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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 September 30, 1998
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
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(Exact name of registrant as specified in its charter)
Delaware 33-0112644
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11011 Torreyana Road, San Diego, CA 92121
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(Address of principal executive offices)(Zip code)
(619) 550-8500
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(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 October 31, 1998, the Registrant had 20,002,870 shares of its common
stock, $.001 par value, issued and outstanding.
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IDEC PHARMACEUTICALS CORPORATION
FORM 10-Q-- QUARTERLY REPORT
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1998 and
December 31, 1997 ...................................................... 1
Condensed Consolidated Statements of Operations -- Three months ended
September 30, 1998 and 1997 and nine months ended September 30,
1998 and 1997 ........................................................ 2
Condensed Consolidated Statements of Cash Flows -- Nine months ended
September 30, 1998 and 1997 .......................................... 3
Notes to Condensed Consolidated Financial Statements ................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 6
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............. 9
PART II. OTHER INFORMATION
Risk Factors ...........................................................10
Item 1. Legal Proceedings.......................................................17
Item 2. Changes in Securities ..................................................17
Item 3. Defaults upon Senior Securities ........................................17
Item 4. Submission of Matters to a Vote of Security Holders ....................17
Item 5. Other Information ......................................................17
Item 6. Exhibits and Reports on Form 8-K .......................................17
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
1998 1997
------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,047 $ 34,847
Securities available-for-sale 46,194 34,810
Contract revenue receivables, net 4,564 3,971
Due from related party, net 10,491 --
Inventories 8,824 4,134
Prepaid expenses and other current assets 2,016 1,431
--------- ---------
Total current assets 91,136 79,193
Property and equipment, net 21,482 23,449
Investment and other assets 3,374 3,371
--------- ---------
$ 115,992 $ 106,013
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 1,868 $ 3,908
Accounts payable 1,525 1,626
Accrued expenses 8,549 6,382
Due to related party, net -- 870
Deferred revenue 346 6,646
--------- ---------
Total current liabilities 12,288 19,432
Notes payable, less current portion 2,505 3,886
Deferred rent 2,261 2,016
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.001 par value 20 19
Additional paid-in capital 182,470 179,956
Unrealized gains on securities available-for-sale 35 57
Accumulated deficit (83,587) (99,353)
--------- ---------
Total stockholders' equity 98,938 80,679
--------- ---------
$ 115,992 $ 106,013
========= =========
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 Nine months
ended September 30, ended September 30.
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Revenues from unconsolidated joint business $ 12,290 $ 2,332 $ 31,046 $ 4,210
Contract revenues 2,719 2,595 9,860 7,783
License fees 2,000 1,500 18,300 6,500
-------- -------- -------- --------
17,009 6,427 59,206 18,493
Operating expenses:
Manufacturing costs 4,055 5,261 10,985 10,475
Research and development 8,009 7,988 22,187 25,754
Selling, general and administrative 3,784 3,477 12,225 8,183
-------- -------- -------- --------
15,848 16,726 45,397 44,412
-------- -------- -------- --------
Income (loss) from operations 1,161 (10,299) 13,809 (25,919)
Other income (expenses):
Interest income, net 756 723 2,238 2,240
Income tax provision (152) -- (282) --
-------- -------- -------- --------
604 723 1,956 2,240
-------- -------- -------- --------
Net income (loss) $ 1,765 $ (9,576) $ 15,765 $(23,679)
======== ======== ======== ========
Earnings (loss) per share:
Basic $ 0.09 $ (0.51) $ 0.80 $ (1.27)
Diluted $ 0.08 $ (0.51) $ 0.67 $ (1.27)
Shares used in calculation of earnings
(loss) per share:
Basic 19,892 18,875 19,779 18,601
Diluted 22,898 18,875 23,365 18,601
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)
Nine months ended
September 30,
-----------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net cash used in operating activities $ (2,236) $(25,146)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,252) (4,729)
Investment in Cytokine Networks, Inc. -- (3,000)
Purchase of securities available-for-sale (45,784) (27,141)
Sales and maturities of securities available-for-sale 34,378 39,434
-------- --------
Net cash provided by (used in) investing activities (12,658) 4,564
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,515 2,585
Proceeds from notes payable -- 3,003
Payments on notes payable (3,421) (2,954)
-------- --------
Net cash provided by (used in) financing activities (906) 2,634
-------- --------
Net decrease in cash and cash equivalents (15,800) (17,948)
Cash and cash equivalents, beginning of period 34,847 25,337
-------- --------
Cash and cash equivalents, end of period $ 19,047 $ 7,389
======== ========
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 September 30, 1998, and for the
three and nine month periods ended September 30, 1998 and 1997, is unaudited. In
the opinion of management, these financial statements include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
results for the interim periods presented. Interim results are not necessarily
indicative of results for a full year or for any subsequent interim period.
These financial statements should be read in conjunction with IDEC
Pharmaceuticals(R) Corporation's (the "Company") Annual Report on Form 10-K/A
for the year ended December 31, 1997.
Revenues from Unconsolidated Joint Business: Revenues from unconsolidated
joint business consist of the Company's share of the pretax copromotion profits
generated from its joint business arrangement with Genentech, Inc.
("Genentech"), revenue from bulk Rituxan(R) sales to Genentech, reimbursement
from Genentech of the Company's sales force and development expenses and royalty
income on sales of Rituximab outside the United States. Rituxan is the trade
name in the United States for the compound Rituximab (formerly known as
IDEC-C2B8). Outside the United States, Rituximab is marketed as MabThera
(Rituximab, Rituxan and MabThera are collectively referred to herein as Rituxan,
except where otherwise indicated). Under the joint business arrangement, all
U.S. sales of Rituxan and associated expenses will be recognized by Genentech,
with the Company recording its share of the pretax copromotion profits on a
quarterly basis as defined in the Company's collaborative agreement with
Genentech (Note 2). Pretax copromotion profits under the joint business
arrangement are derived by taking U.S. net sales of Rituxan to third-party
customers less cost of sales, third-party royalty expenses, distribution,
selling and marketing expenses and joint development expenses by the Company and
Genentech. Revenue from bulk Rituxan sales is recognized when bulk product is
accepted by Genentech.
Contract Revenues: Contract revenues consist of nonrefundable research and
development funding under collaborative agreements with the Company's various
strategic partners and other funding under contractual arrangements with other
parties. Contract research and development funding generally compensates the
Company for discovery, preclinical and clinical expenses related to the
collaborative development programs for certain products and product candidates
of the Company and is recognized at the time research and development activities
are performed under the terms of the collaborative agreements. Contract revenues
earned in excess of contract payments received are classified as contract
revenue receivables, and contract research and development funding received in
excess of amounts earned are classified as deferred revenue.
License Fees: License fees consist of nonrefundable fees from product
development milestone payments, the sale of license rights to the Company's
proprietary gene expression technology and nonrefundable fees from the sale of
product rights under collaborative development and license agreements with the
Company's strategic partners. Revenues from product development milestone
payments are recognized when the results or events stipulated in the agreement
have been achieved. License fee payments received in excess of amounts earned
are classified as deferred revenue.
Manufacturing Costs: Manufacturing costs consist of manufacturing costs
related to the production of bulk Rituxan sold to Genentech.
Earnings (Loss) Per Share: Earnings (loss) per share are calculated in
accordance with Statement of Financial Accounting Standards No. 128 "Earnings
per Share." Basic earnings per share excludes the dilutive effects of options,
warrants and other convertible securities compared to diluted earnings per share
which reflects the potential dilution of options, warrants and other convertible
securities that could share in the earnings of the Company. Calculations of
basic and diluted earnings (loss) per share use the weighted average number of
shares outstanding during the period. Diluted earnings per share for the three
and nine months ended September 30, 1998 includes the dilutive effect of
3,006,000 shares and 3,586,000 shares, respectively, of common stock from
options, warrants and convertible preferred stock and excludes 1,683,000 shares
and 649,000 shares, respectively, of common stock from options because the
options' exercise price was greater than the average market price of the
Company's common stock for the respective periods. Options, warrants and
convertible preferred stock were excluded from the calculations of diluted loss
per share for the three and nine months ended September 30, 1997, as their
effect was antidilutive.
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IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2. RELATED PARTY ARRANGEMENTS
In March 1995, the Company and Genentech entered into a collaborative
agreement for the clinical development and commercialization of the Company's
anti-CD20 monoclonal antibody, Rituxan, for the treatment of relapsed or
refractory, low-grade or follicular, CD20 positive, B-cell non-Hodgkin's
lymphomas ("B-cell non-Hodgkin's lymphomas"). Concurrent with the collaborative
agreement the Company and Genentech also entered into (i) a technology license
agreement for a proprietary gene expression technology developed by the Company,
and (ii) a preferred stock purchase agreement providing for certain equity
investments in the Company by Genentech. Under the terms of the collaborative
agreement, Genentech will reimburse the Company for certain development and
regulatory approval expenses. Genentech may terminate this agreement at any time
for any reason, with a resulting loss of product rights. Included in contract
revenues for the three and nine months ended September 30, 1998 are $24,000 and
$150,000, respectively, received from Genentech pursuant to the collaborative
agreement to fund specific product development. Such amounts approximate the
research and development expenses incurred under the program. Included in
contract revenues for the three and nine months ended September 30, 1997 are
$636,000 and $1,030,000, respectively, received from Genentech pursuant to the
collaborative agreement to fund specific product development, which approximates
the research and development expenses incurred under the program. The license
fees for the nine months ended September 30, 1998 include $10,000,000 earned
under these agreements.
The Company and Genentech are copromoting Rituxan in the United States under
a joint business arrangement, with the Company receiving a share of the pretax
copromotion profits. Additionally, the Company has a contractual obligation to
manufacture and supply bulk Rituxan to Genentech through the end of 1999, and
the Company has an option to continue supplying Rituxan thereafter. Under the
Company's collaborative agreement with Genentech, the sales price of bulk
Rituxan sold to Genentech is capped at a price that is currently less than the
Company's cost to manufacture bulk Rituxan. Included in inventories at September
30, 1998, is $5,518,000 of bulk Rituxan inventory that is expected to be sold to
Genentech.
Under the terms of separate agreements with Genentech, commercialization of
Rituxan outside the United States is the responsibility of F. Hoffmann-La Roche
Ltd. ("Hoffmann-La Roche"), except in Japan, where Zenyaku Kogyo Co., Ltd.
("Zenyaku") will be responsible for product development, marketing and sales.
The Company receives royalties on sales outside the United States.
NOTE 3. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" ("Statement No. 130").
Statement No. 130 establishes standards for the reporting and display of
comprehensive income and its components. The adoption of Statement No. 130 had
no impact on the Company's results of operations or financial position.
Statement No. 130 requires unrealized gains on securities available-for-sale to
be included as a component of comprehensive income in addition to net income
(loss) for the period. During the nine months ended September 30, 1998
comprehensive income totaled $15,800,000 and during the nine months ended
September 30, 1997 comprehensive loss totaled $23,793,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
IDEC Pharmaceuticals Corporation is primarily engaged in the
commercialization, research and development of targeted therapies for the
treatment of cancer and autoimmune and inflammatory diseases. In November 1997,
the Company received approval from the U.S. Food and Drug Administration ("FDA")
to market its first product, Rituxan, in the United States, and in June 1998,
Hoffmann-La Roche, the Company's European marketing partner was granted
marketing authorization for Rituximab in all European Union countries. Rituxan
is the trade name in the United States for the compound Rituximab (formerly
known as IDEC-C2B8). Outside the United States, Rituximab is marketed as
MabThera (Rituximab, Rituxan and MabThera are collectively referred to herein as
Rituxan, except where otherwise indicated). Rituxan is being copromoted in the
United States under a joint business arrangement with Genentech, with the
Company receiving a share of the pretax copromotion profits. Under the terms of
separate agreements with Genentech, commercialization of Rituxan outside the
United States is the responsibility of Hoffmann-La Roche, except in Japan where
Zenyaku will be responsible for product development, marketing and sales. The
Company receives royalties on Rituxan sales outside the United States.
Revenues for the Company consist of revenues from unconsolidated joint
business, contract revenues and license fees. To date a substantial portion of
the Company's revenues have been derived from contract revenues and license
fees, and the Company anticipates that revenues from unconsolidated joint
business will comprise an increasing portion of total revenues in the future.
Revenues from unconsolidated joint business consist of the Company's share
of the pretax copromotion profits generated from its joint business arrangement
with Genentech, revenue from bulk Rituxan sales to Genentech and reimbursement
from Genentech for the Company's sales force and development expenses. Revenues
from unconsolidated joint business also include royalty income on sales of
Rituxan outside the United States. Under the joint business arrangement, all
U.S. sales of Rituxan and associated expenses will be recognized by Genentech,
with the Company recording its share of the pretax copromotion profits on a
quarterly basis, as defined in the Company's collaborative agreement with
Genentech. Pretax copromotion profits under the joint business arrangement are
derived by taking U.S. net sales of Rituxan to third-party customers less cost
of sales, third-party royalty expenses, distribution, selling and marketing
expenses and joint development expenses by the Company and Genentech.
Contract revenues consist of nonrefundable research and development funding
under collaborative agreements with the Company's various strategic partners and
other funding under contractual arrangements with other parties. Contract
research and development funding generally compensates the Company for
discovery, preclinical and clinical expenses related to the collaborative
development programs for certain products of the Company.
License fees consist of nonrefundable fees from product development
milestone payments, the sale of license rights to the Company's proprietary gene
expression technology and nonrefundable fees from the sale of product rights
under collaborative development and license agreements with the Company's
strategic partners.
The Company has a contractual obligation to manufacture and supply bulk
Rituxan to Genentech through the end of 1999 and the Company has an option to
continue supplying Rituxan thereafter. The cost of bulk Rituxan sold to
Genentech is recorded as manufacturing costs in the Company's condensed
consolidated statements of operations. Under the Company's collaborative
agreement with Genentech, the sales price of bulk Rituxan sold to Genentech is
capped at a price that is currently less than the Company's cost to manufacture
bulk Rituxan.
The Company has incurred increasing annual operating expenses and, with the
commercialization of Rituxan, the Company expects such trends to continue. The
Company has incurred annual operating losses since its inception in 1985 and the
sustained profitability of the Company will be dependent upon the continued
commercial success of Rituxan, product investment and development and revenues
from the achievement of product development objectives and licensing
transactions. As of September 30, 1998, the Company had an accumulated deficit
of $83.6 million.
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RESULTS OF OPERATIONS
Revenues from unconsolidated joint business for the three and nine months
ended September 30, 1998 totaled $12.3 million and $31.0 million, respectively,
compared to $2.3 million and $4.2 million for the comparable periods in 1997.
Revenues from unconsolidated joint business for the three and nine months ended
September 30, 1998 reflect the financial results from the commercialization of
Rituxan through the Company's collaboration with Genentech. These revenues
consist of the Company's share of pretax copromotion profits, sales of bulk
Rituxan to Genentech, reimbursement from Genentech for the Company's
Rituxan-related sales force and development expenses and royalty income from
Hoffmann-La Roche on sales of Rituxan outside the United States. Under its
agreement with Genentech, the Company's share of the pretax copromotion profits
rose to a higher percentage upon achievement of an annual fixed profit target by
the Rituxan joint business arrangement during the later part of the third
quarter of 1998. The Company's share of the pretax copromotion profits for the
three months ended September 30, 1998 amounted to 19.1% of U.S. net sales of
Rituxan before reimbursements to the Company for certain manufacturing, sales
and development expenses. Revenues from unconsolidated joint business for the
three and nine months ended September 30, 1997 consist of sales of bulk Rituxan
to Genentech.
Rituxan net sales to third-party customers in the United States by Genentech
for the three and nine months ended September 30, 1998 amounted to $36.1 million
and $103.3 million respectively. The Company believes pent-up demand for Rituxan
was satisfied during the first quarter of 1998 and that subsequent sales growth
is being driven by increased adoption and use of Rituxan. At the end of the
third quarter of 1998 Genentech began the anticipated transition from
drop-shipment directly to end users to a more standard practice of distribution
of Rituxan via drug wholesalers. The Company expects additional wholesaler
stockings to take place in the fourth quarter. The Company also anticipates
increased sales revenue due to a recently announced 6% increase in the wholesale
price of Rituxan effective October 5, 1998. While the Company is encouraged by
the volume of Rituxan sales to existing and new customers, not enough time has
passed for these figures to be indicative of future sales.
Contract revenues for the three and nine months ended September 30, 1998
totaled $2.7 million and $9.9 million, respectively, compared to $2.6 million
and $7.8 million for the comparable periods in 1997. The increase in contract
research revenues for the nine months ended September 30, 1998 resulted
primarily from increased funding under collaborative license agreements with
Eisai Co. Ltd. ("Eisai") and SmithKline Beecham p.l.c. ("SmithKline Beecham"),
which was offset by decreased research and development funding from Genentech.
License fees for the three and nine months ended September 30, 1998 totaled
$2.0 million and $18.3 million, respectively, compared to $1.5 million and $6.5
million for the comparable periods in 1997. License fees for the three months
ended September 30, 1998 resulted from the achievement of a product development
milestone for the Investigational New Drug ("IND") allowance of IDEC-114, an
investigational PRIMATIZED(R) anti-B7 monoclonal antibody for the treatment of
psoriasis, under the Company`s collaboration with Mitsubishi Chemical
Corporation ("Mitsubishi"). License fees for the nine months ended September 30,
1998 consist of a product development milestone payment from Genentech for
European approval of Rituxan, a license fee from Kirin Brewery Co., Ltd.,
Pharmaceutical Division for the license of the Company's proprietary gene
expression technology and the aforementioned IND milestone license fee from
Mitsubishi. License fees for the three months ended September 30, 1997 consist
of a product development milestone under the Company's collaboration with
Seikagaku Corporation ("Seikagaku") for the development of PRIMATIZED anti-CD23
antibodies. License fees for the nine months ended September 30, 1997 consist of
the aforementioned license fee from Seikagaku and payment from Boehringer
Ingelheim GmbH for the license of the Company's proprietary gene expression
technology. Contract revenues and license fees may vary from period to period
and are in part dependent upon achievement of certain research and development
objectives. The magnitude and timing of contract revenues and license fees may
influence the achievement and level of profitability for the Company. The
Company continues to pursue other collaborative and license arrangements,
however, no assurance can be given that 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.
Manufacturing costs totaled $4.1 million and $11.0 million for the three and
nine months ended September 30, 1998, respectively, compared to $5.3 million and
$10.5 million for the comparable periods in 1997. Manufacturing costs for 1998
and 1997 relates to production of bulk Rituxan sold to Genentech. Manufacturing
costs are recognized when bulk Rituxan inventory is accepted by Genentech. The
lower manufacturing costs during the third quarter of 1998 are primarily the
result of greater efficiencies and yields in the manufacture of Rituxan. The
Company expects
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to continue incurring substantial additional manufacturing costs as the Company
continues to manufacture and ship bulk Rituxan to Genentech. The Company has an
obligation to manufacture and supply Rituxan to Genentech through the end of
1999, and the Company has an option to continue supplying Rituxan thereafter.
Research and development expenses totaled $8.0 million and $22.2 million for
the three and nine months ended September 30, 1998, respectively, compared to
$8.0 million and $25.8 million for the comparable periods in 1997. The decrease
in research and development expenses for the nine months ended September 30,
1998 is due to certain one-time charges related to acquisition of product rights
and development incurred during the three months ended June 30, 1997. The
Company expects to continue incurring substantial additional research and
development expenses in the future, due to expansion or addition of research and
development programs; technology in-licensing and regulatory-related expenses;
preclinical and clinical testing of the Company's various products under
development; and production scale-up and manufacturing of products used in
clinical trials.
Selling, general and administrative expenses totaled $3.8 million and $12.2
million for the three and nine months ended September 30, 1998, respectively,
compared to $3.5 million and $8.2 million for the comparable periods in 1997.
Selling, general and administrative expenses increased in 1998 due to increased
sales and marketing expenses resulting from the commercialization of Rituxan.
Selling, general and administrative expenses necessary to support expanded
manufacturing capacity, expanded clinical trials, research and development and
the potential expansion of the sales and marketing organization are expected to
increase in the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operating and capital expenditures since
inception principally through the sale of equity securities, license fees,
contract revenues, lease financing transactions and interest income. The Company
expects to finance its current and planned operating requirements principally
through cash on hand, funds from its joint business arrangement with Genentech
and with funds from existing collaborative agreements and contracts which the
Company believes will be sufficient to meet its near-term operating
requirements. Existing collaborative research agreements and contracts, however,
could be canceled by the contracting parties. In addition, the Company may, from
time to time seek additional funding through a combination of new collaborative
agreements, strategic alliances and additional equity and debt financings or
from other sources. There can be no assurance that such additional funds will be
obtained through these sources on acceptable terms, if at all. Should the
Company not enter into any such arrangements, the Company anticipates its cash,
cash equivalents and securities available-for-sale, together with the existing
agreements and contracts and cash generated from its joint business arrangement,
will be sufficient to finance the Company's currently anticipated needs for
operating and capital expenditures for the foreseeable future. If adequate funds
are not available from the joint business arrangement, operations or additional
sources of financing, the Company's business could be materially and adversely
affected.
The Company's working capital and capital requirements will depend upon
numerous factors, including: the progress of the Company's preclinical and
clinical testing; fluctuating or increasing manufacturing requirements and
research and development programs; timing and expense of obtaining regulatory
approvals; levels of resources that the Company devotes to the development of
manufacturing, sales and marketing capabilities; technological advances; status
of competitors; and the ability of the Company to establish collaborative
arrangements with other organizations.
Until required for operations, the Company's policy under established
guidelines is to keep its cash reserves in bank deposits, certificates of
deposit, commercial paper, corporate notes, United States government instruments
and other readily marketable debt instruments, all of which are investment-grade
quality.
At September 30, 1998, the Company had $65.2 million in cash, cash
equivalents and securities available-for-sale compared to $69.7 million at
December 31, 1997. Sources of cash, cash equivalents and securities
available-for-sale during the nine months ended September 30, 1998, include $2.5
million from the issuance of common stock issued under employee stock option and
purchase plans. Uses of cash, cash equivalents and securities available-for-sale
during the nine months ended September 30, 1998, included $2.2 million used in
operations, $1.3 million used to purchase capital equipment and $3.4 million
used to pay notes payable.
In February 1997, the Company acquired worldwide rights from Pharmacia &
Upjohn S.p.A. ("Pharmacia & Upjohn") to 9-aminocamptothecin ("9-AC"), a broad
spectrum anti-cancer agent. Under the terms of the 9-AC asset
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transfer agreement, the Company may make payments to Pharmacia & Upjohn totaling
up to $16.0 million, subject to the attainment of certain product development
objectives. The Company anticipates that it may achieve a product development
objective in 1999 (commencement of a Phase III trial) that would result in the
Company making a $6.0 million payment to Pharmacia & Upjohn. In the event the
Company commences Phase III trials, it may seek a strategic partner for
development, marketing, distribution and sale of 9-AC in Europe, however, no
assurances can be given that any such arrangement will result.
In September, 1997, the Company sold to a financial institution a call
option, exercisable only at maturity, entitling the financial institution to
purchase from the Company up to 900,000 shares of the Company's common stock.
Also in September, 1997, the Company purchased from the financial institution a
call option, exercisable only at maturity, to purchase from the financial
institution up to 600,000 shares. Both options expired in September 1998 at no
cost to the Company. Neither the Company nor the financial institution exercised
their respective option.
In August 1995, the Company completed the receipt of funding under a $10.0
million lease financing agreement to finance both equipment and facility
improvements. In July 1998, the Company made a $1.1 million principal payment as
required under the terms of the financing agreement.
YEAR 2000 COMPLIANCE
The Company has appointed a program manager for its Year 2000 Program and
has developed a strategy to address the potential exposures related to the
impact on its computer systems for the Year 2000. The Company has completed an
initial inventory and review of all system hardware, operating systems including
manufacturing and laboratory control systems and application software in order
to identify potential Year 2000 problems within the Company. The Company has
begun to communicate with all known suppliers, manufacturers, service providers
and other entities with which it has a material business relationship
(collectively, "Third-Party Businesses") regarding compliance with Year 2000
requirements. The Company has also begun developing plans for implementation and
testing required modifications for resolving Year 2000 problems, including
several of the Company's manufacturing control systems and application software
which have been identified as not being Year 2000-compliant. The financial
impact of making the required systems changes cannot be known precisely at this
time, but it is currently expected to be less than $2.0 million. The actual
financial cost of correcting Year 2000 problems could, however, exceed this
estimate.
The Company anticipates that its Year 2000 Program will be materially
completed before January 1, 2000. However, there can be no assurance that the
Year 2000 Program, or computer systems and applications of Third-Party
Businesses on which the Company`s operations rely, will be converted on a timely
basis, or that any such failure to convert by another company would not have a
material adverse effect on the Company`s systems. Moreover, a failure to correct
any noncompliant manufacturing software could disable the Company`s
manufacturing capacity, resulting in inventory and product shortages and
ultimately creating higher manufacturing costs for the Company. The failure of
any of the Third Party Businesses to be Year 2000 compliant, to the extant that
such failure affected the Company's relationship with any such Third Party
Business, could also have a material adverse effect on the Company's business.
The Company currently has no contingency plans to deal with major Year 2000
failures, though such plans will be developed over the coming quarters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The disclosures under this item are not required for the Registrant.
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PART II -- OTHER INFORMATION
This Form 10-Q contains predictions, estimates and other forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
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 in this Form 10-Q. 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 required by the Securities Exchange Act of 1934, as amended, or the
rules and regulations promulgated thereunder.
RISK FACTORS
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
IDEC Pharmaceuticals Corporation has incurred annual operating losses since
its inception in 1985 and may incur additional losses in the future. As of
September 30, 1998, the Company's accumulated deficit was approximately $83.6
million. There is no guarantee that the Company will achieve profitable
operations on an annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS
The Company's reported quarterly revenues, expenses and operating results
are likely to vary significantly in the future due to a variety of factors such
as demand for the Company's product (which may be affected by changes in the
pricing of the Company's product, including the recent 6% increase to the
wholesale price of Rituxan), the Company's achievement of certain product
development objectives, hospital and pharmacy buying decisions, physician
acceptance rates, changes in government or private reimbursement policies,
manufacturing constraints, the ability of the Company to obtain approvals of
additional products for commercial sale on a timely basis, changes in the
Company's level of operating expenses, the Company's ability to attract and
retain qualified personnel, changes in the Company's sales incentive plans or
copromotion agreements, timeliness of financial reporting by certain strategic
partners, foreign currency exchange rates and overall economic conditions.
Because the Company's expense levels are based to a significant extent on the
Company's expectations of future revenues and, therefore, will vary only
slightly in the short term, if revenues fall below expectations, operating
results are likely to be adversely and disproportionately affected.
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. Between January 1, 1998 and October 31, 1998, the
Company's stock price has fluctuated between $17 1/4 per share and $47 3/8 per
share. Numerous factors, both related (directly or indirectly) and unrelated to
the Company may have a significant impact on the market price of the Company's
common stock.
MANUFACTURING RISKS AND DEPENDENCE ON CONTRACT MANUFACTURERS
To be commercially successful, the Company must manufacture its products
either directly or through third parties, in commercial quantities, in
compliance with regulatory requirements (see "Lengthy Regulatory Process; No
Assurance of Regulatory Approvals"), and at an acceptable cost. The Company has
the ability to produce only limited quantities of Rituxan and its other product
candidates, and it has no fill finish experience and capacity and no experience
in the field of chemical manufacturing for small molecule drugs. Thus the
Company is dependent upon third party manufacturers to manufacture a significant
portion of its products and product candidates. In addition, the Company's
manufacturing experience is limited to preclinical quantities of product
candidates and, in the case of Rituxan, approximately two years of commercial
production. Thus, no assurance can be given to the ultimate performance of the
Company's manufacturing facility or the Company's ability to sustain ongoing
commercial production of that portion of its products that it manufactures on
its own.
The Company's copromotion agreement with Genentech stipulates that the
Company commit its full manufacturing capacity to supply Genentech with bulk
Rituxan at the higher of a fixed price or Genentech's cost to
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manufacture per gram until the end of 1999. The Company currently manufactures
Rituxan at a cost in excess of the Genentech contract's fixed price, decreasing
margins on returns from the copromotion agreement. Furthermore, although the
Company has the ability to manufacture limited commercial bulk quantities of
Rituxan, the Company is dependent upon Genentech to supplement its Rituxan
manufacturing capabilities, to manufacture additional worldwide requirements and
to complete all the fill/finish production of Rituxan. Prior to manufacturing
Rituxan for sale outside the United States, Genentech will need to obtain any
requisite foreign manufacturing process approvals. There are no assurances that
Genentech will be able to manufacture and fill/finish Rituxan on a timely and
cost-effective basis to avoid an insufficient supply of Rituxan inventory or to
obtain and maintain any required manufacturing approvals. The failure of
Genentech to so manufacture and fill/finish Rituxan or obtain and maintain
required manufacturing approvals could materially and adversely affect the
Company's business, results of operations and financial condition.
The Company is contractually dependent upon SmithKline Beecham to fulfill
all of the manufacturing requirements for IDEC-151. IDEC-Y2B8 and IDEC-In2B8 are
multiple component products that necessitate coordination between multiple third
party contract manufacturers. The Company is currently negotiating with
commercial contractors to meet the long-term manufacturing demands for IDEC-Y2B8
and IDEC-In2B8. There can be no assurance that the Company will reach agreement
on reasonable terms with such manufacturers or that there will be successful
coordination between such manufacturers. In addition, as the Company does not
have expertise or facilities for small molecule chemical manufacturing, the
Company will need to establish a long-term manufacturing arrangement for 9-AC
with an appropriate contract manufacturer. The Company's 9-AC clinical material
requirements will be met through February 2000 by Pharmacia & Upjohn as part of
the product in-license agreement. Additionally, as the Company does not have
fill/finish capacity, the Company will be dependent on outside contractors to
meet all of the Company's current and future fill/finish requirements. There can
be no assurance as to the ultimate performance of any of the Company's current
or future contract manufacturers.
Biologics manufacturing of the Company's products involves the growing and
harvest of cells and the purification of the target protein by removal of
impurities in controlled environments. This process is extremely susceptible to
product loss due to any microbial or viral contamination of the process. Since
the process is highly defined and controlled, any material problem due to
equipment failure, vendor or operator error could cause the loss of the entire
batch being manufactured. Certain bacterial or viral contamination could cause
the closure of the manufacturing plant for an extended period of time, until the
cause of the contamination is identified and corrective action is implemented.
Certain items of manufacturing equipment may have long lead times to perform
repair and revalidation prior to use. The Company has attempted to plan for most
equipment failure contingencies. Not all potential problems, however, can be
appropriately addressed ahead of time nor spare parts obtained in a reasonable
time frame. Any extended unplanned plant shutdowns will ultimately create higher
manufacturing costs for the Company and could result in inventory and product
shortages.
DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company has several suppliers for raw materials that are used in the
manufacture of products for commercial or clinical trial use that are the sole
source available. Any disruption in the supply of these materials would have a
material adverse effect on the Company's ability to meet its manufacturing
commitments or requirements, would ultimately have a negative effect on
manufacturing costs, or could delay significantly current clinical trials. The
Company has initiated a program for identifying alternative suppliers for
certain raw materials, where possible.
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 secrets and orphan
drug designation. The Company owns by assignment 17 issued and 5 allowed U.S.
patents, 18 U.S. patent applications and numerous corresponding foreign patent
applications, and has licenses to patents or patent applications that are
assigned to 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
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14
Company or its licensees may have to participate in interference proceedings if
declared by the U.S. Patent and Trademark Office ("PTO") to determine priority
of inventions, which typically take several years to resolve and could result in
diminished scope of patent protection and 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 and recombinant DNA technology field, competitors may have filed
applications for or have been issued 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. Moreover,
United States and foreign country patent laws are distinct and the
interpretations thereunder unique to each country. Thus, patentability, validity
and infringement issues for the same technology or invention may be resolved
differently in different jurisdictions. 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. Specifically, the Company is aware of several patents and
patent applications that 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 or entities 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, enforceability 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 these patents
and the plaintiff in such action prevails, the Company could be prevented from
making, using, offering to sell, selling or importing 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 business, results of operations and financial condition.
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 PTO. The Company also relies on trade secrets and proprietary know-how
which it seeks to protect, in part, by confidentiality agreements with its
employees, collaborators 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.
LIMITED SALES AND MARKETING EXPERIENCE
The Company has limited experience in commercial sales and marketing. The
Company has adopted a strategy of pursuing collaborative agreements with
strategic partners which may provide for copromotion of certain of the Company's
products within the United States. The Company will also need either to build
sales and marketing support services or else rely on its strategic partners to
perform these functions. There can be no assurance that the Company will be able
to establish and maintain 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. Further, there can be no assurance that the
Company's market research is accurate or indicative of future sales of Rituxan
or future products.
Outside of the United States, the Company has adopted a strategy of
pursuing 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 sublicenses will successfully market,
distribute or sell the Company's products or that the Company will be able to
establish and maintain successful copromotion or distribution arrangements.
Failure to establish a sales capability either in the United States or outside
the United States may have a material adverse effect on the Company's business,
results of operations and financial condition.
RELIANCE ON THIRD-PARTY DEVELOPMENT AND MARKETING EFFORTS
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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's products. There can be no assurance that these parties will perform
their obligations as expected, that they will not terminate the agreements, that
any revenue will be derived from such arrangements or that these arrangements
will be successful in general. If one or more of the Company's strategic
partners fail to achieve certain product development objectives, such failure
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. Furthermore, the Company's revenues are based upon sales
recognized by certain third parties. The delay or failure of any such third
party to timely record such sales figures could have a material adverse effect
on the Company's own reporting of revenues.
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF REGULATORY APPROVALS
The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's proposed products are subject to
extensive regulation by governmental authorities in the United States and other
countries. The testing and approval process required before a product may be
approved 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 clinical 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.
Before approving a product the FDA will inspect the facilities at which the
product is manufactured and will not approve the product unless cGMP compliance
is satisfactory. Even if cGMP compliance is deemed satisfactory at a given time,
the FDA may revoke such cGMP approval at a later date if it does not remain
satisfied, shutting down the manufacturing facility until the required
corrections are made. Also, if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed and/or require postmarketing testing and surveillance to monitor the
safety or efficacy of a product. Manufacturers of biologics or drugs may also be
subject to state regulation.
The Company will also be subject to a variety of foreign regulations
governing manufacturing, 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 an approved product that has been granted orphan
drug designation by the FDA is entitled to orphan drug 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. Rituxan has received orphan drug exclusivity in the United States and in
1994, the Company obtained orphan drug designation for IDEC-Y2B8 and IDEC-In2B8
from the FDA to treat certain B-cell non-Hodgkin's lymphomas. However, there can
be no assurance that IDEC-Y2B8 or IDEC-In2B8 will receive orphan drug
exclusivity for the B-cell non-Hodgkin's lymphoma indication, and it is possible
that competitors of the Company could obtain approval, and attendant orphan drug
exclusivity, for IDEC-Y2B8 or IDEC-In2B8 for the B-cell non-Hodgkin's lymphoma
indication, thus precluding the Company from marketing IDEC-Y2B8 or IDEC-In2B8
for that indication in the United States. In addition, there can be no assurance
that competitors will not receive approval of other, different drugs or
biologics for B-cell non-Hodgkin's lymphoma. Although obtaining FDA approval to
market a product with 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.
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
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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
results in increased expenses and delays, which could have a material adverse
effect on the Company's business, result of operations and financial condition.
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 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 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 or a BLA or NDA.
SUBSTANTIAL COMPETITION
Substantial competition exists in the biotechnology industry from
pharmaceutical and biotechnology companies which may have technical or
competitive advantages. The Company competes with these companies in the
development of technologies and processes and sometimes competes with them in
acquiring technology from academic institutions, government agencies, and other
private and public research organizations. There can be no assurance that the
Company will be able to produce or acquire rights to products that have
commercial potential. Even if the Company achieves product commercialization,
there can be no assurance that one or more of the Company's competitors may not:
(i) achieve product commercialization earlier than the Company, (ii) receive
patent protection that dominates or adversely affects the Company's activities,
(iii) have significantly greater sales and marketing capabilities or (iv)
develop products that are more widely accepted than those developed by the
Company.
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 payers to contain or reduce costs of health care
through various means. 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 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, operating results and financial condition.
The Company's ability to commercialize its 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"). The cost containment measures that health care payers
and providers are instituting, the effect of any health care reform, a decline
in the rate of acceptance of the product into reimbursement programs or an
adverse variance in levels of reimbursement could materially adversely affect
the Company's business, results of operations and financial condition
PRODUCT LIABILITY EXPOSURE
Clinical trials, manufacturing, marketing and sale of any of the products or
products under development owned or 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 could have a material adverse effect on the Company's business, operating
results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
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17
distinguish 21st century dates from 20th century dates. As a result, in less
than 15 months, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
The Company has appointed a program manager for its Year 2000 Program and
has developed a strategy to address the potential exposures related to the
impact on its computer systems for the Year 2000. The Company has completed an
initial inventory and review of all system hardware, operating systems including
manufacturing and laboratory control systems and application software in order
to identify potential Year 2000 problems within the Company. The Company has
begun to communicate with all known suppliers, manufacturers, service providers
and other entities with which it has a material business relationship
(collectively, "Third-Party Businesses") regarding compliance with Year 2000
requirements. The Company has also begun developing plans for implementation and
testing required modifications for resolving Year 2000 problems, including
several of the Company's manufacturing control systems and application software
which have been identified as not being Year 2000-compliant. The financial
impact of making the required systems changes cannot be known precisely at this
time, but it is currently expected to be less than $2.0 million. The actual
financial cost of correcting Year 2000 problems could, however, exceed this
estimate.
The Company anticipates that its Year 2000 Program will be materially
completed before January 1, 2000. However, there can be no assurance that the
Year 2000 Program, or computer systems and applications of Third-Party
Businesses on which the Company`s operations rely, will be converted on a timely
basis, or that any such failure to convert by another company would not have a
material adverse effect on the Company`s systems. Moreover, a failure to correct
any noncompliant manufacturing software could disable the Company`s
manufacturing capacity, resulting in inventory and product shortages and
ultimately creating higher manufacturing costs for the Company. The failure of
any of the Third Party Businesses to be Year 2000 compliant, to the extant that
such failure affected the Company's relationship with any such Third Party
Business, could also have a material adverse effect on the Company's business.
The Company currently has no contingency plans to deal with major Year 2000
failures, though such plans will be developed over the coming quarters.
ADDITIONAL FINANCING REQUIREMENTS AND UNCERTAIN ACCESS TO CAPITAL MARKETS
The Company has expended and will continue to expend substantial funds to
increase sales of Rituxan and to complete the research, development,
manufacturing and marketing of its other products under development. The Company
has obtained and intends to seek additional funding for these purposes through a
combination of new collaborative arrangements, strategic alliances, and
additional equity or debt financings or from other sources. There can be no
assurance that such future 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, results
of operations and financial condition could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
ENVIRONMENTAL RISKS
The Company's business 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 for all California-based companies has been delayed indefinitely. The
Company currently stores such radioactive materials on site. The Company may
incur substantial cost to comply with environmental regulations.
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
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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.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company has taken a number of actions that could have the effect of
discouraging a takeover attempt that might be beneficial to stockholders who
wish to receive a premium for their shares from a potential bidder. The Company
has adopted a Stockholder Rights Plan that would cause substantial dilution to a
person who attempts to acquire the Company on terms not approved by the
Company's Board of Directors. The Stockholder Rights Plan may therefore have the
effect of delaying or preventing any change in control and deterring any
prospective acquisition of the Company. In addition, the Company's Certificate
of Incorporation grants the Board of Directors the authority to issue up to
8,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by
the Company's stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
shares of preferred stock that may be issued in the future. While the Company
has no present intention to issue shares of preferred stock, such issuance,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
or less attractive for a third party to acquire a majority of the outstanding
voting stock of the Company. Such preferred stock may also have other rights,
including economic rights senior to the common stock, and, as a result, the
issuance thereof could have a material adverse effect on the market value of the
common stock. Furthermore, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"), which prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 also could have the effect of delaying or preventing
a change of control of the Company.
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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. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following exhibits are referenced.
Exhibit
Number Description
------- -----------
10.70(1) Amended and Restated 1988 Stock Option Plan (Amended and Restated
through February 20, 1998).
10.71(1) 1993 Non-Employee Directors Stock Option Plan (Amended through
February 20, 1998).
27.1 Financial Data Schedule.
- ----------
(1) Incorporated by reference to exhibits 99.1 and 99.4, respectively, to
the Company's Registration Statement on Form S-8, File No. 333-62817.
(b) Report on Form 8-K. None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEC PHARMACEUTICALS CORPORATION
Date: November 11, 1998 By: /s/ William H. Rastetter
---------------------- ------------------------------------
William H. Rastetter
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1998 By: /s/ Phillip M. Schneider
---------------------- ------------------------------------
Phillip M. Schneider
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
5
1,000
9-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
19,047
46,194
4,564
0
8,824
91,136
36,968
15,486
115,992
12,288
0
0
0
20
98,918
98,938
0
59,206
0
33,172
0
0
523
0
282
0
0
0
0
15,765
0.80
0.67
