<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, 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 April 28, 2000 the Registrant had 44,410,633 shares of its common stock,
$.0005 par value, issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -- Three months ended March 31, 2000
and 1999 ............................................................................. 1
Condensed Consolidated Balance Sheets -- March 31, 2000 and December 31, 1999 ............. 2
Condensed Consolidated Statements of Cash Flows -- Three months ended March 31, 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 ......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................... 20
</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 ended
March 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Revenues:
Revenues from unconsolidated joint business $21,893 $19,279
Contract revenues 3,504 1,232
------- -------
Total Revenues 25,397 20,511
Operating costs and expenses:
Manufacturing costs 2,134 4,007
Research and development 14,722 7,819
Selling, general and administrative 6,077 4,394
------- -------
Total operating costs and expenses 22,933 16,220
------- -------
Income from operations 2,464 4,291
Interest income, net 1,876 709
------- -------
Income before taxes 4,340 5,000
Income tax provision 741 191
------- -------
Net income $ 3,599 $ 4,809
======= =======
Earnings per share:
Basic $ 0.08 $ 0.12
Diluted $ 0.07 $ 0.10
Shares used in calculation of earnings per share:
Basic 43,449 40,554
Diluted 52,581 48,248
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 89,044 $ 61,404
Securities available-for-sale 176,124 184,882
Contract revenue receivables, net 142 1,310
Due from related parties, net 23,248 23,654
Inventories 1,265 2,400
Prepaid expenses and other current assets 4,759 4,869
--------- ---------
Total current assets 294,582 278,519
Property and equipment, net 23,612 20,822
Investment and other assets 9,073 7,733
--------- ---------
$ 327,267 $ 307,074
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,413 $ 1,513
Accounts payable 1,216 1,269
Accrued expenses 13,352 12,834
Deferred revenue 3,000 --
--------- ---------
Total current liabilities 18,981 15,616
Notes payable, less current portion 124,200 122,910
Deferred taxes and other long-term liabilities 8,875 8,570
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.0005 par value 22 21
Additional paid-in capital 206,821 195,218
Accumulated other comprehensive income - net unrealized losses
on securities available-for-sale (513) (543)
Accumulated deficit (31,119) (34,718)
--------- ---------
Total stockholders' equity 175,211 159,978
--------- ---------
$ 327,267 $ 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>
Three months ended
March 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 13,485 $ 7,728
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (3,860) (617)
Purchase of securities available-for-sale (39,317) (68,372)
Sales and maturities of securities available-for-sale 47,927 19,535
--------- ---------
Net cash provided by (used in) investing activities 4,750 (49,454)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of convertible notes, net -- 112,895
Payments on notes payable (457) (757)
Proceeds from issuance of common stock 9,862 3,506
--------- ---------
Net cash provided by financing activities 9,405 115,644
--------- ---------
Net increase in cash and cash equivalents 27,640 73,918
Cash and cash equivalents, beginning of period 61,404 26,929
--------- ---------
Cash and cash equivalents, end of period $ 89,044 $ 100,847
========= =========
</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 March 31, 2000, and for the three
months ended March 31, 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 which 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) is capped at a price
that is less than our cost to manufacture bulk Rituxan and as such, finished
goods inventory is written down to its net realizable value. Such write-downs
are recorded in manufacturing costs. Inventories for the three months ended
March 31, 2000 and December 31, 1999 consist of the following (table in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials $1,265 $1,005
Work in process -- --
Finished goods -- 1,395
------ ------
$1,265 $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, reimbursement from Genentech of our 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 is recognized when bulk Rituxan is accepted by Genentech. 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 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 recognized at
the time research and development activities are performed under the terms of
the collaborative
4
<PAGE> 7
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 March 31, 2000 and December 31,1999 are net of an allowance of $962,000 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 year.
Diluted earnings per share for the three months ended March 31, 2000 includes
the dilutive effect of 9,132,000 shares of common stock from options and
convertible preferred stock and excludes 4,646,000 shares of common stock from
the assumed conversion of our 20-year zero coupon subordinated convertible notes
("Notes") and 22,000 shares of common stock from options because their effect is
antidilutive. Diluted earnings per share for the three months ended March 31,
1999 includes the dilutive effect of 7,694,000 shares of common stock from
options and convertible preferred stock and excludes 2,488,000 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 months
ended March 31, 1999 have been restated to reflect our two-for-one stock split
effected in December 1999.
Comprehensive Income: Comprehensive income for the three months ended March
31, 2000 and 1999 was $3,624,000 and $4,612,000, respectively.
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 is capped at a price that is less than
our cost to manufacture bulk Rituxan. In September 1999 we transferred all
manufacturing responsibilities for bulk Rituxan to Genentech.
5
<PAGE> 8
Revenues from unconsolidated joint business for the three months ended March
31, 2000 and 1999 consist of the following (table in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Copromotion profit $15,548 $12,406
Bulk Rituxan sales 2,078 3,867
Reimbursement of selling and development expenses 2,429 2,015
Royalty income on sales of Rituximab outside the U.S. 1,838 991
------- -------
Total from unconsolidated joint business $21,893 $19,279
------- -------
</TABLE>
Amounts due from related parties, net at March 31, 2000 and December 31,
1999 consist of the following (table in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Due from Genentech, copromotion profits $15,548 $17,869
Due from Genentech, bulk Rituxan sales 5,379 3,291
Due from Genentech, selling and development expenses 2,295 2,467
Due from Roche 26 27
------- -------
Total due from related parties, net $23,248 $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. Additionally, we will receive royalties on sales of Genentech
products manufactured using our proprietary gene expression system.
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 and Japan, 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 and post approval clinical
studies and obtaining potential approval of Rituxan for additional indications.
Genentech provides 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, Genentech is responsible for 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 consist of our share of the
pretax copromotion profits generated from our joint business arrangement with
Genentech, revenue from bulk Rituxan sales to Genentech, reimbursement from
Genentech of our sales force and development expenses and royalty income from
Roche on sales of Rituximab outside the United States. Revenue from bulk Rituxan
sales is recognized when bulk Rituxan is accepted by Genentech. 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 profit 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 is 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 is
capped at a price that is 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 remaining manufacturing
capacity for production of specification-setting lots and potential commercial
inventory of ZEVALIN(TM) antibodies. During the first quarter of 2000 we
completed the BLA-enabling bulk manufacturing runs of the antibody component for
ZEVALIN. We anticipate using our available manufacturing capacity for production
of clinical material.
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,
revenues from the achievement of product development objectives and licensing
transactions. As of March 31, 2000, we had an accumulated deficit of $31.1
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 trail 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 months ended March
31, 2000 totaled $21.9 million, compared to $19.3 million for the comparable
period in 1999. Revenues from unconsolidated joint business for the three months
ended March 31, 2000 and 1999 reflect the financial results from the
commercialization of Rituxan through our collaboration with Genentech. Included
in these revenues is our share of the pretax copromotion profits generated from
our joint business arrangement with Genentech, revenue from bulk Rituxan sales
to Genentech, reimbursement from Genentech of our sales force and development
expenses and royalty income from Roche on sales of Rituximab outside the United
States. Revenues from unconsolidated joint business for the three months ended
March 31, 2000 and 1999, consist of the following (table in thousands):
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Copromotion profit $15,548 $12,406
Bulk Rituxan sales 2,078 3,867
Reimbursement of selling and development expenses 2,429 2,015
Royalty income on sales of Rituximab outside the U.S. 1,838 991
------- -------
Total from unconsolidated joint business $21,893 $19,279
------- -------
</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 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.
8
<PAGE> 11
Rituxan net sales to third-party customers in the United States recorded by
Genentech for the three months ended March 31, 2000 amounted to $78.0 million
compared to $52.0 million for the comparable period in 1999. This increase was
primarily due to increased market penetration in treatments of B-cell
non-Hodgkin's lymphoma.
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
months ended March 31, 2000 we recognized $1.8 million in royalties from Roche's
end-users sales compared to $1.0 million for the comparable period in 1999.
Contract revenues for the three months ended March 31, 2000 totaled $3.5
million compared to $1.2 million for the comparable period in 1999. The increase
in contract research revenues for the three months ended March 31, 2000 is
primarily the result of funding under a collaboration and license agreement with
Schering Aktiengesellschaft ("Schering AG") offset by decreased funding under a
collaborative agreement with Eisai Co, Ltd. ("Eisai").
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.
Manufacturing costs totaled $2.1 million for the three months ended March
31, 2000 compared to $4.0 million for the comparable period in 1999.
Manufacturing costs for 2000 and 1999 relate to production of bulk Rituxan sold
to Genentech. Manufacturing costs are recognized when Genentech accepts 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 bulk Rituxan to Genentech, certain of our
manufacturing efforts have been associated with clinical development and such
manufacturing expenses have been recorded as research and development expenses.
Research and development expenses totaled $14.7 million for the three months
ended March 31, 2000 compared to $7.8 million for the comparable period in 1999.
The increase in research and development expense in 2000 is primarily due to
ZEVALIN-related manufacturing expenses relating to process development and
manufacturing scale-up and increased personnel expenses, clinical trials and
contract manufacturing by 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
potential commercial inventory of ZEVALIN antibodies, and anticipate using our
remaining manufacturing capacity for production of clinical material. We expect
to continue incurring substantial additional research and development expenses
in the future, 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; and preclinical and clinical testing of our various products under
development.
Selling, general and administrative expenses totaled $6.1 million for the
three months ended March 31, 2000 compared to $4.4 million for the comparable
period in 1999. Selling, general and administrative expenses increased in 2000
primarily due to increased legal expenses, 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 sales and administration, our
preparation for the potential commercialization of ZEVALIN, expanded
manufacturing capacity, expanded clinical trials, research and development and
the potential expansion of our sales and marketing organization.
Interest income totaled $3.6 million for the three months ended March 31,
2000 compared to $1.6 million for the comparable period 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 $1.7 million for the three months ended March 31,
2000 compared to $0.9 million for the comparable period 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.
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Our effective tax rate for the three months ended March 31, 2000 was
approximately seventeen percent compared to four 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; 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 March 31, 2000, we had $265.2 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
three months ended March 31, 2000, included $13.5 million from operations and
$9.9 million from the issuance of common stock under employee stock option and
purchase plans. Uses of cash, cash equivalents and securities available-for-sale
during the three months ended March 31, 2000, included $3.9 million used to
purchase capital equipment and $0.5 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.
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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, subject to attainment of
certain product development milestone objectives, of which $3.0 million has been
paid through March 31, 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 by us, our affiliates and licensees 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. 101A, 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, which could extend beyond the
initial contractual period. There are many unanswered questions related to the
application of SAB No. 101 to biotechnology companies, including ours. Some of
these questions have been forwarded to the Financial Accounting Standards
Board's Emerging Issues Task Force for consideration. We are presently
evaluating the impact, if any, that SAB No. 101 will have on our reported
results.
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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 which 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 $24 7/8 per share and $173 per share during the
twelve months ended April 28, 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 this conversion will be
successful or that our manufacturing performance will meet our expectations. We
cannot be certain that we will receive all necessary regulatory approvals, or,
even if our conversion is successful and such approvals are received, that the
conversion 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, 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
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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.
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
thereof directed to methods of growing CHO cells in media that is
free from components obtained directly from an animal source;
- a U.S. patent assigned to Coulter Pharmaceutical, Inc. and the
Regents of the University of Michigan that relates to compositions
comprising radiolabeled antibodies directed to CD20 antigen which
are administered at nonmyelosuppressive doses;
- U.S. patent and patent applications and foreign counterparts filed
by Bristol-Myers Company that relate to ligands to a B7 antigen;
- a U.S. patent 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. 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-K for the year ended December 31, 1999, 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. On or about January 10, 2000 Glaxo
Wellcome filed a request with the court to add additional patent infringement
claims to the suit under Glaxo Wellcome's U.S. Patent No. 5,633,162. Genentech
has
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opposed that request. Based upon the nature of the claims made and the
information available to Genentech, 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
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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.
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
18
<PAGE> 21
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.
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 (205,514 shares of
non-voting convertible preferred stock convertible into 2,341,585 shares of
common stock, were outstanding as of April 28, 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.
19
<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 March 31, 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 three months ended March 31, 2000, would have resulted in
approximately a $0.5 million change in pretax income. We have not used
derivative financial instruments in our investment portfolio.
Our long-term debt totaled $125.6 million at March 31, 2000 and was
comprised principally of the Notes. Our long-term debt obligations bear interest
at a weighed average interest rate of 5.51%. 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 holder. 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. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following exhibit is referenced.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. None
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 12, 2000 By: /s/ William H. Rastetter
--------------- --------------------------------------------
William H. Rastetter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2000 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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 89,044
<SECURITIES> 176,124
<RECEIVABLES> 1,104
<ALLOWANCES> 962
<INVENTORY> 1,265
<CURRENT-ASSETS> 294,582
<PP&E> 45,238
<DEPRECIATION> 21,626
<TOTAL-ASSETS> 327,267
<CURRENT-LIABILITIES> 18,981
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 175,189
<TOTAL-LIABILITY-AND-EQUITY> 327,267
<SALES> 0
<TOTAL-REVENUES> 25,397
<CGS> 0
<TOTAL-COSTS> 22,933
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,743
<INCOME-PRETAX> 4,340
<INCOME-TAX> 741
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,599
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.07
</TABLE>
