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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 0-19311
IDEC PHARMACEUTICALS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 33-0112644
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Torreyana Road, San Diego, CA 92121
(Address of principal executive offices) (Zip code)
(619) 550-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of July 31, 1997, the Registrant had 18,826,904 shares of its common stock,
$.001 par value, issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q/A -- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1997 and December 31, 1996 .......................... 1
Condensed Consolidated Statements of Operations -- Three months ended June 30, 1997 and 1996
and six months ended June 30, 1997 and 1996 ...................................................... 2
Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 1997 and 1996 ............ 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 .......................................................................................... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .....................................................................................14
Item 2. Changes in Securities .................................................................................14
Item 3. Defaults upon Senior Securities .......................................................................14
Item 4. Submission of Matters to a Vote of Security Holders ...................................................14
Item 5. Other Information .....................................................................................15
Item 6. Exhibits and Reports on Form 8-K ......................................................................15
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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,
1997 1996
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,624 $ 25,337
Securities available-for-sale 51,086 53,390
Current portion of note receivable 868 804
Contract research revenue receivables 3,585 3,635
Due from related party 2,887 1,532
Inventories 6,587 4,384
Prepaid expenses and other current assets 1,696 2,533
--------- ---------
Total current assets 78,333 91,615
Property and equipment, net 23,442 21,453
Note receivable, less current portion -- 445
Deposits and other assets 390 316
--------- ---------
$ 102,165 $ 113,829
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,588 $ 3,830
Accounts payable 2,322 3,106
Accrued expenses and other liabilities 10,339 6,751
--------- ---------
Total current liabilities 16,249 13,687
Notes payable, less current portion 3,495 5,015
Other long-term liabilities 1,821 1,513
Due to related party 1,000 1,000
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.001 par value 19 18
Additional paid-in capital 177,614 176,448
Unrealized losses on securities available-for-sale (115) (37)
Accumulated deficit (97,918) (83,815)
--------- ---------
Total stockholders' equity 79,600 92,614
--------- ---------
$ 102,165 $ 113,829
========= =========
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 ended Six months ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
Revenues:
Revenue from unconsolidated joint business $ 1,878 $ -- $ 1,878 $ --
Contract research revenues 2,524 3,064 5,188 6,000
License fees 1,000 2,500 5,000 9,500
Sales -- 1,505 -- 1,505
-------- -------- -------- --------
5,402 7,069 12,066 17,005
Operating expenses:
Manufacturing expenses 5,214 1,384 5,214 1,384
Research and development 10,292 7,078 17,766 12,719
Selling, general and administrative 2,498 1,607 4,706 3,461
-------- -------- -------- --------
18,004 10,069 27,686 17,564
-------- -------- -------- --------
Loss from operations (12,602) (3,000) (15,620) (559)
Interest income (expense), net 731 (490) 1,517 (1,084)
-------- -------- -------- --------
Net loss $(11,871) $ (3,490) $(14,103) $ (1,643)
======== ======== ======== ========
Net loss per share common share $ (0.63) $ (0.22) $ (0.76) $ (0.11)
======== ======== ======== ========
Shares used in computing net loss
per common share 18,724 15,687 18,461 15,419
======== ======== ======== ========
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,
----------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net cash used in operating activities $(11,523) $ (320)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,841) (779)
Purchase of securities available-for-sale (24,084) (13,747)
Sales and maturities of securities available-for-sale 26,311 4,816
-------- --------
Net cash used in investing activities (1,614) (9,710)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,185 47,318
Proceeds from issuance of preferred stock -- 12,500
Proceeds from notes payable -- 1,109
Payments on notes payable (1,761) (1,721)
-------- --------
Net cash provided by (used in) financing activities (576) 59,206
-------- --------
Net increase (decrease) in cash and cash equivalents (13,713) 49,176
Cash and cash equivalents, beginning of period 25,337 18,828
-------- --------
Cash and cash equivalents, end of period $ 11,624 $ 68,004
======== ========
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, 1997, and for the three- and six-month periods
ended June 30, 1997 and 1996, 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. These financial statements should be read
in conjunction with IDEC Pharmaceuticals Corporation's (the "Company") Annual
Report to Shareholders incorporated by reference in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996, which was filed with the
United States Securities and Exchange Commission on March 31, 1997.
New Accounting Standard
On March 3, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("Statement No.
128"). Statement No. 128 supersedes Accounting Principles Board Opinion No. 15
("APB No. 15") and replaces "primary" and "fully diluted" earnings per share
("EPS") under APB No. 15 with "basic" and "diluted" EPS. Unlike primary EPS,
basic EPS excludes the dilutive effects of options, warrants and other
convertible securities. Diluted EPS reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted EPS. Statement No. 128 is effective for years ending after December 15,
1997. The Company is currently evaluating the impact of the implementation of
Statement No. 128.
Reclassification
The prior year balances in preferred stock, common stock and additional
paid-in capital have been reclassified to effect the change in par value to
$.001 per share resulting from stockholder approval on May 22, 1997, of a change
in the state of incorporation of the Company from the State of California to the
State of Delaware.
NOTE 2. RELATED PARTY ARRANGEMENTS
In March 1995, the Company and Genentech, Inc. ("Genentech") entered into a
collaborative agreement for the clinical development and commercialization of
the Company's anti-CD20 monoclonal antibody, Rituxan(TM) (formerly IDEC-C2B8),
for the treatment of non-Hodgkin's B-cell lymphomas. In February 1996, the
parties extended this collaboration to include two radioconjugates, IDEC-Y2B8
and IDEC-In2B8, also for the treatment of B-cell lymphomas. Concurrent with the
collaborative agreement, the Company and Genentech also entered into an
expression technology license agreement for a proprietary gene expression
technology developed by the Company and a preferred stock purchase agreement
providing for certain equity investments in the Company by Genentech. Under the
terms of these agreements, the Company may receive payments totaling
$57,000,000, subject to the attainment of certain milestone events. Genentech
may terminate this agreement for any reason. For the six months ended June 30,
1996, the Company recognized $1,500,000, in license fees under these agreements.
In addition, the Company and Genentech will co-promote Rituxan and IDEC-Y2B8
in the United States and the Company and Genentech's sublicensee will co-promote
Rituxan in Canada under a joint business arrangement, with the Company receiving
a share of the profits. Additionally, the Company has an obligation to supply
Rituxan for the first two years after regulatory approval of Rituxan with an
option to continue supplying Rituxan thereafter. Included in inventory at June
30, 1997, is $3,577,000 in finished goods inventory that will be sold to
Genentech. Included in revenue from unconsolidated joint business for the three
and six months ended June 30, 1997 is $1,878,000 for bulk Rituxan sold to
Genentech.
Under the terms of separate agreements with Genentech, commercialization of
Rituxan outside the United States will be the responsibility of F. Hoffmann-La
Roche Ltd, one of the world's largest pharmaceuticals firms, except in Japan
where Zenyaku Kogyo Co., Ltd. ("Zenyaku") will be responsible for development,
marketing and sales. The Company will receive royalties on sales outside the
U.S. and Canada. Additionally, the Company will receive royalties on sales of
any Genentech products manufactured using the Company's proprietary gene
expression system.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
IDEC Pharmaceuticals Corporation (the "Company") is primarily engaged in the
research and development of targeted immunotherapies for the treatment of cancer
and autoimmune and inflammatory diseases. To date, the Company has not received
any revenues from the commercial sale of its products. The Company has funded
its 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.
The Company has incurred increasing annual operating expenses and, as the
Company prepares for product commercialization, it expects such trends to
continue. The Company has incurred annual operating losses since its inception
in 1985, and the transition of the Company to profitability will be dependent
upon the timing of regulatory approval and the commercial success of Rituxan(TM)
(formerly IDEC-C2B8). As of June 30, 1997, the Company had an accumulated
deficit of $97.9 million.
RESULTS OF OPERATIONS
Revenue from unconsolidated joint business consist of bulk Rituxan sales to
Genentech, Inc. ("Genentech"), the Company's development partner.
Contract research revenues for the three and six months ended June 30, 1997
totaled $2.5 million and $5.2 million, respectively, compared to $3.1 million
and $6.0 million for the comparable periods in 1996. The decrease in contract
research revenues for the three and six months ended June 30, 1997 is primarily
due to the expiration in December 1996 of a collaborative and license agreement
with Mitsubishi Chemical Corporation.
License fees for the three and six months ended June 30, 1997 totaled $1.0
million and $5.0 million, respectively, compared to $2.5 million and $9.5
million for the comparable periods in 1996. License fees for the six months
ended June 30, 1997 consist of a license fee received from Boehringer Ingelheim
GmbH for the license of the Company's proprietary gene expression technology for
the manufacture of recombinant proteins ("gene expression technology"). License
fees for the six months ended June 30, 1996, resulted from the achievement of a
$2.5 million patent milestone under the Company's collaboration with Genentech,
$4.5 million received for the license to Chugai Pharmaceutical Co., Ltd. of the
Company's gene expression technology, $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. The Company continues to
pursue other collaborative and license arrangements; however, no assurance can
be given that discussions in this regard will result in any such arrangements or
that the Company will receive significant revenues from any such collaborative
or license arrangements.
Sales for the six months ended June 30, 1996 were a result of the Company
completing a contract manufacturing arrangement.
Manufacturing expenses totaled $5.2 million for the three and six months
ended June 30, 1997, compared to $1.4 million for the comparable periods in
1996. Manufacturing expenses for 1997 consist of manufacturing costs related to
production of bulk Rituxan sold to Genentech and includes approximately $2.0
million of costs associated with the start-up of the Company's manufacturing
facility. Manufacturing expenses for 1996 were a result of the Company
completing a contract manufacturing arrangement. The Company expects to continue
incurring substantial additional manufacturing expenses as the Company continues
to build Rituxan inventory in anticipation of marketing clearance from the
United States Food and Drug Administration.
Research and development expenses totaled $10.3 million and $17.8 million for
the three and six months ended June 30, 1997, respectively, compared to $7.1
million and $12.7 million for the comparable periods in 1996. Research and
development expenses for the three and six months ended June 30, 1997 increased
primarily due to an accrual of a $3.0 million up-front licensing fee to
Pharmacia & Upjohn for exclusive rights to 9-aminocamptothecin, a broad spectrum
anti-cancer agent, and $2.0 million of contract manufacturing costs representing
about two-thirds of the production costs, for IDEC-Y2B8 in preparation for Phase
III trials. These one-
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time charges were partially offset by the utilization of the Company's
manufacturing facility for bulk production of Rituxan inventory in 1997 compared
to research and development manufacturing production in 1996 of clinical
material used for clinical trials. The Company expects to continue incurring
substantial additional research and development costs in the future, due to
expansion or addition of research and development programs; technology
inlicensing costs and regulatory-related costs; preclinical and clinical testing
of the Company's various products under development; and production scale-up and
manufacturing of products used in clinical trials.
General and administrative expenses totaled $2.5 million and $4.7 million for
the three and six months ended June 30, 1997, compared to $1.6 million and $3.5
million for the comparable periods in 1996. General and administrative expenses
increased in 1997 due to higher personnel costs to support expanded
manufacturing operations and initial costs incurred for the creation of a
marketing and sales organization. General and administrative costs necessary to
support expanded manufacturing capacity, expanded clinical trials, research and
development and the creation of a marketing and sales organization are expected
to increase in the foreseeable future.
Net interest income totaled $0.7 million and $1.5 million for the three and
six months ended June 30, 1997, respectively, compared to net interest expense
of $0.5 million and $1.1 million during the comparable periods in 1996. The
increase in net interest income in 1997 from net interest expense in 1996 is due
to higher balances in cash, cash equivalents and securities available-for-sale,
a decrease in noncash interest charges for common stock warrants issued in
connection with certain debt financings and a decrease in interest expense due
to lower balances in notes payable.
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
may pursue additional capital through a combination of new collaborative
agreements, strategic alliances and equity and debt financings. However, no
assurance can be provided that additional capital will be obtained through these
sources on favorable terms or at all. Should the Company not enter into any such
arrangements, the Company anticipates its cash, cash equivalents and securities
available-for-sale, together with the existing agreements and contracts, will be
sufficient to finance the Company's currently anticipated needs for operating
and capital expenditures through early commercialization of its first product.
If adequate funds are not available from additional sources of financing, or if
the commercialization of Rituxan is delayed, 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, 1997, the Company had $62.7 million in cash, cash equivalents and
securities available-for-sale compared to cash, cash equivalents and securities
available-for-sale of $78.7 million at December 31, 1996. Sources of cash, cash
equivalents and securities available-for-sale at June 30, 1997 include $1.2
million from the issuance of common stock under employee stock option and
employee stock purchase plans. Uses of cash, cash equivalents and securities
available-for-sale during the six months ended June 30, 1997 include $11.5
million used in operations, $3.8 million used to purchase capital equipment and
$1.8 million used to pay notes payable.
During the second quarter the Company completed the acquisition of worldwide
rights from Pharmacia & Upjohn to 9-aminocamptothecin, a broad spectrum
anti-cancer agent. Under the terms of the agreement, the Company will reimburse
Pharmacia & Upjohn for a portion of their development costs by making an initial
payment of $3.0 million during the third quarter of 1997. Terms of the agreement
require the Company to pay additional license fees upon the achievement of
certain development milestone events. No royalties are payable to Pharmacia &
Upjohn under
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the agreement. The acquisition costs for these technology rights are included in
research and development expenses in the condensed consolidated financial
statements as of June 30, 1997.
In July 1997, the Company received a $3.0 million loan commitment to finance
planned equipment purchases. Although no assurances can be provided that such
loan will result, the Company anticipates finalizing the terms of this loan in
the third quarter of 1997.
In August 1995, the Company completed receipt of funding under a $10.0
million lease financing agreement to finance both equipment and facility
improvements. Terms of the financing agreement require final principal payments
of $1.1 million and $0.4 million in July 1998 and January 1999, respectively.
This quarterly report contains predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this outlook represents our current judgment on the future direction of
the business, such risks and uncertainties could cause actual results to differ
materially from any future performance 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 other than as required by the Securities Exchange Act of 1934, as
amended.
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RISK FACTORS
Lengthy Regulatory Process; No Assurance of Regulatory Approvals
The testing, manufacturing, labeling, advertising, promotion, export, and
marketing, among other things, of IDEC Pharmaceuticals Corporation's ("IDEC
Pharmaceuticals" or the "Company") 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 United States Food
and Drug Administration ("FDA") under the Federal Food, Drug, and Cosmetic Act
and other laws, including, in the case of biologics, the Public Health Service
Act. At the present time, with the exception of 9-aminocamptothecin, 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 and well-controlled human clinical
trials to establish the safety and efficacy of the product, (iv) the submission
to the FDA of a Biological License Application ("BLA"), (v) FDA review of the
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
current Good Manufacturing Practices ("cGMP"). The testing and approval process
requires substantial time, effort and financial resources and there can be no
assurance that any approval will be granted on a timely basis, if at all. 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
safety 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 BLA requesting approval to market the
product. Before approving a BLA, the FDA will inspect the facilities at which
the product is manufactured, and will not approve the product unless safety and
efficacy criteria and cGMP compliance is satisfactory. The FDA may deny a 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 BLA submitted by the Company will be granted on a timely basis,
if at all. Also, if regulatory approval of a product is granted, such approval
may entail limitations on the indicated uses for which the product may be
marketed.
Both before and after approval is obtained, violations of regulatory
requirements 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 among patients who use the Company's products
to the FDA, and to comply with certain requirements concerning advertising and
promotional labeling for their products. Also, quality control and manufacturing
procedures must continue to conform to cGMP regulations after approval, and the
FDA periodically inspects manufacturing facilities to assess compliance with
cGMP. Accordingly, manufacturers must continue to expend time, monies and effort
in the area of production and quality control to maintain cGMP compliance. In
addition, discovery of problems may result in restrictions on a product,
manufacturer or 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, other than in Canada, to obtain regulatory
approval for marketing its products in foreign countries.
In February 1997, the Company and Genentech, Inc. ("Genentech") submitted
BLAs to the FDA for Rituxan(TM) (formerly IDEC-C2B8) as a single agent therapy
for the treatment of relapsed low grade or follicular non-Hodgkin's lymphoma and
in July 1997, Rituxan was recommended unanimously for marketing clearance by the
Biological Response Modifiers Advisory Committee to the FDA. F. Hoffmann-La
Roche Ltd ("Hoffmann-La Roche"), also submitted, through one of its subsidiaries
in the European Union, a Marketing Authorization Application ("MAA")
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with the European Medicines Evaluation Agency ("EMEA") for marketing Rituxan in
Europe. There can be no assurance that the FDA and the EMEA approval of the BLAs
and MAA submitted by the Company, Genentech and Hoffmann-La Roche will be
granted on a timely basis, if at all, and delays in receipt or failure to
receive regulatory approval could have a material adverse effect on the
Company's business, financial condition and results of operations.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs
intended to treat a "rare disease or condition," which generally is a disease or
condition that affects fewer than 200,000 individuals in the United States.
Orphan drug designation must be requested before submitting a BLA. After the FDA
grants orphan drug designation, the generic identity of the therapeutic agent
and its potential orphan use are publicly disclosed by the FDA. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory review and approval process. If a product that has an orphan drug
designation subsequently receives FDA approval for the indication for which it
has such designation, the product is entitled to orphan drug status, i.e., the
FDA may not approve any other applications to market the same drug for the same
indication, except in certain very limited circumstances, for a period of seven
years.
In 1994, the Company obtained orphan drug designation for Rituxan, IDEC-Y2B8
and IDEC-In2B8 from the FDA to treat low grade B-cell lymphoma. There can be no
assurance that any of these compounds will receive orphan drug status for the
low grade B-cell lymphoma indication, and it is possible that competitors of the
Company could obtain approval, and attendant orphan drug status, 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 drug status 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 orphan drug status 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 status will remain in effect in the future.
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, performing research and
development, fulfilling long term manufacturing demands and marketing,
distribution and sales with respect to the Company's products. The Company's
strategic partners may also develop products that may compete with the Company.
Although the Company 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 research and
development and license agreements with 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 and market 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.
Limited Manufacturing Experience and Dependence on Contact Manufacturer
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 limited commercial bulk quantities of
certain of its products, the Company
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has not received regulatory approval for such commercial 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 fill/finish experience and capacity.
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.
The Company is dependent upon Genentech to fulfill long term manufacturing
demands for Rituxan and SmithKline Beecham to fulfill all of the manufacturing
requirements for IDEC-CE9.1 and IDEC-151. Genentech is currently constructing a
larger manufacturing plant to satisfy long term demands for Rituxan and
SmithKline Beecham has constructed a larger manufacturing plant for IDEC-CE9.1
and IDEC-151. 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.
In November 1996, the Company contracted with Covance Biotechnology Services,
Inc. ("Covance") for the manufacture of the Company's antibody used in its
IDEC-Y2B8 and IDEC-In2B8 products, which are radiolabeled for the treatment of
non-Hodgkin's lymphoma. The Company is also developing this product in
partnership with Genentech. The Company is dependent upon Covance to fulfill its
manufacturing demands for clinical quantities of IDEC-Y2B8 and IDEC-In2B8. There
can be no assurance that Covance will be able to complete any such manufacturing
contract in a timely or cost-effective manner, if at all, or that the Company
could obtain such capacity from others. Failure by Covance to meet the Company's
manufacturing needs will result in delayed clinical trials for IDEC-Y2B8 and
IDEC-In2B8 and may 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 status. The Company has title or exclusive rights to two issued and nine
allowed United States patents, 27 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
patents and are likely to 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, however, patents may issue with
claims that conflict with the Company's own patent filings or read on its own
products. There can be no assurance that patents do not already exist in the
United States or in foreign countries or that patents will not be issued that
would entail substantial costs to challenge and that, if unsuccessfully
challenged, would have a material adverse effect on the Company's ability to
market its products. Specifically, the Company is aware of several patents and
patent applications which may affect the Company's ability to make, use and sell
its products. 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 infringement or
validity of such patents are uncertain and the costs associated therewith may be
significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture or market its products would be materially adversely affected.
The owners, or licensees of the owners, of these patents may assert that one
or more of the Company's products infringe one or more claims of such patents.
If legal action is commenced against the Company to enforce any of
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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 on the
Company's operations and ability to pursue its long term objectives.
Limited Sales and Marketing Experience
Commercialization of the Company's products is expensive and time-consuming.
The Company has adopted a strategy of pursuing collaborative agreements with
strategic partners that provide for co-promotion of certain of the Company's
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 limited marketing and 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.
Uncertainties Associated with Clinical Trials
The Company has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety, efficacy and applicability 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, changes in managed care and
eligibility criteria for the study. Delays in patient enrollment will result in
increased costs, which could have a material adverse effect on the Company. The
Company cannot ensure that patients enrolled in the Company's clinical trials
will respond to the Company's product candidates. Setbacks are to be expected in
conducting human clinical trials. Failure to comply with the FDA regulations
applicable to such testing can result in delay, suspension or cancellation of
such testing, and/or refusal by the FDA to accept the results of such testing.
In addition, the FDA may suspend clinical trials at any time if it concludes
that the subjects or patients participating in such trials are being exposed to
unacceptable health risks. Thus, there can be no assurance that Phase I, Phase
II or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's potential products.
Further, there can be no assurance that human clinical testing will show any
current or future product candidate to be safe and effective or that data
derived therefrom will be suitable for submission to the FDA or will support the
Company's submission of a BLA.
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 may 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
stockholders. If adequate funds are not available from operations or additional
sources of financing, the Company's business could be materially and adversely
affected.
History of Operating Losses; Accumulated Deficit
The Company has incurred annual operating losses since its inception in 1985.
As of June 30, 1997, the Company's accumulated deficit was approximately $97.9
million.
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Such losses have been 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
products. All revenues to date have resulted from collaborative research,
development and licensing 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.
Uncertainties Regarding Health Care Reimbursement and Reform
The future revenues and profitability of biopharmaceutical companies as well
as the availability of capital may be affected by the continuing efforts of
government and third party payors to contain or reduce costs of health care
through various means. For example, in certain foreign markets pricing or
profitability of prescription pharmaceuticals is subject to government control.
In the United States, there have been, and the Company expects that there will
continue to be, a number of federal and state proposals to implement similar
government controls. While the Company cannot predict whether any such
legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals could have a material adverse effect on the Company's
business, financial condition or prospects.
The Company's ability to commercialize its products successfully will depend,
in part, on the extent to 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 or processes 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.
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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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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 22, 1997, the Company held its Annual Meeting of Stockholders
at which the stockholders approved all of the proposals listed below
except for proposal number 2:
(1) The election of William H. Rastetter, Ph.D., Charles C.
Edwards, M.D., Alan B. Glassberg, M.D., John Groom, Kazuhiro
Hashimoto, Franklin P. Johnson, Jr., Lynn Schenk, and William
D. Young 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 to IDEC Pharmaceuticals Corporation's California
Amended and Restated Articles of Incorporation providing for
the classification of the Board of Directors into three
classes, with members of each class serving for staggered
terms.
(3) The amendment to change the state of incorporation from the
State of California to the State of Delaware by means of a
merger of the Company with and into a wholly-owned Delaware
subsidiary of the Company.
(4) A series of amendments to the 1988 Stock Option Plan (the
"Option Plan") of IDEC Pharmaceuticals Corporation, including
(i) an increase in the total number of common stock authorized
for issuance thereunder from 4,680,000 shares to a total of
5,480,000 shares and (ii) the extension of the term of the
Option Plan from July 19, 1998 to December 31, 2002.
(5) The amendment to the Company's 1995 Employee Stock Purchase
Plan to increase the total number of common stock authorized
for issuance thereunder from 345,000 shares to a total of
495,000 shares.
(6) The selection of KPMG Peat Marwick LLP as the Company's
independent public accountants for the fiscal year ending
December 31, 1997.
The following directors received the number of votes set opposite
their respective names:
For Election Withheld
------------ --------
William H. Rastetter, Ph.D. 17,130,583 146,435
Charles C. Edwards, M.D. 17,135,033 141,985
Alan B. Glassberg, M.D. 17,127,015 150,003
John Groom 15,238,624 2,038,394
Kazuhiro Hashimoto 14,786,314 2,490,704
Franklin P. Johnson, Jr. 14,164,915 3,112,103
Lynn Schenk 17,130,543 146,475
William D. Young 17,117,033 159,985
The proposal to amend and restate the California articles of
incorporation to provide for classification of the Board of
Directors into three classes received 8,197,925 affirmative votes
(for the amendment and restatement), 6,347,460 negative votes
(against the amendment and restatement), 2,680,328 broker non-votes
and 51,305 votes abstained.
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The proposal to change the state of incorporation from the State of
California to the State of Delaware received 9,572,194 affirmative
votes (for the reincorporation), 4,598,045 negative votes (against
the reincorporation), 3,079,813 broker non-votes and 26,966 votes
abstained.
The proposal to amend the Option Plan received 10,748,251
affirmative votes (for the amendment), 6,085,606 negative votes
(against the amendment), 387,913 broker non-votes and 55,248 votes
abstained.
The proposal to amend the 1995 Employee Stock Purchase Plan received
13,814,602 affirmative votes (for the amendments), 2,847,988
negative votes (against the amendments), 545,431 broker non-votes
and 68,997 votes abstained.
The proposal to select KPMG Peat Marwick LLP as the Company's
independent public accountants received 17,201,504 affirmative votes
(for the selection), 48,007 negative votes (against the selection),
and 27,507 votes abstained. This proposal did not receive any broker
non-votes.
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are referenced.
Exhibit
Number Description
------ -----------
10.69* 9-AC Asset Transfer Agreement between the Company, Pharmacia &
Upjohn S.p.A. and Pharmacia & Upjohn Company dated February 10,
1997.
10.70(1) Amended and Restated 1988 Stock Option Plan (Amended and Restated
through May 22, 1997)
10.71(1) 1995 Employee Stock Purchase Plan (Amended through May 22, 1997)
27.1 Financial Data Schedule.
- -----------------
* Confidential treatment requested as to certain portions of this
agreement.
(1) Incorporated by reference to exhibits 99.1 and 99.4, respectively,
to the Company's Registration Statement on Form S-8, File No.
333-2969.
b) Report on Form 8-K.
On June 16, 1997, the Company filed a current report on
Form 8-K reporting the reincorporation of the Company to the State of Delaware
by merging into IDEC Pharmaceuticals Corporation, a Delaware corporation ("IDEC
Delaware"), pursuant to the terms of an Agreement and Plan of Merger between the
Company and IDEC Delaware. There has been no change in the name, business,
management, fiscal year, location of principal facilities, assets or liabilities
of the Company as a result of the merger.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEC PHARMACEUTICALS CORPORATION
Date: August 15, 1997 By: /s/ William H. Rastetter
--------------- -----------------------------------
William H. Rastetter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 15, 1997 By: /s/ Phillip M. Schneider
--------------- -----------------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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