.9 million for the comparable period in 1999. Manufacturing
costs totaled $2.1 million for the six months ended June 30, 2000 compared to
$4.9 million for the comparable period in 1999. Manufacturing costs relate to
production of bulk Rituxan sold to Genentech. Manufacturing costs were
recognized when Genentech accepted bulk Rituxan inventory. The decrease in
manufacturing costs for 2000 is due to the transfer of all manufacturing
responsibilities for bulk Rituxan to Genentech in September 1999. The final lots
of bulk Rituxan manufactured by us during the third quarter of 1999 were
accepted by Genentech during the first quarter of 2000. Since the transfer of
all manufacturing responsibilities for bulk Rituxan to Genentech, we have been
using our manufacturing capacity for production of specification-setting lots
and pre-commercial inventory of ZEVALIN antibodies and production of clinical
antibodies. Those manufacturing expenses have been recorded as
research and development expenses.
Research and development expenses totaled $17.0 million and $31.8
million for the three and six months ended June 30, 2000, respectively, compared
to $9.5 million and $17.4 million for the comparable periods in 1999. The
increase in research and development expenses in 2000 is primarily due to
ZEVALIN-related manufacturing and process development expenses, technology
in-licensing, clinical trials, expansion of our facilities and contract
manufacturing to third-parties. We expect to continue incurring substantial
manufacturing related expenses as we have begun using our manufacturing capacity
for production of specification-setting lots and pre-commercial inventory of
ZEVALIN antibodies and production of other clinical antibodies under
development. In the future we expect to continue incurring substantial
additional research and development expenses due to: completion of our primary
development program for ZEVALIN and preparation of our ZEVELIN BLA package; the
expansion or addition of research and development programs; technology
in-licensing; regulatory-related expenses; facility expansion; and preclinical
and clinical testing of our various products under development.
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Selling, general and administrative expenses totaled $6.6 million and
$12.7 million for the three and six months ended June 30, 2000 compared to $4.9
million and $9.3 million for the comparable periods in 1999. Selling, general
and administrative expenses increased in 2000 primarily due to increased legal
and patent filing fees and general increases in general and administrative
expenses to support overall organizational growth. Selling, general and
administrative expenses are expected to increase in the foreseeable future to
support expanded growth in sales, marketing and administration related to the
potential commercialization of ZEVALIN, manufacturing capacity, clinical trials
and research and development.
Interest income totaled $4.2 million and $7.8 million for the three and
six months ended June 30, 2000 compared to $2.7 million and $4.3 million for the
comparable periods in 1999. The increase in interest income in 2000 is primarily
due to higher average balances in cash, cash equivalents and securities
available-for-sale resulting from the completion of a Notes offering in February
1999, see "Liquidity and Capital Resources," cash provided by operations and
cash provided from the issuance of common stock under employee stock option and
purchase plans.
Interest expense totaled $1.8 million and $3.5 million for the three and
six months ended June 30, 2000 compared to $1.7 million and $2.6 million for the
comparable periods in 1999. The increase in interest expense in 2000 is
primarily due to noncash interest charges relating to the Notes offering in
February 1999. Interest expense is expected to increase in the future due to
interest charges from the Notes.
Our effective tax rate for the six months ended June 30, 2000 was
approximately seventeen percent compared to five percent in 1999. Our effective
tax rate for 2000 and 1999 results from the utilization of net operating loss
carryforwards. At December 31, 1999, we had a valuation allowance equal to our
deferred tax assets of $57.5 million since we have not established a pattern of
profitable operations for income tax reporting purposes. Our net operating loss
carryforwards available to offset future taxable income at December 31, 1999
were approximately $87.0 million for federal income tax purposes and begin to
expire in 2006. The utilization of our net operating loss carryforwards and tax
credits may be subject to an annual limitation under the Internal Revenue Code
due to a cumulative change of ownership in us of more than fifty percent in
prior years. However, we anticipate this annual limitation to only result in a
slight deferral in the utilization of our net operating loss carryforwards and
tax credits.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operating and capital expenditures since inception
principally through the sale of equity securities, commercialization of Rituxan,
license fees, contract revenues, lease financing transactions, debt and interest
income. We expect to finance our current and planned operating requirements
principally through cash on hand, funds from our joint business arrangement with
Genentech and with funds from existing collaborative agreements and contracts
which we believe will be sufficient to meet our operating requirements for the
foreseeable future. Existing collaborative research agreements and contracts
however could be canceled by the contracting parties. In addition, we 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 additional
funds will be obtained through these sources on acceptable terms, if at all.
Should we not enter into any such arrangements, we anticipate our cash, cash
equivalents and securities available-for-sale, together with the existing
agreements and contracts and cash generated from our joint business arrangement
with Genentech, will be sufficient to finance our 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, our business could be materially and adversely
affected.
Our working capital and capital requirements will depend upon numerous
factors, including: the continued commercial success of Rituxan; the progress of
our 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 we devote to the
development of manufacturing, sales and marketing capabilities, including
resources devoted to the potential commercial launch of ZEVALIN; technological
advances; status of competitors; and our ability to establish collaborative
arrangements with other organizations.
Until required for operations we invest our cash reserves in bank
deposits, certificates of deposit, commercial paper, corporate notes, United
States government instruments and other readily marketable debt instruments in
accordance with our investment policy.
At June 30, 2000, we had $274.3 million in cash, cash equivalents and
securities available-for-sale compared to $246.3 million at December 31, 1999.
Sources of cash, cash equivalents and securities available-for-sale during the
six months ended June 30, 2000, included $21.4 million from operations and $12.4
million from the issuance of
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common stock under employee stock option and purchase plans. Uses of cash, cash
equivalents and securities available-for-sale during the six months ended June
30, 2000, included $6.8 million used to purchase capital equipment and $0.8
million used to pay notes payable.
In February 1999, we raised through the sale of Notes approximately
$112.7 million, net of underwriting commissions and expenses of $3.9 million.
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 13.468 shares of our common
stock at an initial conversion price of $25.09. We are 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 us 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 us having the
option to repay the Notes plus accrued original issue discount in cash, our
common stock or a combination thereof. We have the right to redeem the Notes on
or after February 16, 2004.
In September 1997, we entered into a development and license agreement
with Cytokine Pharmasciences, Inc., formally known as Cytokine Networks, Inc.,
("CPI"). Under the terms of the development and license agreement with CPI, we
may make payments to CPI totaling up to $10.5 million plus a share of future
royalty and development milestone payments received by us from third parties
subject to attainment of certain product development milestone objectives, of
which $3.5 million has been paid through June 30, 2000.
In October 1992, we entered into a collaborative research and license
agreement with SmithKline Beecham p.l.c. ("SmithKline Beecham") related to the
development and commercialization of compounds based on our PRIMATIZED(R)
anti-CD4 antibodies. In February 2000, we amended and restated our agreement
with SmithKline Beecham which resulted in all anti-CD4 program rights, including
IDEC-151, being returned to us. We will receive no further funding from
SmithKline Beecham under the restated agreement. As part of the restated
agreement, SmithKline Beecham has the option to negotiate commercialization and
copromotion rights with us for the first compound based on our PRIMATIZED
anti-CD4 antibodies to complete a Phase II study. If we do not commercialize and
copromote the compound with SmithKline Beecham, we will pay SmithKline Beecham
royalties on sales and licensees by us or our affiliates, on products emerging
from the rights returned to us under the restated agreement.
NEW ACCOUNTING BULLETIN
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"). SAB No. 101, as amended by SAB No. 101B, summarizes certain of
the SEC's staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB No. 101 provides that specific
facts and circumstances may result in nonrefundable fees received under our
collaborative agreements not being recognized as revenue upon payment but
instead recognized as revenue over future periods. We are presently evaluating
the impact, if any, that SAB No. 101 will have on our reported results.
Implementation of SAB No. 101 is required no later than the fourth quarter of
2000.
In March of 2000, the Financial Accounting Standards Boards ("FASB")
issued FASB Interpretation No. 44 ("FIN 44"), Accounting for Certain
Transactions Involving Stock Compensation - an Interpretation of Accounting
Principles Board Opinion No. 25. FIN 44 is effective July 1, 2000. We do not
expect the application of FIN 44 to have a significant effect on our
consolidated financial statements.
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FORWARD-LOOKING INFORMATION AND RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements based on our current
expectations. You should be aware that such statements are projections or
estimates as to future events, and actual results may differ materially.
In addition to the other information in this Form 10-Q, you should
carefully consider the following risk factors that could affect our actual
future results and have a material and adverse effect on our business, financial
condition and results of operations. The risks and uncertainties described below
are not the only ones facing us, 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 or that
Rituxan sales will continue to increase. 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 outside the United States;
- 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;
- the amount and timing of sales orders of Rituxan by Genentech for
customers in the United States and by Roche for customers outside the
United States;
- rate and success of product approvals;
- timing of FDA approval, if any, of competitive products and the rate
of market penetration of competing products;
- collaboration obligations and copromotion payments we make or receive;
- foreign currency exchange rates; and
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- 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
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 $42 3/4 per share and $173 per share
during the twelve months ended August 11, 2000. 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;
- economic and other external factors, disaster or crisis;
- hedge and/or arbitrage activities by holders of our Notes;
- period-to-period fluctuations in our financial results;
- market trends relating to or affecting 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. We
cannot be certain that patients enrolled in our clinical trials will respond to
our products, that any product will be safe and effective or that data derived
from the trials will be suitable for submission to the FDA or satisfactorily
support a BLA or NDA.
The completion rate of 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.
In addition, the length of time necessary to complete clinical trials
and submit an application for marketing and manufacturing approvals varies
significantly and may be difficult to predict. 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
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unacceptable risks. Consequently, we cannot ensure that Phase I, Phase II, Phase
III or Phase IV (post-marketing) testing will be completed timely or
successfully, if at all, with respect to any of our potential or existing
products. Furthermore, success in preclinical and early clinical trials does not
ensure that later phase or large scale trials will be successful.
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 or 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 HAVE LIMITED MANUFACTURING EXPERIENCE AND RELY HEAVILY ON CONTRACT
MANUFACTURERS
We rely heavily upon third-party manufacturers to manufacture
significant portions of our products and product candidates. Our manufacturing
capacity is limited. Our manufacturing experience to date has been limited to
the production of preclinical and clinical quantities of product candidates and
to approximately three years of commercial production of bulk Rituxan. We have
no fill/finish experience or capacity and we do not have experience
manufacturing in the field of chelates or radioisotopes and therefore, we rely
entirely upon third parties for the manufacture of these products and
components. 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.
In September 1999 we transferred all manufacturing of bulk Rituxan to
Genentech. We rely upon Genentech for all Rituxan manufacturing to meet
worldwide requirements. 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.
Since the completion in September 1999 of our obligation to manufacture
bulk Rituxan, we have commenced conversion of our manufacturing facility to a
multi-product facility, where we will initially manufacture ZEVALIN and other
clinical antibodies. We cannot be certain that our manufacturing performance
will meet our expectations. We cannot be certain that we will receive all
necessary regulatory approvals for a multi-product facility, or, even if
approvals are received, that the approvals will be obtained 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, our ability to timely file our product license
applications and our ability to timely produce commercial supplies of the
ZEVALIN antibody, if approved, 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, of which there are only a
limited number capable of manufacturing biologics as contract suppliers. We
cannot be certain that we could reach agreement on reasonable terms, if at all,
with those manufacturers.
ZEVALIN has multiple components that require successful coordination
among several third-party contract manufacturers and suppliers. We are currently
negotiating with commercial contractors to meet our long-term manufacturing
demands for fill/finish of ZEVALIN bulk product. We cannot be certain that we
will reach agreement on reasonable terms, if at all, with our contract
manufacturers or that the integration of our contract manufacturers and
suppliers 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 ZEVALIN, 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. For example, we have
identified a new commercial supplier of the radioisotope used with our ZEVALIN
product. Prior to the commercialization of ZEVALIN, the supplier will be
required to obtain NDA approval. 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 obtaining applicable governmental
approvals or any loss of a sole source supplier, including any interruption or
loss related to the supply or supplier of our radioisotope for ZEVALIN, 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 and we cannot be
certain that we will be able to produce or acquire rights to new products with
commercial potential. 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. 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 preparing to file a BLA for a radiolabeled murine antibody product for the
treatment of non-Hodgkin's lymphomas, which may compete with Rituxan and
ZEVALIN, if approved. We are also aware of other potentially competitive
biologic therapies for non-Hodgkin's lymphomas in development.
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 currently 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 and the abilities of our partners to obtain and maintain
patent and other protection for our products will affect our 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. The patent
positions of pharmaceutical and biotechnology companies can be highly uncertain
and involve complex legal and factual questions. We 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
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be certain that our trade secrets will not become known or be independently
developed or patented by our competitors.
In September 1999, an interference to determine priority of inventorship
was declared in the United States Patent and Trademark Office between Dartmouth
University's patent application (which patent application has been exclusively
licensed to us) and Columbia University's patent (which patent we believe has
been exclusively licensed to Biogen) relating to anti-CD40L antibodies. We are
aware that oppositions have been filed to a granted Japanese Immunex patent
relating to anti-CD40L antibodies. We are also aware that oppositions have been
filed in the European Patent Office to granted European applications that have
been licensed to us. Each of these applications contain claims relating to the
use of anti-CD40L antibodies as a therapeutic. Also, we are aware of an
opposition that was filed to a granted European patent application which names
us as the applicant and which relates to PROVAX and therapeutic use thereof. We
have filed a response to the opposition. If the outcome of the interference or
any of the oppositions is adverse, 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:
- three U.S. patents assigned to Glaxo Wellcome and foreign counterparts
relating to therapeutic uses of CHO-glycosylated antibodies;
- two U.S. patents assigned to Glaxo Wellcome and foreign counterparts
relating to chelator-stabilized antibody preparations;
- two U.S. patents assigned to Glaxo Wellcome and foreign counterparts
directed to methods of growing CHO cells in media that is free from
components obtained directly from an animal source;
- two U.S. patents assigned to Coulter Pharmaceutical, Inc. and the
Regents of the University of Michigan; one that relates to
compositions comprising radiolabeled antibodies directed to CD20
antigen which are administered at nonmyelosuppressive doses, and the
second patent which relates to methods of treating lymphoma with
anti-CD20 antibodies in combination with an anti-CD20 radiolabeled
antibody, an apoptosis-inducing agent, external beam radiation, or a
chemotherapeutic agent.
- a U.S. patent and foreign counterparts filed by Bristol-Myers Company
that relate to ligands to a B7 antigen;
- two U.S. patents assigned to Columbia University and a Japanese patent
assigned to Immunex, which we believe have been exclusively licensed
to Biogen, related to monoclonal antibodies to the 5C8 antigen found
on T cells and methods of their use. We believe the 5C8 antigen is
associated with CD40L, the target for our anti-CD40L antibodies
expressed on the surface of activated T cells; and
- 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.
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 or our partners
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.
We are aware that on May 28, 1999, Glaxo Wellcome filed a patent
infringement lawsuit against Genentech in the U.S. District Court in Delaware.
According to Genentech's Form 10-Q for the quarter ended March 31, 2000, that
suit asserts that Genentech infringes four U.S. patents owned by Glaxo Wellcome.
Two of the patents relate to the use of specific kinds of monoclonal antibodies
for the treatment of human disease, including cancer. The other two patents
asserted against Genentech relate to preparations of specific kinds of
monoclonal antibodies which are made more stable and the methods by which such
preparations are made. Genentech believes that the suit relates to the
manufacture, use and sale of Rituxan and their product Herceptin. The judge has
scheduled the trial of this suit to begin January 29, 2001. Based upon the
nature of the claims made and the information available to Genentech,
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Genentech reports that it believes that the outcome of this action is not likely
to have a material adverse effect on their financial position, results of
operations or cash flows, but that if an unfavorable ruling were to occur in any
quarterly period, there exists the possibility of a material impact on
Genentech's net income of that period. If the suit relates to the manufacture,
use and sale of Rituxan, and depending on the suit's outcome, there exists the
possibility of a material impact on our corresponding period copromotion profit
related to Rituxan and a material adverse effect on our business, financial
condition and results of operations.
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, oppositions to
patents in foreign countries or litigation against our partners, 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, we as well as our partners, contract
manufacturers and suppliers 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 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 ZEVALIN or 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, as well as our partners, contract
manufacturers and suppliers, are subject to numerous FDA requirements covering,
among other things, research and development, testing, manufacturing, quality
control, labeling and promotion of drugs, and to government inspection at all
times. Among the conditions for NDA or BLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
on an ongoing basis with Good Manufacturing Practices, or GMP. Before approval
of a NDA or BLA, the FDA will perform a prelicensing inspection of the facility
to determine its compliance with GMP and other rules and regulations. After the
facility is licensed for the manufacture of any product, manufacturers are
subject to periodic inspections by the FDA. 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 and continue to address compliance
issues raised from time-to-time by the FDA, we cannot be certain that we 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, testing, development, manufacture and marketing 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
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<PAGE> 20
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.
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 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
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<PAGE> 21
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.
THE ZERO COUPON SUBORDINATED CONVERTIBLE NOTES LEVERAGE US CONSIDERABLY
As a result of issuing the Notes in February 1999, we raised
approximately $112.7 million, net of underwriting commissions and expenses of
$3.9 million, by incurring indebtedness of $345.0 million at maturity in 2019.
As a result of this indebtedness, our principal and interest obligations
increased 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. We have 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 we 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 us 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 (183,014 shares of
non-voting convertible preferred stock convertible into 2,091,585 shares of
common stock, were outstanding as of July 31, 2000), 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.
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<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a variety of risks, including changes in interest
rates affecting the return on our investments and the cost of our debt.
At June 30, 2000, we maintained a portion of our cash and cash
equivalents in financial instruments with original maturities of three months or
less. We also maintained a short-term investment portfolio containing financial
instruments in which the majority have original maturities of greater than three
months but less than twelve months. These financial instruments, principally
comprised of corporate obligations and to a lesser extent foreign and U.S.
government obligations, are subject to interest rate risk and will decline in
value if interest rates increase. A hypothetical ten percent change in interest
rates during the six months ended June 30, 2000, would have resulted in
approximately a $0.8 million change in pretax income. We have not used
derivative financial instruments in our investment portfolio.
Our long-term debt totaled $126.9 million at June 30, 2000 and was
comprised principally of the Notes. Our long-term debt obligations bear interest
at a weighed average interest rate of 5.50%. Due to the fixed rate nature of the
Notes, an immediate ten percent change in interest rates would not have a
material effect on our financial condition or results of operations.
Underlying market risk exists related to an increase in our stock price
or an increase in interest rates which may make conversion of the Notes to
common stock beneficial to the Notes holders. Conversion of the Notes would have
a dilutive effect on our earnings per share and book value per common share.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 17, 2000, the Company held its Annual Meeting of Stockholders at
which the stockholders approved all of the proposals listed below:
(1) The election of Alan B. Glassberg, M.D., Robert W. Pangia, and
William D. Young to the Board of Directors to serve for a three-year
term ending in the year 2003, or until their successors shall have
been duly elected or appointed or until their earlier death,
resignation or removal.
(2) The amendment to the Company's 1988 Stock Option Plan to increase
the total number of common shares authorized for issuance thereunder
from 14,270,000 shares to a total of 15,980,000 shares and to extend
the term of the Option Plan from December 31, 2002 to December 31,
2005.
(3) The amendment to the Company's 1993 Non-Employee Directors Stock
Option Plan to increase the total number of common shares authorized
for issuance thereunder from 740,000 shares to a total of 1,040,000
shares and to extend the term of the Directors Plan from September
13, 2003 to December 31, 2005.
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<PAGE> 23
(4) The selection of KPMG LLP as the Company's independent public
accountants for the fiscal year ending December 31, 2000.
The following directors received the number of votes set opposite
their respective names:
<TABLE>
<CAPTION>
For Election Withheld
------------ --------
<S> <C> <C>
Alan B. Glassberg, M.D. 37,913,352 52,685
Robert W. Pangia 37,911,966 54,071
William D. Young 37,787,432 178,605
</TABLE>
The proposal to amend the 1988 Stock Option Plan received
16,761,336 affirmative votes (for the amendment), 12,583,539 negative
votes (against the amendment) and 69,451 votes abstained. The proposal
did not receive any broker nonvotes.
The proposal to amend the 1993 Non-Employee Directors Stock
Option Plan received 19,924,598 affirmative votes (for the amendment),
9,419,111 negative votes (against the amendment) and 70,617 votes
abstained. This proposal did not receive any broker nonvotes.
The proposal to select KPMG LLP as the Company's independent
public accountants received 37,905,757 affirmative votes (for the
selection), 32,624 negative votes (against the selection), and 27,656
votes abstained. This proposal did not receive any broker nonvotes.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibits are referenced.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.10* Collaborative Development Agreement between the Company and
Taisho Pharmaceuticals Co., Ltd. dated December 22, 1999.
10.11* License Agreement between the Company and Taisho
Pharmaceuticals Co., Ltd. dated December 22, 1999.
27.1 Financial Data Schedule.
</TABLE>
--------------------------------------------------------------------------------
* Confidential treatment requested as to certain portions of this agreement.
(b) Reports on Form 8-K. None
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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: August 14, 2000 By: /s/ William H. Rastetter
--------------------------------
William H. Rastetter
Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 By: /s/ Phillip M. Schneider
--------------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
22
