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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 March 31, 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
(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 April 30, 1998, the Registrant had 19,795,429 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 MARCH 31, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- March 31, 1998 and December 31, 1997 ...................1
Condensed Consolidated Statements of Operations -- Three months ended March 31, 1998 and 1997 ...2
Condensed Consolidated Statements of Cash Flows -- Three months ended March 31, 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
Risk Factors ....................................................................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...............................................................................19
Item 2. Changes in Securities ...........................................................................19
Item 3. Defaults upon Senior Securities .................................................................19
Item 4. Submission of Matters to a Vote of Stockholders .................................................19
Item 5. Other Information ...............................................................................19
Item 6. Exhibits and Reports on Form 8-K ................................................................19
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
IDEC PHARMACEUTICALS CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1998 1997
---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,635 $ 34,847
Securities available-for-sale 41,777 34,810
Contract revenue receivables, net 2,395 3,971
Due from related party, net 5,514 --
Inventories 5,918 4,134
Prepaid expenses and other current assets 1,357 1,431
---------- -----------
Total current assets 78,596 79,193
Property and equipment, net 22,821 23,449
Investment and other assets 3,343 3,371
---------- -----------
$ 104,760 $ 106,013
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 3,664 $ 3,908
Accounts payable 2,045 1,626
Accrued expenses 7,473 6,382
Due to related party, net -- 870
Deferred revenue 346 6,646
---------- -----------
Total current liabilities 13,528 19,432
Notes payable, less current portion 3,140 3,886
Deferred rent 2,186 2,016
Stockholders' equity:
Convertible preferred stock, $.001 par value -- --
Common stock, $.001 par value 20 19
Additional paid-in capital 181,340 179,956
Unrealized gains on securities available-for-sale 31 57
Accumulated deficit (95,485) (99,353)
---------- ----------
Total stockholders' equity 85,906 80,679
---------- -----------
$ 104,760 $ 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 ended
March 31,
----------------------
1998 1997
-------- --------
Revenues:
Revenues from unconsolidated joint business $ 9,189 $ --
Contract revenues 2,645 2,664
License fees 6,300 4,000
-------- --------
18,134 6,664
Operating expenses:
Manufacturing costs 4,075 --
Research and development 7,037 7,474
Selling, general and administrative 3,899 2,208
-------- --------
15,011 9,682
-------- --------
Income (loss) from operations 3,123 (3,018)
Interest income, net 745 786
-------- --------
Net income (loss) $ 3,868 $ (2,232)
======== ========
Earnings (loss) per share
Basic $ 0.20 $ (0.12)
Diluted $ 0.16 $ (0.12)
Shares used in calculation of earnings (loss) per share
Basic 19,637 18,195
Diluted 23,676 18,195
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)
Three months ended
March 31,
-----------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net cash used in operating activities $ (6,173) $ (5,644)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (441) (2,755)
Purchase of securities available-for-sale (20,961) (14,361)
Sales and maturities of securities available-for-sale 13,968 15,465
-------- --------
Net cash used in investing activities (7,434) (1,651)
-------- --------
Cash flows from financing activities:
Payments on notes payable (990) (914)
Proceeds from issuance of common stock 1,385 727
-------- --------
Net cash provided by (used in) financing activities 395 (187)
-------- --------
Net decrease in cash and cash equivalents (13,212) (7,482)
Cash and cash equivalents, beginning of period 34,847 25,337
-------- --------
Cash and cash equivalents, end of period $ 21,635 $ 17,855
======== ========
See accompanying notes to condensed consolidated financial statements.
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The information at March 31, 1998, and for the
three-month periods ended March 31, 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 co-promotion profits
generated from its joint business arrangement with Genentech, Inc.
("Genentech"), revenue from bulk Rituxan(TM) sales to Genentech, reimbursement
from Genentech of the Company's sales force and development expenses and royalty
income on sales of Rituxan outside the United States and Canada. Revenue from
bulk Rituxan sales is recognized when accepted by Genentech. Under the joint
business arrangement, all U.S. sales of Rituxan and associated expenses will be
recorded in the books and accounts of Genentech with the Company recording its
share of the pretax co-promotion profits on a quarterly basis, as defined in the
Company's collaborative agreement with Genentech (Note 2). Pretax co-promotion
profits under the joint business arrangement are derived by taking net U.S.
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: Contract revenues consist of non-refundable 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 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.
License Fees: License fees consist of non-refundable fees from product
development milestone payments, the sale of license rights to the Company's
propriety gene expression technology and non-refundable 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 is computed 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 period
ended March 31, 1998 includes the dilutive effect of 4,039,000 shares of common
stock from options, warrants and convertible preferred stock and excludes
901,000 shares 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
period. Options, warrants and convertible preferred stock were excluded from the
calculations of diluted loss per share for the period ended March 31, 1997, as
their effect was antidilutive.
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 non-Hodgkin's
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
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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 $58,500,000, subject to
the attainment of certain product development milestone events, of which
$48,500,000 has been recognized through March 31, 1998. Additionally, the
Company may be reimbursed by Genentech for certain other development and
regulatory approval expenses under the terms of the collaborative agreement.
Genentech may terminate this agreement at any time for any reason with a
resulting loss of product rights.
In addition, the Company and Genentech are co-promoting Rituxan in the
United States under a joint business arrangement, with the Company receiving a
share of the pretax co-promotion profits. Additionally, the Company has a
contractual obligation to manufacture and supply Rituxan through the end of 1999
with the Company having 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 which is currently less than
the Company's cost to manufacture bulk Rituxan. Included in inventories at March
31, 1998, is $1,291,000 of bulk Rituxan inventory that will be 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. ("Hoffman-La Roche"), except in Japan where Zenyaku Kogyo
Co., Ltd. ("Zenyaku") will be responsible for product development, marketing and
sales. The Company will receive royalties on sales outside the United States.
Additionally, the Company will receive royalties on sales, if any, of Genentech
products manufactured using the Company's proprietary gene expression system.
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 it 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 three months ended March 31, 1998 total comprehensive
income totaled $3,894,000 and during the three months ended March 31, 1997 total
comprehensive loss totaled $2,290,000.
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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 and 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 Hoffmann-La
Roche, the Company's European marketing partner, received marketing clearance
for Rituxan from the Swiss regulatory body, the Office Intercantonal de Controle
de Medicaments. Rituxan is the trade name in the United States for the compound
Rituximab (formerly known as IDEC-c2B8). In Switzerland, and upon approval in
the rest of Europe, Rituximab is marketed as as MabThera (Rituximab, Rituxan and
MabThera are collectively referred to herein as Rituxan, except where otherwise
indicated.) Rituxan is being co-promoted in the United States under a joint
business arrangement with Genentech, with the Company receiving a share of the
pretax co-promotion profits. Under the terms of separate agreements with
Genentech, commercialization of Rituxan outside the United States will be the
responsibility of Hoffmann-La Roche, except in Japan where Zenyaku will be
responsible for product development, marketing and sales. The Company will
receive 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,
resulting from the commercialization of Rituxan.
Revenues from unconsolidated joint business consist of the Company's
share of the pretax co-promotion profits generated from its joint business
arrangement with Genentech, revenue from bulk Rituxan sales to Genentech and
reimbursement from Genentech of 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
co-promotion profits on a quarterly basis, as defined in the Company's
collaborative agreement with Genentech. Pretax co-promotion profits under the
joint business arrangement are derived by taking net U.S. sales of Rituxan to
third-party customers less costs 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 propriety 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 is obligated to manufacture and supply bulk Rituxan through
the end of 1999 with 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 which 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 transition of the Company to profitability will be dependent upon the
commercial success of Rituxan, product investment and development and revenues
from the achievement of product development milestone events and licensing
transactions. As of March 31, 1998, the Company had an accumulated deficit of
$95.5 million.
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RESULTS OF OPERATIONS
Revenues from unconsolidated joint business for the three months ended
March 31, 1998 totaled $9.2 million and reflect the financial results from the
Rituxan collaboration and commercialization with Genentech. Revenues from
unconsolidated joint business consist of the Company's share of the pretax
co-promotion profits, sales of bulk Rituxan to Genentech, reimbursement from
Genentech for the Company's Rituxan related sales force and development expenses
and limited royalty income from Hoffmann-La Roche on sales of Rituxan outside
the United States. As reported by Genentech, Rituxan sales to third-party
customers in the United States by Genentech for the first quarter of 1998
amounted to $35.2 million. The Company believes that a significant portion of
Rituxan sales recognized by Genentech early in the first quarter is attributable
to patients who were awaiting therapy pending approval and launch of Rituxan.
This initial pent-up demand appears to have been largely satisfied by the end of
the first quarter of 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.
License fees for the three months ended March 31, 1998 totaled $6.3
million, compared to $4.0 million for the comparable period in 1997. License
fees for the three months ended March 31, 1998 and 1997 consist of license fees
from Kirin Brewery Co., Ltd., Pharmaceutical Division and Boehringer Ingelheim
GmbH, respectively, for the license of the Company's proprietary gene expression
technology. 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 for the three months ended
March 31, 1998 and consist of manufacturing costs related to production of bulk
Rituxan sold to Genentech. The Company expects to continue incurring substantial
additional manufacturing costs as the Company continues to manufacture bulk
Rituxan.
Research and development expenses totaled $7.0 million for the three
months ended March 31, 1998, compared to $7.5 million for the comparable period
in 1997. Research and development expenses consist of basic research and
development, preclinical and clinical testing of the Company's various products
under development, and production scale-up and manufacturing of products used in
clinical trials. 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 $3.9 million for
the three months ended March 31, 1998, compared to $2.2 million for the
comparable period 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.
The financial results for the first quarter of 1998 did not include a
provision for income taxes. However, future profitability and resulting
differences between income tax and financial statement amounts may result in the
Company recording a provision for income taxes in future quarters.
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 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
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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 March 31, 1998, the Company had $63.4 million in cash, cash
equivalents and securities available-for-sale compared to cash, cash equivalents
and securities available-for-sale of $69.7 million at December 31, 1997. Sources
of cash, cash equivalents and securities available-for-sale during the three
months ended March 31, 1998, include $1.4 million from the issuance of common
stock issued under an employee stock option and purchase plans. Uses of cash,
cash equivalents and securities available-for- sale during the three months
ended March 31, 1998, included $6.2 million used in operations and $1.0 million
used to pay notes payable.
In September 1997, the Company entered into an agreement with a
financial institution under which the Company purchased in a private transaction
a capped call option, exercisable only at maturity, representing the Company's
right to purchase from the financial institution up to 600,000 shares of the
Company's common stock. The Company has the right to settle the capped call
option by receiving cash or stock. The capped call option which the Company
purchased is expected to be settled, if exercised, with cash paid to the Company
in an amount equal to the difference between the strike price and the market
price, subject to caps which will limit the total amount of cash the Company
could receive.
Simultaneously, with the purchase of the capped call option, the Company
sold to the same 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 at a certain strike price per
share. The Company has the right to settle the call option with cash or stock
and, if exercised, the Company expects the settle the call option by issuing up
to 900,000 shares of the Company's common stock to the financial institution.
The financial institution has advised the Company that it has engaged, and may
continue to engage, in transactions, including buying and selling shares of the
Company's common stock, to offset its risk relating to the call options, which
could affect the market price of the Company's common stock.
In February 1997, the Company acquired worldwide rights from Pharmacia &
Upjohn S.p.A. ("Pharmacia") to 9-aminocamptothecin ("9-AC"), a broad spectrum
anti-cancer agent. Under the terms of the 9-AC asset transfer agreement, the
Company may make payments to Pharmacia totaling up to $16.0 million, subject to
the attainment of certain product development milestone events. No royalties are
payable to Pharmacia on sales by the Company of any products emerging from the
agreement. The Company anticipates achieving a product development milestone
event in 1999 (commencement of a Phase III trial) that would result in the
Company making a $6.0 million payment to Pharmacia.
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.
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
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
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The Company has appointed a program manager for its Year 2000 Program and is
presently assessing in detail the affected computer systems and software
products. The Company has completed an initial review of all computer systems
and software products in order to identify potential Year 2000 problems within
the Company and has begun to communicate with all known suppliers, service
providers and other entities with which it has a business relationship
(collectively, "Third Party Businesses") regarding compliance with Year 2000
requirements. While the Company has begun evaluating potential strategies and
required modifications for resolving Year 2000 problems, the dollar amount that
the Company will spend to remediate its Year 2000 issues remains uncertain, and
management has not yet assessed the Year 2000 compliance expenses and related
potential effect on the Company's operations. The Company presently intends to
utilize internal and external resources to identify, correct or reprogram and
test its computer systems for Year 2000 compliance.
The Company anticipates its Year 2000 Program will be 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 timely converted, 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 non-compliant
manufacturing software could disable the Company's manufacturing capacity,
resulting in inventory and product shortages and ultimately creating higher
manufacturing costs for the Company. See "Risk Factors -- Limited Manufacturing
Experience."
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This Form 10-Q contains predictions, estimates and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1993, 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
March 31, 1998, the Company's accumulated deficit was approximately $95.5
million. Historical losses have been principally the result of the various
expenses associated with the Company's research and development, clinical and
manufacturing activities prior to approval for marketing of any of the Company's
products. Substantially all revenues to date have resulted from collaborative
research, development and licensing arrangements, research grants and interest
income. 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."
LIMITED MANUFACTURING EXPERIENCE
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
quantities of Rituxan, the Company has only limited experience with regard to
producing such commercial quantities of Rituxan and has not yet received
regulatory approval for commercial production of any other products. In
addition, the Company has limited experience in bulk drug manufacturing in
general and no chemical manufacturing experience, no fill/finish experience and
no fill/finish capacity. Thus, no assurance can be given as to the ultimate
performance of the Company's manufacturing facility or the Company's ability to
make a successful transition to ongoing commercial production.
The Company's co-promotion agreement with Genentech calls for the
Company to commit its full manufacturing capacity for two years to supply
Genentech with bulk Rituxan at the higher of a fixed price per gram or
Genentech's cost to manufacture per gram until the end of 1999. The Company then
has the option to supply Rituxan to Genentech, at the lower of the Company's or
Genentech's cost per gram. The Company currently manufactures Rituxan at a cost
in excess of the Genentech contract's fixed price. Any continuing manufacturing
costs above the contract price per gram or costs attributable to equipment
repair or facility down time could result in an unreimbursable cost, wholly
attributable to the Company, which would, in turn, result in decreased margins.
Biologics manufacturing as performed by the Company 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 or operator error could cause the loss of the
entire batch being manufactured. Certain bacterial or viral contaminations 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
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manufacturing costs for the Company and could result in inventory and product
shortages.
DEPENDENCE ON CONTRACT MANUFACTURERS AND SOLE SOURCE
SUPPLIER
Although the Company has the ability to manufacture limited commercial
bulk quantities of Rituxan, it is dependent upon Genentech to manufacture
additional worldwide requirements and to complete all the fill/finish production
of Rituxan. During the first quarter of 1998, Genentech received FDA approval
for the large-scale (12,000- liter) manufacture of Rituxan at its South San
Francisco manufacturing facility. The Rituxan that Genentech manufactures will
supplement the Rituxan manufactured by IDEC. Genetech is currently constructing
an additional manufacturing plant to satisfy long-term demands for Rituxan. Such
facility must be approved by the FDA before it can supply commercial quantities
of Rituxan and, even if approved, there can be no assurance that the Company or
Genentech can manufacture sufficient quantities of Rituxan to meet as yet
undetermined market demands or that Genentech will be able to fill/finish
Rituxan on a timely and cost effective basis to avoid an insufficient supply of
Rituxan inventory, any of which could materially and adversely affect the
Company's business, results of operation and financial condition.
The Company is contractually dependent upon SmithKline Beecham, p.l.c.
("SmithKline Beecham") to fulfill all of the manufacturing requirements for
IDEC- CE9.1 and IDEC-151. SmithKline Beecham has constructed a commercial-scale
manufacturing plant for IDEC-CE9.1 and/or IDEC-151. However, there can be no
assurance that SmithKline Beecham will be able to manufacture sufficient
quantities of IDEC-CE9.1 or IDEC-151, should either or both receive FDA
approval, to meet as yet undetermined market demands.
Because the Company's capacity is committed to the manufacture of
Rituxan for two years, the Company does not have the current cell culture
capacity to manufacture commercial qualifying material for the Company's
IDEC-Y2B8 or IDEC-In2B8 products. The Company is currently accepting proposals
for a qualified commercial contractor to meet the long-term manufacturing
demands for IDEC-Y2B8 or IDEC- In2B8. 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 materials
requirements will be met over the next two years by Pharmacia, as part of the
product in-license agreement. Additionally, as the Company does not have
fill/finish expertise, the Company will be dependent on outside contractors to
meet all of the Company's current and future fill/finish requirements.
The Company has several vendors 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, and would ultimately have a negative effect on manufacturing costs,
or could delay significantly current clinical studies. Due to the need for raw
materials to meet certain regulatory, pre-qualification and release
specifications prior to their use for manufacturing, the Company is limited to
specific suppliers. The Company has initiated a program for identifying
alternative suppliers for certain raw materials, where possible.
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 that provide for co-promotion of certain of the Company's
products within the United States and Canada. One of these agreements is the
Company's co-promotion agreement with Genentech. To the extent that the Company
has elected or further elects to participate in co-promotion efforts, and in
those instances where the Company retains exclusive marketing rights in
specified territories, the Company will need to maintain and expand its sales
and marketing capability in order to successfully market and sell its products
in the targeted markets. The Company will also need either to build marketing
support services including customer service, order entry, shipping and billing,
customer reimbursement assistance, managed-care sales support, medical
information and sales training, 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
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for its products. To the extent that the Company has entered or in the future
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 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 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 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
The Company has adopted a research, development and product
commercialization strategy that is dependent upon various arrangements with
strategic partners and others. The success of the Company's products is
substantially dependent upon the success of these outside parties in performing
their obligations, which include, but are not limited to, providing funding and
performing research and development with respect to the Company's products. The
Company's strategic partners may also develop products that may compete with the
Company. Although the Company believes that its strategic partners have an
economic incentive to succeed in performing their contractual obligations, the
amount and timing of resources that they devote to these activities is not
within the control of the Company. There can be no assurance that these parties
will perform their obligations as expected or that any revenue will be derived
from such arrangements. The Company has entered into collaborative agreements
with Genentech, Zenyaku, 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 strategic partners elect to terminate their relationship with the Company,
or if the Company or its strategic partners fail to achieve certain product
development milestone events, it could have a material adverse effect on the
Company's ability to fund the related programs and to develop any products that
may have resulted from such collaborations. There can be no assurance that these
collaborations will be successful. In addition, some of the Company's current
strategic partners have certain rights to control the planning and execution of
product development and clinical programs, and there can be no assurance that
such strategic 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. 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 products, the Company's achievement of
certain product development milestone events, 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 co-promotion 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.
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF ADDITIONAL 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
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and other countries. In the United States, pharmaceutical products are regulated
by the FDA under the Federal Food, Drug, and Cosmetic Act and other laws,
including, in the case of biologics, the Public Health Service Act. The nature
and extent of regulation by governmental authorities in the United States
differs with respect to different products. At the present time, with the
exception of 9-AC, the Company believes that its products will be regulated by
the FDA as biologics. Biologics require the submission of a Biologics License
Application ("BLA") and approval by the FDA prior to being marketed in the
United States. The Company believes that the FDA will regulate the Company's
9-AC product candidate as a drug which will require the submission of a New Drug
Application ("NDA") for approval by the FDA prior to being marketed in the
United States. The regulatory approval process for a NDA is similar to the
approval process for a BLA. Manufacturers of biologics or drugs may also be
subject to state regulation.
The steps required before a product 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 BLA or NDA, (v) FDA review of the BLA or NDA and (vi)
satisfactory completion of an 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. There can be no
assurance that Phase I, Phase II or Phase III testing will be completed
successfully within any specific time period, if at all, with respect to any of
the Company's product candidates. Furthermore, the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The results of the preclinical studies and clinical study or studies,
together with detailed information on the manufacture and composition of the
product, are submitted to the FDA in the form of a BLA or NDA requesting
approval to market the product. Before approving a BLA or NDA, the FDA will
inspect the facilities at which the product is manufactured, and will not
approve the product unless cGMP compliance is satisfactory. The FDA may deny a
BLA or NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, and/or 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 or NDA submitted by the Company will be
granted on a timely basis or at all. Also, if regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
it may be marketed.
Both before and after approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the BLA or
NDA review process, or thereafter (including after approval) may result in
various adverse consequences, including the FDA's delay in approving or refusal
to approve a product, withdrawal of an approved product from the market, and/or
the imposition of criminal penalties against the manufacturer and/or BLA or NDA
holder. For example, BLA or NDA holders are required to report certain adverse
reactions to the FDA, and to comply with certain requirements concerning
advertising and promotional labeling for their products. Also, quality control
and manufacturing procedures must continue to conform to 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 BLA or NDA holder, including withdrawal of the product
from the market. Also, new government requirements may be established that could
delay or prevent regulatory approval of the Company's products under
development.
The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its products. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, the Company intends, to the extent possible,
to rely on foreign licensees to obtain regulatory approval for marketing its
products in foreign countries.
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While Rituxan has been cleared for marketing by the FDA and the
equivalent Swiss regulatory agency, the Marketing Authorization Application
("MAA") submitted by Hoffmann-LaRoche with the European Medicines Evaluation
Agency ("EMEA") for marketing Rituxan in the European Union is still pending
approval. There can be no assurance that EMEA approval of the MAA 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, results of operations and financial condition.
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 or
NDA. 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
exclusivity, i.e., the FDA may not approve any other applications to market the
same drug for the same indication, except in certain very limited circumstances,
for a period of seven years.
In 1994, the Company obtained orphan drug designation for Rituxan,
IDEC-Y2B8 and IDEC-In2B8 from the FDA to treat certain B-cell non-Hodgkin's
lymphomas (as defined under "-- History of Operating Losses; Accumulated
Deficit"). In connection with its approval by the FDA, Rituxan has received
orphan drug exclusivity in the United States. 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, even if the Company does obtain
orphan exclusivity for any of its compounds for B-cell non-Hodgkin's lymphoma,
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 the nature of the Company's clinical trial
protocols, existence of competing protocols, size of the patient population,
proximity of patients to clinical sites and eligibility criteria for the study.
Delays in patient enrollment will result in increased expenses and delays, which
could have a material adverse effect on the Company's business, results 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 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 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 or NDA.
PATENTS AND PROPRIETARY RIGHTS
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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 12 issued and 15
allowed U.S. patents, 16 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 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 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 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 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.
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
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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."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends in part upon the continued contributions
of its senior management and key scientific and technical personnel. The
Company's success is also dependent upon its ability to attract and retain
additional qualified scientific, technical, manufacturing and managerial
personnel and to develop and maintain relationships with qualified clinical
researchers. Significant competition exists among pharmaceutical and
biotechnology companies for such personnel, and there can be no assurance that
the Company will retain such personnel or that it will be able to attract,
assimilate and retain such personnel as may be required in the future or to
develop and maintain relationships with such researchers. The Company does not
maintain or intend to purchase "key person" life insurance on any of its
personnel.
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.
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 April 1, 1997 and March 31, 1998, the
Company's stock price has fluctuated between $16 1/4 per share and $47 3/8 per
share. 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 or products under development by the Company or its
competitors, regulatory developments in either the United States or foreign
countries, public concern as to the safety of biotechnology products and
economic and other external factors including the buying and selling of shares
by option holders to offset their risk, 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. See "-- Outstanding Options; Possible Dilution
and Hedging."
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
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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, 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"). 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 business,
results of operations and financial condition
The speed with which Rituxan is adopted into the marketplace will be
dependent on the rate of acceptance of the product into reimbursement programs
operated by governmental authorities, private health insurers and other
organizations, such as HMOs. Any significant delay in the ability of health care
providers to receive reimbursement for Rituxan will similarly delay the adoption
of Rituxan and could have a material adverse effect on the Company's business,
operating results 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.
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 has been delayed indefinitely. The Company currently stores
such radioactive materials on site. The Company may incur substantial cost to
comply with environmental regulations.
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
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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 prohibits 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.
OUTSTANDING OPTIONS; POSSIBLE HEDGING AND DILUTION
In September 1997, the Company entered into an agreement with a
financial institution under which the Company sold to the 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
at a certain strike price per share. The Company has the right to settle the
call option with cash or stock and, if exercised, the Company expects to settle
the call option by issuing up to 900,000 shares of the Company's common stock to
the financial institution. The financial institution has advised the Company
that it has engaged, and may continue to engage, in transactions, including
buying and selling shares of the Company's common stock, to offset its risk
relating to the call option, which could affect the market price of the
Company's common stock. Furthermore, should the Company settle the call option
by issuing stock, new investors will experience an immediate dilution at the
time of issuance. The exercise of any options outstanding under the Company's
employee and director's stock plans will result in further dilution to
stockholders.
YEAR 2000 COMPLIANCE
The Company has appointed a program manager for its Year 2000 Program
and is presently assessing in detail the affected computer systems and software
products. The Company has completed an initial review of all computer systems
and software products in order to identify potential Year 2000 problems within
the Company and has begun to communicate with all known suppliers, service
providers and other entities with which it has a business relationship
(collectively, "Third Party Businesses") regarding compliance with Year 2000
requirements. While the Company has begun evaluating potential strategies and
required modifications for resolving Year 2000 problems (including several
manufacturing software systems which have been identified as not being Year 2000
compliant), the dollar amount that the Company will spend to remediate its Year
2000 issues remains uncertain, and management has not yet assessed the Year 2000
compliance expenses and related potential effect on the Company's operations.
The Company presently intends to utilize internal and external resources to
identify, correct or reprogram and test its computer systems for Year 2000
compliance.
The Company anticipates that its Year 2000 Program will be 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 timely converted, 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 non-compliant
manufacturing software could disable the Company's manufacturing capacity,
resulting in inventory and product shortages and ultimately creating higher
manufacturing costs for the Company. See " -- Limited Manufacturing Experience."
18
21
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None
ITEM 2. CHANGES IN SECURITIES. None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS. None
ITEM 5. OTHER INFORMATION. None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit.
The following exhibit is referenced.
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. None
- ---------------
IDEC Pharmaceuticals(R) and PRIMATIZED(R) are registered U.S. trademarks and
Rituxan (Rituximab)(TM) is a trademark of the Company.
19
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IDEC PHARMACEUTICALS CORPORATION
Date: May 13, 1998 By: /s/ William H. Rastetter
----------------------- ----------------------------------
William H. Rastetter
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1998 By: /s/ Phillip M. Schneider
----------------------- ----------------------------------
Phillip M. Schneider
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
20
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-30-1998
21,635
41,777
2,395
0
5,918
78,596
36,326
13,505
104,760
13,528
0
0
0
20
85,886
85,906
0
18,134
0
11,112
0
0
211
0
0
0
0
0
0
3,868
0.20
0.16
