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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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)
California 33-0112644
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Torreyana Road, San Diego, CA 92121
-----------------------------------------
(Address of principal executive offices) (Zip code)
(619) 550-8500
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
As of July 31, 1996, the Registrant had 17,392,583 shares of its common stock,
no par value, issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1996 and December 31, 1995 ........................ 1
Condensed Consolidated Statements of Operations -- Three months ended June 30, 1996 and 1995
and six months ended June 30, 1996 and 1995 .................................................... 2
Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 1996 and 1995 .......... 3
Notes to Condensed Consolidated Financial Statements ................................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 5
Risk Factors ........................................................................................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................................... 13
Item 2. Changes in Securities ............................................................................... 13
Item 3. Defaults upon Senior Securities ..................................................................... 13
Item 4. Submission of Matters to a Vote of Shareholders ..................................................... 13
Item 5. Other Information ................................................................................... 13
Item 6. Exhibits and Report on Form 8-K ..................................................................... 14
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PART I -- FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
1996 1995
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 68,004 $ 18,828
Securities available-for-sale 14,859 5,182
Current portion of note receivable 720 640
Contract research revenue receivables 2,857 1,455
Inventory 479 --
Prepaid expenses and other current assets 2,500 1,333
--------- ---------
Total current assets 89,419 27,438
Property and equipment, net 17,411 17,955
Restricted marketable security -- 750
Note receivable, less current portion 868 1,249
Deposits and other assets 224 234
--------- ---------
$ 107,922 $ 47,626
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,438 $ 3,248
Trade payable - clinical materials -- 238
Accounts payable 1,340 970
Accrued expenses 5,333 4,280
--------- ---------
Total current liabilities 10,111 8,736
Notes payable, less current portion 5,759 6,598
Other long-term liabilities 1,310 1,123
Shareholders' equity (Note 2):
Convertible preferred stock, no par value 26,586 14,086
Common stock, no par value 141,021 93,554
Additional paid-in capital 3,632 2,379
Unrealized gains on securities available-for-sale 6 10
Accumulated deficit (80,503) (78,860)
--------- ---------
Total shareholders' equity 90,742 31,169
--------- ---------
$ 107,922 $ 47,626
========= =========
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three months Six months
ended June 30, ended June 30,
------------------------ ------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Sales $ 1,505 $ -- $ 1,505 $ --
Contract research revenues 3,064 2,202 6,000 5,549
License fees 2,500 -- 9,500 5,000
-------- -------- -------- --------
7,069 2,202 17,005 10,549
Operating expenses:
Cost of sales 1,384 -- 1,384 --
Research and development 7,078 5,395 12,719 10,933
General and administrative 1,607 1,350 3,461 3,005
Acquired technology rights -- -- -- 11,437
-------- -------- -------- --------
10,069 6,745 17,564 25,375
-------- -------- -------- --------
Loss from operations (3,000) (4,543) (559) (14,826)
Interest expense, net (490) (64) (1,084) (205)
-------- -------- -------- --------
Net loss $ (3,490) $ (4,607) $ (1,643) $(15,031)
======== ======== ======== ========
Net loss per common share $ (0.22) $ (0.31) $ (0.11) $ (1.04)
======== ======== ======== ========
Shares used in computing net loss
per common share 15,687 14,834 15,419 14,388
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six months ended
June 30,
------------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net cash used in operating activities $ (320) $ (2,740)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (779) (388)
Purchase of securities available-for-sale (13,747) (2,988)
Sales and maturities of securities available-for-sale 4,816 1,492
-------- --------
Net cash used in investing activities (9,710) (1,884)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 47,318 71
Proceeds from issuance of preferred stock 12,500 4,652
Proceeds from notes payable 1,109 --
Payments on notes payable (1,721) (2,513)
-------- --------
Net cash provided by financing activities 59,206 2,210
-------- --------
Net increase (decrease) in cash and cash equivalents 49,176 (2,414)
Cash and cash equivalents, beginning of period 18,828 13,691
-------- --------
Cash and cash equivalents, end of period $ 68,004 $ 11,277
======== ========
See accompanying notes to condensed consolidated financial statements.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The information at June 30, 1996, and for the three and six month periods ended
June 30, 1996 and 1995, is unaudited. In the opinion of management, these
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of results for the interim
periods presented. Interim results are not necessarily indicative of results for
a full year. These financial statements should be read in conjunction with IDEC
Pharmaceuticals Corporation's Annual Report to Shareholders incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, which was filed with the United States Securities and
Exchange Commission on April 1, 1996.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined in a
manner which approximates the first-in, first-out (FIFO) method. Inventory
consists of raw materials at June 30, 1996.
New Accounting Standards
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement
123"). Statement 123, allows companies to expand the use of fair value
accounting for stock compensation plans or requires companies that elect to
retain the current approach for recognizing stock-based compensation expense to
make annual pro forma disclosures of the Company's operating results as if they
had adopted the fair value method. Management of the Company has retained the
current approach for recognizing stock-based compensation which did not have a
financial effect on the Company's consolidated financial statements and will
report the annual pro forma disclosures in the notes to the fiscal 1996
consolidated financial statements.
Effective January 1, 1996, the Company adopted Financial Accounting Standards
Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("Statement 121"). Statement 121
requires impairment of losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. The adoption of Statement 121 did not have a material effect on
the Company's consolidated financial statements for the three and six months
ended June 30, 1996.
NOTE 2. SHAREHOLDERS' EQUITY
Common Stock
In June 1996, the Company completed a pubic offering of 2,070,000 shares of its
common stock resulting in net proceeds of approximately $46,300,000.
Convertible Preferred Stock
The Company issued 23,000 shares of its Series A-3 Nonvoting Convertible
Preferred Stock ("Series A-3 Preferred Stock") in March 1996, and 100,000 shares
of its Series A-6 Nonvoting Convertible Preferred Stock ("Series A-6 Preferred
Stock") in May 1996, to Genentech, Inc. pursuant to the terms of a preferred
stock purchase agreement. The preferred stock purchase agreement was entered
into concurrently with a collaboration agreement in March 1995. The Series A-3
Preferred Stock and Series A-6 Preferred Stock are recorded on the balance sheet
at their liquidation preference per share of $217 and $75, respectively. Each
share of Series A-3 Preferred Stock is convertible at any time into ten shares
of common stock. Each share of Series A-6 Preferred Stock is convertible into
the number of shares of common stock equal to 75 divided by the average closing
price of the Company's common stock as reported by the Nasdaq National Market
for the 20 trading days following the earlier of (i) the FDA approval date for
IDEC-C2B8 or (ii) September 16, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception, IDEC Pharmaceuticals Corporation (the "Company") has been
primarily engaged in the research and development of therapeutic products for
the long-term management of immune system cancers and autoimmune and
inflammatory diseases. To date, the Company has not received any revenues from
the commercial sale of its therapeutic products. The Company has funded it
operations primarily through the sale of equity securities as well as through
contract research and license fee revenues received in connection with
collaborative arrangements entered into with the Company's strategic partners.
For the six months ended June 30, 1996 and the year ended December 31, 1995, the
Company recognized contract research and license fee revenues of $15.5 million
and $23.6 million, respectively.
The Company has incurred increasing annual operating expenses and, as the
Company moves closer to product commercialization, it expects such trends to
continue. The Company has incurred annual operating losses since its inception
in 1985, and anticipates that such operating losses will continue for at least
the next two years. As of June 30, 1996, the Company had an accumulated
deficit of $80.5 million.
RESULTS OF OPERATIONS
Contract research revenues for the three and six months ended June 30, 1996
totaled $3.1 million and $6.0 million, respectively, compared to $2.2 million
and $5.5 million for the comparable periods in 1995. The increase in contract
research revenues is due primarily to revenue from a new collaboration entered
into with Eisai Co., Ltd. in December 1995, partially offset by decreased
revenues from SmithKline Beecham, p.l.c. ("SmithKline Beecham") as a result of
the transfer of clinical development of IDEC-CE9.1 to SmithKline Beecham in late
1995.
License fees for the three and six months ended June 30, 1996 totaled $2.5
million and $9.5 million, respectively, compared to $5.0 million for the six
months ended June 30, 1995. License fees for the three months ended June 30,
1996, resulted from the achievement of a $2.5 million patent milestone under the
Company's collaboration with Genentech, Inc. ("Genentech"). In addition to the
aforementioned patent milestone achievement, license fees for the six months
ended June 30, 1996 also included $4.5 million received for the license to
Chugai Pharmaceutical Co., Ltd. of the Company' s proprietary gene expression
technology for the manufacture of recombinant proteins, $1.5 million from
Genentech for the expansion of its collaboration with the Company to include two
radioconjugates, IDEC-Y2B8 and IDEC-In2B8 for the treatment and imaging,
respectively, of B-cell lymphomas and $1.0 million from Seikagaku Corporation
("Seikagaku") for the achievement of a product development milestone event.
License fees for the six-months ended June 30, 1995 consisted of one-time
licensing fees from corporate partnerships with Genentech and Seikagaku
established in that period.
Sales and costs of sales for the three and six months ended June 30, 1996 was a
result of the Company completing a contract manufacturing arrangement.
Research and development expenses totaled $7.1 million and $12.7 million for the
three and six months ended June 30, 1996, compared to $5.4 million and $10.9
million for the comparable periods in 1995. Research and development expenses
for the three and six months ended June 30, 1996 increased primarily due to a
$1.3 million expense for access to certain patent rights related to IDEC-C2B8,
increased personnel costs related to the ongoing Phase III trial and the
preparation for building of commercial inventory of the Company's lead product
candidate, IDEC-C2B8. The Company expects to incur additional research and
development expenses in the future due to additional personnel to handle
manufacturing operations, expanded clinical trials, costs associated with
obtaining regulatory approval for the Company's products, increased costs to
support expanding research and development programs, and costs associated with
additional leased office and warehouse facilities.
General and administrative expenses totaled $1.6 million and $3.5 million for
the three and six months ended June 30, 1996, compared to $1.4 million and $3.0
million for the comparable periods in 1995. General and administrative expenses
increased due to higher personnel costs to support expanded manufacturing
operations and the ongoing Phase III trial of IDEC-C2B8. General and
administrative costs necessary to support expanded
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manufacturing operations, expanded clinical trials, research and development and
the creation of a marketing and sales organization are expected to continue to
increase in the foreseeable future.
Beginning in 1988, the Company obtained funds from ML/MS Associates, L.P.
("ML/MS") for the development of the Company's lymphoma products. In connection
with such funding, ML/MS obtained rights in such products. In March 1995, the
Company repurchased such rights by the issuance of 1.0 million shares of its
common stock and 69,375 shares of 10% Series B Nonvoting Cumulative Convertible
Preferred Stock to ML/MS. In March 1995, the Company recorded a noncash charge
of $11.4 million, representing the purchase of the acquired technology rights.
Net interest expense totaled $0.5 million and $1.1 million for the three and six
months ended June 30, 1996 compared to $0.1 million and $0.2 million during the
comparable periods in 1995. Net interest expense increased during the three and
six months ended June 30, 1996 due to an accounting requirement under which the
Company records a noncash charge to interest expense for the excess of the fair
market value over the exercise price of certain common stock warrants issued in
connection with a debt financing.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures since inception
principally through the sale of equity securities, license fees, contract
research revenues, lease financing transactions and interest income. The Company
expects to finance its current and planned operating requirements principally
through cash on hand and with funds from existing collaborative agreements and
contracts which the Company believes will be sufficient to meet its near-term
operating requirements. Existing agreements and contracts, however, could be
canceled by the contracting parties. In addition, the Company intends to pursue
additional capital through a combination of new collaborative agreements,
strategic alliances, equity and debt financings. However, no assurance can be
provided that additional capital will be obtained through these sources. Should
the Company not enter into any such arrangements, the Company anticipates its
cash, cash equivalents and securities available-for-sale, together with the
existing agreements and contracts, will be sufficient to finance the Company's
currently anticipated needs for operating and capital expenditures through early
commercialization. If adequate funds are not available from additional sources
of financing, the Company's business could be adversely affected.
The Company's working capital and capital requirements will depend upon numerous
factors, including the progress of the Company's preclinical and clinical
testing; manufacturing; research and development programs; timing and cost of
obtaining regulatory approvals; levels of resources that the Company devotes to
the development of manufacturing and marketing capabilities; technological
advances; status of competitors; and the ability of the Company to establish
collaborative arrangements with other organizations.
Until required for operations, the Company's policy under established guidelines
is to keep its cash reserves in bank deposits, certificates of deposit,
commercial paper, corporate notes, United States government instruments and
other readily marketable debt instruments, all of which are investment-grade
quality.
At June 30, 1996, the Company had $82.9 million in cash, cash equivalents and
securities available-for-sale compared to cash, cash equivalents and securities
available-for-sale of $24.7 million at December 31, 1995. Sources of cash, cash
equivalents and securities available-for-sale at June 30, 1996 include $12.5
million from the issuance of convertible preferred stock, $47.3 million from the
issuance of common stock (including approximately $1.0 million from the exercise
of stock options and from common stock issued under an employee stock purchase
plan) and $1.1 million from funding under an existing lease line. Uses of cash,
cash equivalents and securities available-for-sale during the six months ended
June 30, 1996 include $0.3 million used in operations, $0.8 million used to
purchase capital equipment and $1.7 million used to pay notes payable.
In June 1996, the Company completed a public offering of 2,070,000 shares of its
common stock resulting in net proceeds of approximately $46.3 million. In May
1996, the Company issued 100,000 shares of its Series A-6 Convertible Preferred
Stock and in March 1996, the Company issued 23,000 shares of its Series A-3
Convertible Preferred Stock pursuant to terms of a preferred stock purchase
agreement with Genentech resulting in proceeds of $12.5 million.
This quarterly report contains predictions, estimates and other forward-looking
statements that involve a number of risk and uncertainties. While this outlook
represents management's current judgment on the future direction of the
business, such risk and uncertainties could cause actual results to differ
materially from any future performance
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suggested above. The Company undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date hereof.
RISK FACTORS
Uncertainties Associated with Clinical Trials
The Company has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety and efficacy of its potential
products. The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the nature of the Company's clinical trial
protocols, existence of competing protocols, size of the patient population,
proximity of patients to clinical sites and eligibility criteria for the study.
Delays in patient enrollment will result in increased costs and delays, which
could have a material adverse effect on the Company. The Company cannot assure
that patients enrolled in the Company's clinical trials will respond to the
Company's product candidates. Setbacks are to be expected in conducting human
clinical trials. Failure to comply with the United States Food and Drug
Administration ("FDA") regulations applicable to such testing can result in
delay, suspension or cancellation of such testing, and/or refusal by the FDA to
accept the results of such testing. In addition, the FDA may suspend clinical
trials at any time if it concludes that the subjects or patients participating
in such trials are being exposed to unacceptable health risks. Further, there
can be no assurance that human clinical testing will show any current or future
product candidate to be safe and effective or that data derived therefrom will
be suitable for submission to the FDA or will support the Company's submission
of a Product License Application ("PLA") and Establishment License Application
("ELA") or a Biologics License Application ("BLA").
Reliance on Third Party Development and Marketing Efforts
The Company has adopted a research, development and product commercialization
strategy that is dependent upon various arrangements with strategic partners and
others. The success of the Company's products is substantially dependent upon
the success of these outside parties in performing their obligations, which
include, but are not limited to, providing funding and performing research and
development with respect to the Company's products. The Company's strategic
partners may also develop products that may compete with the Company. Although
IDEC Pharmaceuticals believes that its partners have an economic incentive to
succeed in performing their contractual obligations, the amount and timing of
resources that they devote to these activities is not within the control of the
Company. There can be no assurance that these parties will perform their
obligations as expected or that any revenue will be derived from such
arrangements. The Company has entered into collaborative agreements with
Genentech, Inc. ("Genentech"), Zenyaku Kogyo, Ltd. ("Zenyaku"), SmithKline
Beecham, p.l.c. ("SmithKline Beecham"), Mitsubishi Chemical Corporation
("Mitsubishi"), Seikagaku Corporation ("Seikagaku") and Eisai Co., Ltd.
("Eisai"). These agreements generally may be terminated at any time by the
strategic partner, typically on short notice to the Company. If one or more of
these partners elect to terminate their relationship with the Company, or if the
Company or its partners fail to achieve certain milestones, it could have a
material adverse effect on the Company's ability to fund the related programs
and to develop any products that may have resulted from such collaborations.
There can be no assurance that these collaborations will be successful. In
addition, some of the Company's current partners have certain rights to control
the planning and execution of product development and clinical programs, and
there can be no assurance that such partners' rights to control aspects of such
programs will not impede the Company's ability to conduct such programs in
accordance with the schedules currently contemplated by the Company for such
programs and will not otherwise impact the Company's strategy.
Lengthy Regulatory Process; No Assurance of Regulatory Approvals
The clinical testing, manufacturing, labeling, advertising, promotion, export,
and marketing, among other things, of the Company's products are subject to
extensive regulation by governmental authorities in the United States and other
countries. In the United States, pharmaceutical products are regulated by the
FDA under the Federal Food, Drug, and Cosmetic Act and other laws, including, in
the case of biologics, the Public Health Service Act. At the present time, the
Company believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulations.
The steps required before a biologic may be approved for marketing in the United
States generally include (i) preclinical laboratory tests and animal tests, (ii)
the submission to the FDA of an Investigational New Drug application ("IND") for
human clinical testing, which must become effective before human clinical trials
may commence, (iii) adequate well controlled human clinical trials to establish
the safety and efficacy of the product, (iv) the submission to the FDA of a PLA
and
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ELA or a BLA, (v) FDA review of the PLA/ELA or BLA, and (vi) satisfactory
completion of a FDA inspection of the manufacturing facility or facilities at
which the product is made to assess compliance with Good Manufacturing Practices
("GMP"). The testing and approval process requires substantial time, effort and
financial resources and there can be no assurance that any approval will be
granted on a timely basis, if at all. There can be no assurance that Phase I,
Phase II or Phase III testing will be completed successfully within any specific
time period, if at all, with respect to any of the Company's product candidates.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of the preclinical studies and clinical studies, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a PLA/ELA or BLA requesting approval to
market the product. Before approving a PLA/ELA or BLA, the FDA will inspect the
facilities at which the product is manufactured, and will not approve the
product unless GMP compliance is satisfactory. The FDA may deny a PLA/ELA or BLA
if applicable regulatory criteria are not satisfied, may require additional
testing or information, and/or may require postmarketing testing and
surveillance to monitor the safety or efficacy of a product. There can be no
assurance that FDA approval of any PLA/ELA or BLA submitted by the Company will
be granted on a timely basis or at all. Also, if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the
PLA/ELA or BLA review process, or thereafter (including after approval) may
result in various adverse consequences, including the FDA's delay in approving
or refusal to approve a product, withdrawal of an approved product from the
market, and/or the imposition of criminal penalties against the manufacturer
and/or license holder. For example, license holders are required to report
certain adverse reactions to the FDA, and to comply with certain requirements
concerning advertising and promotional labeling for their products. Also,
quality control and manufacturing procedures must continue to conform to GMP
regulations after approval, and the FDA periodically inspects manufacturing
facilities to assess compliance with GMP. Accordingly, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to maintain GMP compliance. In addition, discovery of problems may
result in restrictions on a product, manufacturer or holder, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of the Company's
products under development.
The Company will also be subject to a variety of foreign regulations governing
clinical trials and sales of its products. Whether or not FDA approval has been
obtained, approval of a product by the comparable regulatory authorities of
foreign countries must be obtained prior to the commencement of marketing of the
product in those countries. The approval process varies from country to country
and the time may be longer or shorter than that required for FDA approval. At
least initially, the Company intends, to the extent possible, to rely on foreign
licensees to obtain regulatory approval for marketing its products in foreign
countries.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects fewer than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting a PLA/ELA or BLA.
After the FDA grants orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are publicly disclosed by the
FDA. Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process. If a product that has
an orphan drug designation subsequently receives FDA approval for the indication
for which it has such designation, the product is entitled to orphan
exclusivity, i.e., the FDA may not approve any other applications to market the
same drug for the same indication, except in certain very limited circumstances,
for a period of seven years.
In 1994, the Company obtained orphan drug designation for IDEC-C2B8, IDEC-Y2B8
and IDEC-In2B8 from the FDA to treat low-grade B-cell lymphoma. There can be no
assurance that any of these compounds will receive orphan exclusivity for the
low-grade B-cell lymphoma indication, and it is possible that competitors of the
Company could obtain approval, and attendant orphan drug exclusivity, for these
same compounds for the low-grade B-cell lymphoma indication, thus precluding the
Company from marketing its products for the same indication in the United
States. In addition, even if the Company does obtain orphan exclusivity for any
of its compounds for low-grade B-cell lymphoma, there can be no assurance that
competitors will not receive approval of other, different drugs or biologics for
low-grade B-cell lymphoma. Although obtaining FDA approval to market a product
with
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orphan drug exclusivity can be advantageous, there can be no assurance that the
scope of protection or the level of marketing exclusivity that is currently
afforded by orphan drug designation will remain in effect in the future.
Additional Financing Requirements and Uncertain Access to Capital
Markets
The Company has expended and will continue to expend substantial funds to
complete the research, development, manufacturing and marketing of its products.
The Company intends to seek additional funding for these purposes through a
combination of new collaborative arrangements, strategic alliances, additional
equity or debt financings or from other sources. There can be no assurance that
such additional funds will be available on acceptable terms, if at all. Even if
available, the cost of funds may result in substantial dilution to current
shareholders. If adequate funds are not available from operations or additional
sources of financing, the Company's business could be adversely affected.
Limited Manufacturing Experience
The Company has not yet commercialized any therapeutic products. To conduct
clinical trials on a timely basis, to obtain regulatory approval and to be
commercially successful, the Company must manufacture its products either
directly or through third parties in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. Although the Company has
produced its products in the laboratory, scaled its production process to pilot
levels and has the ability to manufacture commercial quantities of certain of
its products, the Company has not yet produced commercial quantities nor
received regulatory approval for such production. The Company anticipates that
production of its products in commercial quantities will create technical as
well as financial challenges for the Company. The Company has limited experience
in manufacturing, and no assurance can be given as to the ultimate performance
of the Company's manufacturing facility in San Diego, its suitability for
approval for commercial production or the Company's ability to make a successful
transition to commercial production.
During 1996, the Company will manufacture IDEC-C2B8, IDEC-Y2B8 and IDEC-In2B8
and other product candidates for clinical trials at its manufacturing facility
in San Diego, California. The Company anticipates that its facility in San Diego
should provide sufficient production capacity to meet clinical and early
commercial requirements of IDEC-C2B8 product. However, there can be no assurance
that the Company will be able to produce adequate quantities of its products to
meet clinical and early commercial requirements in a cost-effective manner or
that the Company's current manufacturing facility will be approved by the FDA.
The Company is dependent upon Genentech to fulfill long-term manufacturing
demands for its IDEC-C2B8 product and SmithKline Beecham to fulfill all of the
manufacturing requirements for IDEC-CE9.1. Genentech is currently constructing a
larger manufacturing plant to satisfy such long-term demands. The Company is
considering the addition of another manufacturing facility to meet its
long-term requirements for additional products under development. Failure by the
Company or its strategic partners to establish additional manufacturing capacity
on a timely basis would have a material adverse effect on the Company.
Patents and Proprietary Rights
The Company's success will depend, in large part, on its ability to maintain a
proprietary position in its products through patents, trade secret and orphan
drug designation. IDEC Pharmaceuticals holds one issued and one allowed United
States patent, 18 United States patent applications and numerous corresponding
foreign patent applications, and has licenses to patents or patent applications
of other entities. No assurance can be given, however, that the patent
applications of the Company or the Company's licensors will be issued or that
any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. Moreover, there can be no assurance that any patents issued to the
Company or the Company's licensors will not be infringed by others or will be
enforceable against others. In addition, there can be no assurance that the
patents, if issued, would not be held invalid or unenforceable by a court of
competent jurisdiction. Enforcement of the Company's patents may require
substantial financial and human resources. Moreover, the Company may have to
participate in interference proceedings if declared by the United States Patent
and Trademark Office to determine priority of inventions, which typically take
several years to resolve and could result in substantial cost to the Company.
A substantial number of patents have already been issued to other biotechnology
and biopharmaceutical companies. Particularly in the monoclonal antibody field,
competitors may have filed applications for or have been issued
9
12
patents and may obtain additional patents and proprietary rights relating to
products or processes competitive with or similar to those of the Company. To
date, no consistent policy has emerged regarding the breadth of claims allowed
in biopharmaceutical patents. There can be no assurance that patents do not
exist in the United States or in foreign countries or that patents will not be
issued that would have an adverse effect on the Company's ability to market its
products. Accordingly, the Company expects that commercializing monoclonal
antibody-based products may require licensing and/or cross-licensing of patents
with other companies in this field. There can be no assurance that the licenses,
which might be required for the Company's processes or products, would be
available, if at all, on commercially acceptable terms. The ability to license
any such patents and the likelihood of successfully contesting the scope or
validity of such patents are uncertain and the costs associated therewith may be
significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture or market its products would be materially adversely affected.
Specifically, the Company is aware of several patents and patent applications
which may affect the Company's ability to make, use and sell its products,
including United States patent applications and foreign counterparts filed by
Bristol-Myers that disclose antibodies to a B7 antigen, a recently issued United
States patent assigned to Columbia University which the Company believes has
been exclusively licensed to Biogen, Inc. ("Biogen") that discloses monoclonal
antibodies to the 5C8 antigen found on T cells, a European patent issued in
January 1996 to Protein Design Labs, Inc. ("Protein Design Labs") that discloses
methods of making amino acid substitutions in antibody structures and a number
of issued patents that relate to various aspects of radioimmunotherapy and
methods of treating patients with anti-CD4 antibodies.
The owners, or licensees of the owners, of these patents may assert that one or
more of the Company's products infringe one or more claims of such patents. If
legal action is commenced against the Company to enforce any of these patents
and the plaintiff in such action prevails, the Company could be prevented from
practicing the subject matter claimed in such patents. In such event or under
other appropriate circumstances, the Company may attempt to obtain licenses to
such patents. However, no assurance can be given that any owner would license
the patents to the Company at all or on terms that would permit
commercialization of the Company's products. An inability to commercialize such
products could have a material adverse effect impact on the Company's operations
and ability to pursue its long-term objectives.
Furthermore, the patent position worldwide of biotechnology companies in
relation to proprietary products is highly uncertain and involves complex legal
and factual questions. There is a substantial backlog of biotechnology patents
at the United States Patent and Trademark Office. The Company also relies on
trade secrets and proprietary know-how which it seeks to protect, in part, by
confidentiality agreements with its employees and consultants. There can be no
assurance that these agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors.
Dependence on Key Personnel
The Company's success depends in part upon the continued contributions of its
senior management and key scientific and technical personnel. The Company's
success is also dependent upon its ability to attract and retain additional
qualified scientific, technical, manufacturing and managerial personnel and to
develop and maintain relationships with qualified clinical researchers.
Significant competition exists among pharmaceutical and biotechnology companies
for such personnel, and there can be no assurance that the Company will retain
such personnel or that it will be able to attract, assimilate and retain such
personnel as may be required in the future or to develop and maintain
relationships with such researchers. The Company does not maintain or intend to
purchase "key person" life insurance on any of its personnel.
Rapid Technological Change and Substantial Competition
The pharmaceutical industry is subject to rapid and substantial technological
change. Technological competition in the industry from pharmaceutical and
biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development capabilities
than the Company, as well as substantially more marketing, financial and
managerial resources, and represent significant competition for the Company.
Acquisitions of or investments in competing biotechnology companies by large
pharmaceutical companies could increase such competitors' financial, marketing
and other resources. There can be no assurance that developments by others will
not render the
10
13
Company's products or technologies noncompetitive or that the Company will be
able to keep pace with technological developments. Competitors have developed or
are in the process of developing technologies that are or, in the future, may be
the basis for competitive products. Some of these products may have an entirely
different approach or means of accomplishing similar therapeutic effects to
those products being developed by the Company. These competing products may be
more effective and less costly than the products developed by the Company. In
addition, conventional drug therapy, surgery and other more familiar treatments
and modalities will offer competition to the Company's products.
Limited Sales and Marketing Capability
Commercialization of the Company's therapeutic products is expensive and
time-consuming. The Company has adopted a strategy of pursuing collaborative
agreements with strategic partners that provide for co-promotion of certain of
the Company's therapeutic products. In the event that the Company elects to
participate in co-promotion efforts in the United States or Canada, and in those
instances where the Company has retained exclusive marketing rights in specified
territories, the Company will need to build a sales and marketing capability in
the targeted markets. The Company currently has a limited marketing staff and no
sales personnel. There can be no assurance that the Company will be able to
establish a successful direct sales and marketing capability in any or all
targeted markets or that it will be successful in gaining market acceptance for
its products. To the extent that the Company enters into co-promotion or other
licensing arrangements, any revenues received by the Company will be dependent
on the efforts of third parties and there can be no assurance that such efforts
will be successful. Outside of the United States and Canada, the Company has
adopted a strategy to pursue collaborative arrangements with established
pharmaceutical companies for marketing, distribution and sale of its products.
There can be no assurance that any of these companies or their sublicensees will
successfully market, distribute or sell the Company's products or that the
Company will be able to establish and maintain successful co-promotion or
distribution arrangements. Failure to establish a sales capability in the United
States or outside the United States may have a material adverse effect on the
Company.
History of Operating Losses; Accumulated Deficit
The Company has incurred annual operating losses since its inception in 1985. As
of June 30, 1996, the Company's accumulated deficit was approximately $80.5
million. The Company anticipates that it will continue to incur operating losses
over at least the next two years. Such losses have been and will be principally
the result of the various costs associated with the Company's research and
development, clinical and manufacturing activities. The Company has not
generated operating profits from the sale of its therapeutic products. All
revenues to date have resulted from research, development and licensing
collaborative arrangements, contract manufacturing arrangements, research grants
and interest income. The Company has no products approved by the FDA or any
foreign authority and does not expect to achieve profitable operations on an
annual basis unless product candidates now under development receive FDA or
foreign regulatory approval and are thereafter commercialized successfully.
Possible Volatility of Stock Price
The stock market has from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. In addition, the market price of the Company's common stock, like the
stock prices of many publicly traded biotechnology companies, has been highly
volatile. Announcements of technological innovations or new commercial products
by the Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and foreign countries, public
concern as to the safety of biotechnology products and economic and other
external factors, as well as period-to-period fluctuations in financial results
may have a significant impact on the market price of the Company's common stock.
It is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts and investors. In such event,
the price of the Company's common stock would likely be materially adversely
affected.
Uncertainty Regarding Health Care Reimbursement and Reform
The future revenues and profitability of biopharmaceutical companies as well as
the availability of capital may be affected by the continuing efforts of
government and third party payors to contain or reduce costs of health care
11
14
through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government controls. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition or prospects.
The Company's ability to commercialize its therapeutic products successfully
will depend in part on the extent which appropriate reimbursement levels for the
cost of such products and related treatment are obtained from governmental
authorities, private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Third-party payors are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed health care in the United States and the concurrent growth
of organizations such as HMOs, which could control or significantly influence
the purchase of health care services and products, as well as legislative
proposals to reform health care or reduce government insurance programs may all
result in lower prices for the Company's products. The cost containment measures
that health care payors and providers are instituting and the effect of any
health care reform could materially adversely affect the Company's ability to
operate profitably.
Product Liability Exposure
Clinical trials, manufacturing, marketing and sale of any of the Company's or
its strategic partners' pharmaceutical products licensed by the Company may
expose the Company to product liability claims. The Company currently carries
limited product liability insurance. There can be no assurance that the Company
or its strategic partners will be able to continue to maintain or obtain
additional insurance or, if available, that sufficient coverage can be acquired
at a reasonable cost. An inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise protect against potential product liability claims
could prevent or inhibit the commercialization of pharmaceutical products
developed by the Company or its strategic partners. A product liability claim or
recall would have a material adverse effect on the business and financial
condition of the Company.
Environmental Concerns
The Company's research and development involves the controlled use of hazardous
materials, chemicals and radioactive compounds. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company. In addition, disposal of radioactive materials used by the Company
in its research efforts may only be made at approved facilities. Approval of a
site in California has been delayed indefinitely. The Company currently stores
such radioactive materials on site. The Company may incur substantial cost to
comply with environmental regulations.
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15
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
On May 22, 1996, the Company held its Annual Meeting of Shareholders
at which the shareholders approved:
(1) The election of William H. Rastetter, Ph.D., Charles C. Edwards,
M.D., John Groom, Kazuhiro Hashimoto, Peter Barton Hutt, Franklin
P. Johnson, Jr., John P. McLaughlin, and Lynn Schenk, to the Board
of Directors and to serve until the next annual meeting, or until
their successors shall have been duly elected or appointed.
(2) The amendment and restatement of the Articles of Incorporation of
IDEC Pharmaceuticals Corporation, to increase the total number of
shares of common stock authorized for issuance thereunder by
25,000,000 shares to a total of 50,000,000 shares.
(3) The amendment of the 1988 Stock Option Plan (the "Option Plan") of
IDEC Pharmaceuticals Corporation to increase the total number of
common shares authorized for issuance thereunder from 3,480,000
shares to a total of 4,680,000 shares.
(4) The selection of KPMG Peat Marwick LLP as the Company's
independent public accountants for the fiscal year ending
December 31, 1996.
The following directors received the number of votes set opposite their
respective names:
For Election Withheld
------------ ---------
William H. Rastetter, Ph.D. 13,712,938 132,380
Charles C. Edwards, M.D. 13,710,898 134,420
John Groom 13,710,938 134,380
Kazuhiro Hashimoto 11,855,511 1,989,807
Peter Barton Hutt 13,711,138 134,180
Franklin P. Johnson, Jr. 11,853,898 1,991,807
John P. McLaughlin 13,712,838 132,480
Lynn Schenk 13,709,294 136,024
The proposal to amend and restate the articles of incorporation
received 13,667,610 affirmative votes (for the amendment and
restatement), 152,725 negative votes (against the amendment and
restatement) and 24,983 votes abstained. This proposal did not receive
any broker non-votes.
The proposal to amend the Option Plan received 8,474,512 affirmative
votes (for the amendment), 2,757,878 negative votes (against the
amendment), 2,589,378 broker non-votes and 23,540 votes abstained.
The proposal to select KPMG Peat Marwick LLP as the Company's
independent public accountants received 13,776,818 affirmative votes
(for the selection), 24,245 negative votes (against the selection), and
44,255 votes abstained. This proposal did not receive any broker
non-votes.
ITEM 5. OTHER INFORMATION. None
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16
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
(a) Exhibits.
The following exhibits are referenced.
Exhibit
Number Description
------- -----------
3.1(1) Second Amended and Restated Articles of Incorporation
10.1(2) 1988 Stock Option Plan, as Amended and Restated through
January 24, 1996.
10.2(2) Form of Notice of Grant.
10.3(2) Form of Option Agreement.
10.4(1) Letter Agreement between the Company and Genentech, Inc.,
dated May 21, 1996.
----------------------------------------
(1) Incorporated by reference with the Registrant's Form 8-K
filed with the United States Securities and Exchange
Commission on June 6, 1996. File No. 000-19311.
(2) Incorporated by reference to the Registrant's Registration
Statement on Form S-8, File No. 333-06543.
b) Report on Form 8-K.
On June 6, 1996, the Company filed a report on Form 8-K reporting a
Letter Agreement with Genentech, Inc. and the filing of the Company's
Second Amended and Restated Articles of Incorporation.
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17
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 12, 1996 By: /s/ William H. Rastetter
--------------------------- ---------------------------------
William H. Rastetter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1996 By: /s/ Phillip M. Schneider
---------------------------- ---------------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
15
5
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
68,004
14,859
3,577
0
479
89,419
24,678
7,267
107,922
10,111
7,069
0
26,586
141,021
(76,865)
107,922
1,505
17,005
1,384
14,103
0
0
1,084
(1,643)
0
(1,643)
0
0
0
(1,643)
(0.11)
0
