-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I6+iDifK6LYh1/MgKVLhlfP0qVoKzexl/YBZyVc1KUXW29nhDCGmy9ssWlAGjmTB hluVZY/aUnx5SlRqXXHWPg== 0001032210-01-500535.txt : 20010514 0001032210-01-500535.hdr.sgml : 20010514 ACCESSION NUMBER: 0001032210-01-500535 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMMUNEX CORP /DE/ CENTRAL INDEX KEY: 0000719529 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 510346580 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12406 FILM NUMBER: 1630808 BUSINESS ADDRESS: STREET 1: 51 UNIVERSITY ST CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2065870430 MAIL ADDRESS: STREET 1: 51 UNIVERSITY STREET CITY: SEATLE STATE: WA ZIP: 98101 10-Q 1 d10q.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 3/31/01 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, 2001 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 0-12406 IMMUNEX CORPORATION (exact name of registrant as specified in its charter) Washington 51-0346580 ---------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 51 University Street, Seattle, WA 98101 (Address of principal executive offices) Registrant's telephone number, including area code (206) 587-0430 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 --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.01 par value 542,162,689 - ------------------------------------ -------------------------- Class Outstanding at May 7, 2001 IMMUNEX CORPORATION QUARTERLY REPORT ON FORM 10-Q MARCH 31, 2001 TABLE OF CONTENTS
Page No. -------- PART I. FINANCIAL INFORMATION 3 Item 1. Financial Statements: a) Consolidated Condensed Balance Sheets - 4 March 31, 2001 and December 31, 2000 b) Consolidated Condensed Statements of Income - 5 for the three-month periods ended March 31, 2001 and March 31, 2000 c) Consolidated Condensed Statements of Cash Flows - 6 for the three-month periods ended March 31, 2001 and March 31, 2000 d) Notes to Consolidated Condensed Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial 11 - 26 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 6. Exhibits and Reports on Form 8-K 27 SIGNATURES 28
2 PART I. FINANCIAL INFORMATION --------------------- Immunex Corporation has prepared the consolidated condensed financial statements included herein without audit, according to the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flow as of and for the periods indicated. The statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the three-month period ended March 31, 2001, are not necessarily indicative of results to be expected for the entire year ending December 31, 2001. 3 Item 1. FINANCIAL STATEMENTS -------------------- IMMUNEX CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS (in thousands, except per share data)
March 31, December 31, 2001 2000 ---------- ------------ ASSETS - ------ Current assets: Cash and cash equivalents $ 8,940 $ 552,767 Short-term investments 852,535 1,052,043 Accounts receivable-trade, net 67,283 89,864 Other receivables 32,061 26,561 Inventories 31,847 19,371 Other current assets 18,004 15,675 ---------- ---------- Total current assets 1,010,670 1,756,281 Property, plant and equipment, net 173,312 174,049 Restricted cash and investments 765,837 - Other assets 109,191 109,043 ---------- ---------- $2,059,010 $2,039,373 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 84,162 $ 93,905 Accounts payable - AHP 57,923 75,119 Accrued compensation and related items 14,562 25,422 Other current liabilities 9,991 5,995 ---------- ---------- Total current liabilities 166,638 200,441 Other long-term obligations 787 796 Shareholders' equity: Common stock, $.01 par value 2,102,731 2,092,294 Accumulated other comprehensive income 33,860 30,681 Accumulated deficit (245,006) (284,839) ---------- ---------- Total shareholders' equity 1,891,585 1,838,136 ---------- ---------- $2,059,010 $2,039,373 ========== ==========
See accompanying notes. 4 Item 1. FINANCIAL STATEMENTS (continued) -------------------- IMMUNEX CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF INCOME (in thousands, except per share amounts)
Three months ended March 31, -------------------------------------- 2001 2000 -------- -------- Revenues: Product sales $211,846 $166,698 Royalty and contract revenue 5,993 12,340 -------- -------- 217,839 179,038 Operating expenses: Cost of product sales 58,783 47,803 Research and development 49,207 34,700 Selling, general and administrative 92,961 72,300 -------- -------- 200,951 154,803 -------- -------- Operating income 16,888 24,235 Other income (expense): Interest and other income, net 29,988 11,784 Interest expense (14) (3,434) -------- -------- 29,974 8,350 -------- -------- Income before income taxes 46,862 32,585 Provision for income taxes 7,029 424 -------- -------- Net income $ 39,833 $ 32,161 ======== ======== Net income per common share: Basic $ 0.07 $ 0.06 ======== ======== Diluted $ 0.07 $ 0.06 ======== ======== Number of shares used for per share amounts: Basic 541,266 497,256 ======== ======== Diluted 575,902 544,357 ======== ========
See accompanying notes. 5 Item 1. FINANCIAL STATEMENTS (continued) -------------------- IMMUNEX CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands)
Three months ended March 31, --------------------------------------- 2001 2000 --------- --------- Operating Activities: Net income $ 39,833 $ 32,161 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,687 5,004 Tax benefit from stock option plans 5,828 - Cash flow impact of changes to: Accounts receivable 17,081 (7,149) Inventories (8,733) (4,218) Accounts payable, accrued liabilities and other current liabilities (37,546) (677) Other current assets 57 19 --------- --------- Net cash provided by operating activities 23,207 25,140 --------- --------- Investing Activities: Purchases of restricted cash and investments (765,837) - Purchases of investments (468,473) (214,344) Proceeds from sales and maturities of investments 680,902 154,614 Purchases of property, plant and equipment (14,903) (17,789) Purchases of property held for development (13,378) - Acquisition of rights to marketed products, net - (2,500) --------- --------- Net cash used in investing activities (581,689) (80,019) --------- --------- Financing Activities: Proceeds from lease financing 10,055 - Proceeds from common stock issued to employees 4,609 28,858 Proceeds from common stock issued to AHP - 18,209 Other (9) 10 --------- --------- Net cash provided by financing activities 14,655 47,077 --------- --------- Net decrease in cash and cash equivalents (543,827) (7,802) Cash and cash equivalents, beginning of period 552,767 260,770 --------- --------- Cash and cash equivalents, end of period $ 8,940 $ 252,968 ========= =========
See accompanying notes. 6 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements Note 1. Organization and Basis of Presentation - ----------------------------------------------- We are a leading biopharmaceutical company dedicated to developing immune system science to protect human health. Applying our scientific expertise in the fields of immunology, cytokine biology, vascular biology, antibody-based therapeutics and small molecule research, we work to discover new targets and new therapeutics for treating rheumatoid arthritis, asthma and other inflammatory diseases, as well as cancer and cardiovascular diseases. We operate in a highly regulated and competitive environment. Our business is regulated primarily by the U.S. Food and Drug Administration, or FDA. The FDA regulates the products we sell, our manufacturing processes and our promotional activities. Obtaining approval for a new therapeutic product is never certain, generally takes many years and is very costly. Competition in researching, developing and marketing biotechnology and pharmaceutical products is intense. Any of the technologies covering our existing products or products under development could become obsolete or diminished in value by discoveries and developments of other organizations. Our market for pharmaceutical products is primarily the United States. Our sales are primarily to pharmaceutical wholesalers. For the three months ended March 31, 2001, approximately 55% of our product sales were made to three of these wholesalers. American Home Products Corporation, or AHP, holds an approximate 41% interest in Immunex. All references to AHP include AHP and its various affiliates, divisions and subsidiaries. The consolidated condensed financial statements are prepared in conformity with accounting principles generally accepted in the United States. In preparing the financial statements, management must make some estimates and assumptions that affect reported amounts and disclosures. Note 2. Summary of Significant Accounting Policies - --------------------------------------------------- Inventories Inventories are stated at the lower of cost, using a weighted-average method, or market. The components of inventories at specific balance sheet dates are as follows (in thousands):
March 31, December 31, 2001 2000 --------- ------------ Raw materials $ 4,101 $ 4,779 Work in process 16,240 11,987 Finished goods 11,506 2,605 ------- ------- Totals $31,847 $19,371 ======= =======
Restricted cash and investments In March 2001, we entered into a seven and one-half year lease to finance the initial phase of our new research and technology center in Seattle, Washington. The lease will be classified as an operating lease for financial reporting purposes. Under the terms of the financing, we have guaranteed a portion of the payment and performance obligations of the lessor under its borrowing of the construction costs with respect to the project. We are required to post, as collateral for our obligations under the Guarantee, investment securities worth $765.0 million during the construction of the project and 102% of the funds borrowed by the lessor thereafter. The restricted investments consist primarily of U.S. government 7 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (continued) Note 2. Summary of Significant Accounting Policies (continued) - --------------------------------------------------------------- obligations with maturities of one-year or less and are carried at fair value. These investments are held in our name, are restricted as to their withdrawal and will be classified as non-current on our balance sheet until they are released from collateral. Revenues Product sales are recognized when product is shipped and are recorded net of reserves for estimated chargebacks, returns, discounts, Medicaid rebates and administrative fees. We maintain reserves at a level that we believe is sufficient to cover estimated future requirements. Revenues received under royalty, licensing and contract manufacturing agreements are recognized based upon performance under the terms of the underlying agreements. Shipping and handling costs are included in cost of product sales. Recent accounting guidance Effective January 1, 2001, we adopted Financial Accounting Standard No. 133, Accounting for Derivative and Hedging Activities, or FAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. FAS 133, as amended, requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet at fair value. The adoption of FAS 133 impacts our accounting for forward exchange contracts. Our future product orders for Enbrel(R) (etanercept) are made up to fifteen months in advance. During the fourth quarter of 2000, we entered into forward foreign currency contracts to reduce the impact of future currency rate fluctuations related to our purchase commitments for Enbrel. The forward contracts have been designated as cash-flow hedges and, as of March 31, 2001, were considered highly effective. We do not enter into any forward contracts for trading purposes. The unrealized gain from these contracts of approximately $2,388,000 at March 31, 2001 (which consists of $7.6 million of unrealized gains upon adoption of FAS 133 and unrealized losses of $5.2 million experienced during the first quarter of 2001) is included in other current assets and accumulated other comprehensive income. Unrealized gains and losses included in other comprehensive income will be reclassified to earnings when the hedged item is recognized in earnings, which we expect to occur over the next 12 months. Note 3. Reporting Comprehensive Income - --------------------------------------- Our investments are considered available-for-sale and are stated at fair value on the balance sheet with the unrealized gains and losses included as a component of shareholders' equity as comprehensive income. The following table sets forth the components of comprehensive income, (in thousands):
Three months ended March 31, ---------------------------------- 2001 2000 ---------- ---------- Net income $ 39,833 $ 32,161 Cumulative effect of adopting FAS 133 7,641 - Changes in fair value of forward contracts (5,253) - Changes in fair value of investments 791 27,317 ---------- ---------- Comprehensive income $ 43,012 $ 59,478 ========== ==========
8 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (continued) Note 4. Income Taxes - --------------------- The provision for income taxes was $7,029,000, or 15% of pre-tax income, for the three months ended March 31, 2001, compared to $424,000, or 1% of pre- tax income, for the three months ended March 31, 2000. During 2001, we are utilizing our unused research and experimentation credits, which totaled approximately $34.5 million at December 31, 2000, and any research and experimentation credits generated during 2001 to reduce our effective tax rate. During 2000, our federal income tax expense, for financial reporting purposes, was offset by utilizing net operating loss, or NOL, carryforwards and research and experimentation credits. We utilized all remaining NOL carryforwards available to offset reported federal income tax expense during 2000. Note 5. Net Income per Common Share - ------------------------------------- Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is calculated using the weighted average number of common shares outstanding plus the weighted average dilutive effect of outstanding stock options using the "treasury stock" method. The components for calculating net income per share are set forth in the following table (in thousands, except per share data):
Three months ended March 31, ------------------------------- 2001 2000 ---------- --------- Net income $ 39,833 $ 32,161 ========== ========= Weighted average common shares outstanding, basic 541,266 497,256 Net effect of dilutive stock options 34,636 47,101 ---------- --------- Weighted average common shares outstanding, diluted 575,902 544,357 ========== ========= Net income per common share, basic $ 0.07 $ 0.06 ========== ========= Net income per common share, diluted $ 0.07 $ 0.06 ========== =========
Note 6. Contingencies - ---------------------- We are not a party to any material litigation. According to press reports, approximately 20 pharmaceutical companies are under investigation by the U.S. Department of Justice, U.S. Department of Health and Human Services and/or state agencies related to the pricing of their products. We have received notice from the U.S. Department of Justice requesting us to produce documents in connection with the Civil False Claims Act investigation of the pricing of our products for sale and eventual reimbursement by Medicare or state Medicaid programs. We also have received similar requests from the U.S. Department of Health and Human Services and state agencies. Several of our products are regularly sold at substantial discounts from list price. We have consistently required in our contracts of sale that the purchasers appropriately disclose to governmental agencies the discounts that we give 9 IMMUNEX CORPORATION Notes to Consolidated Condensed Financial Statements (continued) Note 6. Contingencies, continued - -------------------------------- to them. We do not know what action, if any, the federal government or any state agency will take as a result of their investigations. 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- INTRODUCTION Our disclosure and analysis in this report contain forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expected supply capabilities and performance of third-party manufacturers, expected completion dates for new manufacturing and other facilities, expected progress in clinical trials, expenses, the outcome of contingencies such as legal proceedings, and financial results. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be wrong. Inaccurate assumptions we might make and known or unknown risks and uncertainties can affect our forward-looking statements. Consequently, no forward-looking statement can be guaranteed and our actual results may differ materially. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Annual Reports on Form 10-K. Also note that we provide a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business under the caption Important Factors That May Affect our Business, Our Results of Operations and Our Stock Price of this report. These are risks that we think could cause our actual results to differ materially from expected and historical results. Other risks beside those listed in this report could also adversely affect us. RESULTS OF OPERATIONS Overview Net income totaled $39.8 million for the three months ended March 31, 2001, compared to net income of $32.2 million for the three months ended March 31, 2000. The improvement in operating results was primarily due to increased sales of Enbrel and increased sales of Leukine(R) (sargramostim, GM-CSF). Our operating results also reflect increased costs, primarily related to manufacturing, selling and marketing expenses for Enbrel. In addition, we have incurred increased expenses related to corporate infrastructure, increased spending on products in our development pipeline and increased investment in discovery research. Revenues Total revenues increased to $217.8 million for the three months ended March 31, 2001, compared to $179.0 million for the three months ended March 31, 2000. The following table summarizes our sources of revenues: 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) ---------------------------------
Three Months Ended March 31, (in millions) ---------------------------------- 2001 2000 ------ ------ Enbrel $164.9 $131.1 Specialty therapeutic products 46.9 34.7 Other product sales - 0.9 ------ ------ Total product sales 211.8 166.7 Royalty and contract revenue 6.0 12.3 ------ ------ Total revenue $217.8 $179.0 ====== ======
Product sales increased to $211.8 million for the three months ended March 31, 2001, compared to $166.7 million for the three months ended March 31, 2000. The improvement was primarily due to increased sales of Enbrel. We own rights to Enbrel in the United States and Canada, and AHP owns rights to Enbrel in all other countries. Under an Enbrel promotion agreement with AHP, Enbrel is being promoted by Wyeth-Ayerst Laboratories, or Wyeth-Ayerst, the pharmaceutical division of AHP. AHP shares in the gross profits from U.S. and Canadian sales of Enbrel and we share the related costs of selling, marketing and distributing Enbrel. Our share of these expenses and the amount of gross profits shared with AHP from sales of Enbrel are included in selling, general and administrative expenses. Growth in sales of Enbrel during the first quarter of 2001 was impacted by the implementation of the Enbrel Enrollment Program, which was initiated to identify and enroll current users of Enbrel because growing demand was projected to exceed supply. Beginning on January 1, 2001, pharmacies were restricted from replenishing existing inventories. This action resulted in a one-time reduction in pharmacy inventory. In addition, some patients filled prescriptions sooner than usual in the fourth quarter of 2000 due to the announcement of the Enbrel Enrollment Program. Sales of Enbrel in future quarters should more closely reflect the actual usage of patients enrolled in the Enbrel Enrollment Program. We continue to expect U.S. and Canadian sales of Enbrel to total up to a maximum of approximately $750 million for all of 2001. Sales of our specialty therapeutic products, which include Leukine and Novantrone(R) (mitoxantrone for injection concentrate), totaled $46.9 million for the three months ended March 31, 2001, compared to $34.7 million for the three months ended March 31, 2000. Sales of Leukine totaled $26.1 million for the three months ended March 31, 2001, compared to $14.6 million during the three months ended March 31, 2000. During the first quarter of 2000, we discontinued certain distributor price discounts in order to improve the profitability of Leukine. This contributed to a temporary decline in sales volume of Leukine last year as distributors reduced inventory levels before ordering additional product. Additionally, we experienced increased demand for Leukine in the first quarter of this year reflecting expanded use by our customers. 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Sales of Novantrone totaled $13.2 million for the three months ended March 31, 2001, compared to $12.8 million for the three months ended March 31, 2000. The increase in the current period is primarily due to the October 2000 FDA approval of Novantrone for reducing neurologic disability and/or the frequency of clinical relapses in patients with secondary progressive, progressive relapsing or worsening relapsing-remitting multiple sclerosis, or MS. The increased demand for Novantrone from the new indication was partially offset by speculative stocking of Novantrone inventory by certain distributors during the fourth quarter of 2000. Royalty and contract revenue totaled $6.0 million for the three months ended March 31, 2001, compared to $12.3 million for the three months ended March 31, 2000. The decrease in royalty and contract revenue from the prior year period is attributed to the one-time payment of $10.0 million we earned from AHP in February 2000 under the Enbrel promotion agreement, when net sales of Enbrel in the United States exceeded $400.0 million for the preceding 12-month period. The decrease from the prior year was partially offset by royalties earned in the first quarter of 2001 from IVAX Corporation on sales of paclitaxel injection, a generic form of Taxol(R). The remaining revenue recognized is due largely to recurring amounts recognized under existing royalty and license agreements. Operating Expenses Gross margin was 72.3% for the three months ended March 31, 2001, compared to 71.3% for the three months ended March 31, 2000. The increase in gross margin percentage during the current year period was due to: . lower costs for Enbrel primarily due to a reduction in internal costs and favorable exchange rates on purchases of Enbrel from Boehringer Ingelheim Pharma KG, or BI Pharma, our contract manufacturer for Enbrel, which is located in Germany; and . higher realized prices from sales of our specialty therapeutics products. Partially offsetting these items was increased sales of Enbrel. Like Leukine, Enbrel is a biologic, and generally has a higher manufacturing cost than traditional pharmaceutical products and is subject to multiple royalty obligations. Research and development expense was $49.2 million for the three months ended March 31, 2001, compared to $34.7 million for the three months ended March 31, 2000. The increase in research and development expense was primarily due to the development of: . Enbrel for treating chronic heart failure, rheumatoid arthritis, or RA, psoriatic arthritis and other diseases; . ABX-EGF for treating cancer, in collaboration with Abgenix, Inc.; . Nuvance(TM) (IL-4 receptor) for treating persistent asthma; . TRAIL/Apo2L molecule for treating cancer, in collaboration with Genentech, Inc.; and . IL-1R Type II for treating RA and other diseases. The increase in research and development expense also includes the cost of process and formulation development activities intended to improve manufacturing yields of Enbrel and the initial operating costs of our recently completed process development facility in Bothell, Washington. We have also increased spending for our discovery research activities. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- In March 22, 2001, we announced that we would not proceed with Phase 2-3 clinical studies of Enbrel for treatment of chronic heart failure, or CHF. This decision was based on guidance from an independent data monitoring board that these studies would not be able to meet efficacy endpoints. We also announced that data from two Phase 2 clinical studies of Nuvance indicated that there was no apparent improvement in opening lung airways over a four-week period for patients with persistent asthma. We will continue to incur expenses during 2001 related to data collection and analysis for these trials and a third continuing Phase 2 clinical trial of Nuvance in asthma patients receiving steroid therapy. However, we expect decreased development spending from previously anticipated levels during 2001 for Nuvance in persistent asthma and Enbrel in CHF as a result of these developments. Selling, general and administrative expense increased to $93.0 million for the three months ended March 31, 2001, compared to $72.3 million for the three months ended March 31, 2000. The increase was primarily due to expenses associated with selling and marketing Enbrel. Under the terms of the Enbrel promotion agreement, AHP assumed a majority of these expenses in the United States in the year following launch of Enbrel, and a decreasing majority of these expenses in the second year following launch of Enbrel. In November 2000, we and AHP began sharing the U.S. marketing and selling expenses incurred under the Enbrel promotion agreement equally. AHP also shares in the gross profits from U.S. and Canadian sales of Enbrel. Our share of costs incurred under the Enbrel promotion agreement, including the obligation to AHP for its share of the gross profits from U.S. and Canadian sales of Enbrel totaled $58.7 million for the three months ended March 31, 2001, compared to $45.2 million for the three months ended March 31, 2000. In addition to expenses incurred under the Enbrel promotion agreement, selling, general and administrative expense increased due to the following: . increased staffing levels and other infrastructure costs; and . selling and marketing expenses for Leukine and the launch of Novantrone in MS. Other Income (Expense) Interest and other income, net totaled $30.0 million for the three months ended March 31, 2001, compared to $11.8 million for the three months ended March 31, 2000. Interest income grew due to a significant increase in funds available for investment purposes resulting from the proceeds from our public offering of common stock in November 2000 and due to improved operating cash. We also realized gains on investments that were sold in order to collateralize the financing of our new research and technology center. Interest expense was lower in the first quarter of 2001 compared to the prior year period due to AHP converting a $450.0 million subordinated note issued by us to AHP into issued shares of our common stock on October 31, 2000. Provision for Income Taxes The provision for income taxes was $7.0 million for the three months ended March 31, 2001, compared to $0.4 million for the three months ended March 31, 2000. During 2001, we expect to fully utilize our remaining research and experimentation credits available to offset federal tax expense for financial reporting purposes. Accordingly, our effective tax rate during 2001 reflects a rate based on the federal statutory rate, adjusted for the benefit of the utilization of our research and experimentation credits to offset reported tax expense. During 2000, federal income tax expense, for financial reporting purposes, was offset by utilizing net operating loss, or NOL, carryforwards and research and experimentation credits. We utilized all remaining NOL carryforwards available to offset reported federal income tax expense during 2000. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments totaled $861.5 million at March 31, 2001 and $1,604.8 million at December 31, 2000. These amounts are held in a variety of interest-bearing instruments, including government and corporate obligations and money market accounts. Operating activities provided cash of $23.2 million during the three months ended March 31, 2001, reflecting income earned in operations, the tax benefit from stock option plans and non-cash depreciation charges, which were partially offset by increased working capital requirements. Working capital from decreased accounts receivable was more than offset by decreased payables and cash used to fund the increase in inventory. Investing activities include the purchase of $765.8 million of investments held as collateral in the lease financing of our new research and technology center in Seattle, Washington. The terms of the financing require us to post, as collateral for our obligations under a guarantee, investment securities worth approximately $765.0 million during the construction of the project and 102% of the funds borrowed by the lessor thereafter. These investment purchases were partially offset by sales of investments as we liquidated some of our longer term debt securities in order to provide the collateral funding. In addition, we invested $14.9 million for property, plant and equipment through March 31, 2001, primarily for purchases of computer hardware and software and final expenditures on construction of our new process development facility in Bothell, Washington. During the first quarter of 2001, we also purchased property adjacent to the location of our planned new research and technology center. This property will be held to accommodate our future growth. Financing activities provided cash of $14.7 million during the three months ended March 31, 2001. We received $10.1 million in proceeds from the lease financing of our research and technology center. These amounts were a reimbursement for expenditures we incurred prior to finalizing the lease agreement. We also received $4.6 million in proceeds from the exercise of employee stock options during the first quarter of 2001. 15 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price Risks Related to our Business We may be unable to sustain or increase profitability or raise sufficient additional capital, which could result in a decline in our stock price. Future operating performance is never certain, and if our operating results fall below the expectations of securities analysts or investors, the trading price of our common stock will likely decline. Until 1998, we had a history of operating losses. Although we have been profitable for three years, we may be unable to sustain or increase profitability on a quarterly or annual basis. Moreover, we anticipate that our operating and capital expenditures will increase significantly in 2001 and in future years primarily due to: . additional spending to support the marketing and sales of Enbrel; . working capital requirements for sales of Enbrel; . growth in research and development expenses as we progress with the development of our clinical and preclinical product candidates; . design and construction of our planned new research and technology center in Seattle, Washington; and . investment in additional manufacturing capacity for our existing products and products in development, including our investment in purchasing and retrofitting a Rhode Island manufacturing facility to produce Enbrel. Our ability to generate sufficient cash flow, or to raise sufficient capital, to fund these operating and capital expenditures depends on our ability to improve operating performance. This in turn depends, among other things, on increasing sales of our existing products, especially Enbrel, and successfully completing product development efforts and obtaining timely regulatory approvals of our lead clinical products. We may not successfully develop and commercialize these products. If we are unable to increase sales of Enbrel, or if sales of Enbrel decline, our revenue growth will be significantly limited, which could result in a decline in our stock price. Because we depend, and expect to continue to depend, on sales of a single product, Enbrel, for a substantial majority of our revenues, decreased or lower- than-anticipated demand for Enbrel, or our inability to meet demand, could materially adversely affect our operating results and harm our business. Because we only began marketing Enbrel in 1998, its long-term effects are largely unknown. Adverse developments regarding the long-term safety and efficacy of Enbrel could adversely affect demand for the product, or restrict our ability to market and sell it for its current or potential indications. Other factors that would adversely affect sales of Enbrel include: . competition from existing products for treating RA or development of new, superior products; . our ability to maintain adequate and uninterrupted sources of supply to meet demand; 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- . events adversely affecting the ability of our manufacturing collaborators to produce Enbrel; . contamination of product lots or product recalls; . our inability to gain regulatory approval to market Enbrel for indications other than RA; and . changes in private health insurer reimbursement rates or policies for Enbrel. Sales of Enbrel accounted for 78% of our product sales for the three months ended March 31, 2001 and 79% of our product sales for the three months ended March 31, 2000. We expect revenue generated by Enbrel to continue to account for a substantial majority of our product sales. Limits on our current sources of supply for Enbrel will constrain our sales growth unless and until additional manufacturing capacity for Enbrel is approved. We may be unable to expand our operations or improve operating results because our sales growth is constrained by limits on our current source of supply for Enbrel. We estimate that all foreseeable supply of Enbrel from BI Pharma in 2001 should support the actively ordering patients enrolled in the Enbrel enrollment program. The enrolled patients do not include the patients on the program's waiting list. This base of enrolled patients could potentially yield annual U.S. and Canadian sales of Enbrel up to a maximum of approximately $750 million. Actual U.S. and Canadian supply of Enbrel could be lower since our supply is impacted by many manufacturing and production variables, such as the timing and actual number of production runs, production success rate, bulk drug yield and the timing and outcome of product quality testing. Our sales of Enbrel will be adversely affected if we at any time are unable to supply the patients enrolled in the program. We are working with AHP to substantially increase our supply of Enbrel for sale in the United States and Canada. In our current plan, we anticipate that in the near term Enbrel would be produced at two sites: BI Pharma, currently our sole source supplier, and a Rhode Island manufacturing facility, which is being retrofitted to produce Enbrel. We do not expect the Rhode Island manufacturing facility to be able to produce commercial quantities of Enbrel until 2002. It is difficult to predict our actual near-term supply of Enbrel with certainty because of the many complex variables involved in the supply equation. Factors that will affect our actual supply of Enbrel at any time include, without limitation, the following: . Variability in BI Pharma's production cycle. BI Pharma does not produce Enbrel continuously; rather, it produces the drug through a series of periodic campaigns throughout the year. The amount of commercial inventory available to us at any time depends on a variety of factors, including the timing of BI Pharma's production runs, level of production yields and success rates, timing and outcome of product quality testing and amount of vialing capacity. We are making substantial investments in manufacturing process improvements for Enbrel produced by BI Pharma that, assuming FDA approval of the process improvements, we anticipate could result in a significant increase in the level of production yields for Enbrel commencing at the end of 2001 or in early 2002. 17 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- . Potential bottlenecks in the vialing process. BI Pharma schedules the vialing production runs for Enbrel in advance, based on the expected timing and yield of bulk drug production runs. Therefore, if BI Pharma realizes production yields beyond expected levels, or provides additional manufacturing capacity for Enbrel, it may not have sufficient vialing capacity for all of the Enbrel bulk drug that it produces. As a result, even if we are able to increase our supply of Enbrel bulk drug, BI Pharma may not be able to vial the extra bulk drug in time to prevent any supply interruptions. . Timely completion and approval of the Rhode Island manufacturing facility. We and AHP are investing substantial sums and working closely together to retrofit a Rhode Island facility that AHP purchased in 1999 to accommodate the commercial production of Enbrel bulk drug. We and AHP have reached agreements regarding the allocation of Enbrel produced at the BI Pharma facility and that may be produced at the Rhode Island facility. As presently configured, we currently estimate that, when completed, the retrofit of the Rhode Island facility could, on an annual basis, double our current U.S. and Canadian supply of Enbrel. We estimate FDA approval of the Rhode Island facility in 2002. This inventory would not be available for sale in the United States unless and until the Rhode Island facility is approved by the FDA, which approval is not assured. We cannot assure you that these estimated dates relating to the Rhode Island facility will prove accurate. If our market demand for Enbrel continues to grow, we may face future supply limitations even after the Rhode Island facility begins producing Enbrel. To address these limitations, we are evaluating other options to further expand our manufacturing capacity for Enbrel, including building additional capacity at the Rhode Island facility. In addition, AHP plans to establish a new manufacturing facility in Ireland by 2005, which could enhance the U.S. and Canadian supply of Enbrel. We and AHP also have reached an agreement regarding the allocation of Enbrel that may be produced at a potential expansion of the Rhode Island facility and the Ireland facility. If additional manufacturing capacity at the Rhode Island facility is not built or if the Ireland facility is not completed, or if these facilities do not receive FDA approval before we encounter supply constraints, our future sales growth would again be restricted. If third-party manufacturers or suppliers fail to perform, we will be unable to meet demand for some of our products. For all drug products that we market, we rely on unaffiliated third parties and AHP to fill and label vials with our bulk drugs and to provide packaging and, in the case of Enbrel, the self-injection syringe. We would be unable to obtain these materials or products for an indeterminate period of time if AHP's subsidiaries or third-party manufacturers or suppliers, including BI Pharma, were to cease or interrupt production or otherwise fail to supply these materials or products to us or AHP for any reason, including due to labor shortages or disputes. This in turn could materially reduce our ability to satisfy demand for these products, which could adversely affect our operating results. AHP either manufactures through its subsidiaries or sources through third-party manufacturers all finished dosage forms and bulk active raw materials for our nonbiological oncology products, including Novantrone. AHP depends on a single supplier for all of the essential raw material for Amicar(R) (aminocaproic acid). In addition, two of the raw materials used to produce Enbrel and our other recombinant protein products under development are manufactured by single suppliers. 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Our preclinical and clinical testing of potential products could be unsuccessful, which could adversely affect our operating results. Before obtaining regulatory approvals for the sale of any of our potential products, we must subject these products to extensive preclinical and clinical testing to demonstrate their safety and effectiveness in humans. If these tests are unsuccessful, we will be unable to commercialize new products and, as a result, we may be unable to sustain or increase profitability. Results of initial preclinical and clinical testing are not necessarily indicative of results to be obtained from later preclinical and clinical testing and, as a result, we may suffer significant setbacks in advanced clinical trials. We may not complete our clinical trials of products under development and the results of the trials may fail to demonstrate the safety and effectiveness of new products to the extent necessary to obtain regulatory approvals. The rate of completion of clinical trials depends, in part, on the enrollment of patients, which in turn depends on factors such as the size of the patient population, the proximity of target patients to clinical sites, the eligibility criteria for the trial and the existence of competitive clinical trials. Any delay in planned patient enrollment in our current or future clinical trials may result in increased costs, trial delays or both. Our products and product candidates are subject to extensive regulatory approval processes and ongoing regulation, which can be costly and time-consuming and subject us to unanticipated delays or lost sales. The FDA imposes substantial requirements on our products before it permits us to manufacture, market and sell them to the public. Compliance with these requirements is costly and time-consuming, and could delay sales of new products or sales of our existing products for new indications. To meet FDA requirements, we must spend substantial resources on lengthy and detailed laboratory tests and clinical trials. It typically takes many years to complete tests and trials for a product. The actual length of time involved depends on the type, complexity and novelty of the product. The FDA may not approve on a timely basis, if at all, some or all of our future products or may not approve some or all of our applications for additional indications for our previously approved products. If we violate regulatory requirements at any stage, whether before or after marketing approval is obtained, we may be fined or forced to remove a product from the market or may experience other adverse consequences, including delay or increased costs, which could materially harm our financial results. Additionally, we may not be able to obtain approval for the labeling claims necessary or desirable for promoting our products. Even if approval is obtained, we may be required or may elect to undertake post-marketing trials. We may be required to perform additional clinical trials or change the labeling of our products if we or others identify side effects after our products are on the market, which could adversely affect sales of the affected products. If we or others identify side effects after any of our products are on the market, or if manufacturing problems occur, regulatory approval may be withdrawn and reformulation of our products, additional clinical trials, changes in labeling of our products and changes to or re-approvals of our manufacturing facilities may be required, any of which could have a material adverse effect on sales of the affected products and on our business and results of operations. 19 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Because Enbrel has only been marketed since 1998, its long-term effects on the development or course of serious infection, malignancy and autoimmune disease are largely unknown and more rarely occurring side effects may not be known. In May 1999, we announced an update to the package insert for Enbrel to advise doctors not to start using Enbrel in patients who have an active infection, and for doctors to exercise caution when considering using Enbrel in patients with a history of recurring infections or with underlying conditions that may predispose patients to infections. In October 2000, we again revised the package insert for Enbrel in response to spontaneous adverse events reported to us, including rare cases of hematologic and central nervous system disorders. The causal relationship between these adverse events and therapy with Enbrel remains unclear. In January 2001, we revised the package insert for Enbrel to advise doctors that rare cases of central nervous system disorders, include seizures, and rare cases of tuberculosis have also been reported in patients using Enbrel. It is possible that additional spontaneous adverse events will be reported to us as experience with Enbrel continues. If we or others identify new adverse events for patients treated with Enbrel, additional precautions, warnings or other changes in the label for Enbrel may be required. Our ability to discover, develop or commercialize products could be adversely affected if our research and marketing collaborations are terminated. We have relationships with various collaborators who conduct research at our request. Some of our collaborators also have shared marketing rights to products subject to the collaboration. These collaborators are not our employees. As a result, we have limited control over their activities and, except as otherwise required by our collaboration agreements, can expect only limited amounts of their time to be dedicated to our activities. Our ability to discover, develop and commercialize products will depend in part on the continuation of these collaborations. If any of these collaborations are terminated, we may not be able to enter into other acceptable collaborations. In addition, our existing collaborations may not be successful. Disputes may arise between us and our collaborators as to a variety of matters, including financing obligations under our agreements and ownership of intellectual property rights. These disputes may be both costly and time-consuming and may result in delays in the development and commercialization of products. Competition and technological developments could render our products obsolete or noncompetitive. To succeed, we must maintain a competitive position with respect to technological advances. We are engaged in fields characterized by extensive research efforts and rapid technological development. New drug discoveries and developments in the fields of genomics, rational drug design and other drug discovery technologies are accelerating. Many companies and institutions, both public and private, are developing synthetic pharmaceuticals and biotechnological products for human therapeutic application, including the applications we have targeted. 20 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Several products are currently approved for treating RA. In particular, we face competition for Enbrel, principally from the generic drug methotrexate and from Johnson & Johnson's product Remicade(R) (infliximab). There are other products in late-stage development that are targeting RA. Depending on the market acceptance of these products or potential products, our sales of Enbrel could be adversely affected. A number of our competitors have substantially more capital, research and development, regulatory, manufacturing, marketing, human and other resources and experience than we have. Furthermore, large pharmaceutical companies have been consolidating, which has increased their resources and concentrated valuable intellectual property assets. As a result, our competitors may: . develop products that are more effective or less costly than any of our current or future products or that render our products obsolete; . produce and market their products more successfully than we do; . establish superior proprietary positions; or . obtain FDA approval for labeling claims that are more favorable than those for our products. If we are unable to protect and enforce our patents and proprietary rights and gain access to patent and proprietary rights of others, we may be unable to compete effectively. Our success depends in part on obtaining, maintaining and enforcing our patents and other proprietary rights and on our ability to avoid infringing the proprietary rights of others. Third parties have obtained or are seeking patents which, if issued or granted, may have a material adverse effect on our ability to successfully commercialize Enbrel in the United States. Although we have a substantial intellectual property portfolio, which includes patents and patent applications, we cannot be certain that we will be able to protect and enforce our rights. Patent law relating to the scope of claims in the biotechnology field is still evolving and, consequently, patent positions in our industry may not be as strong as in other more well-established fields. Accordingly, the U.S. Patent and Trademark Office, or PTO, may not issue patents from the patent applications owned by or licensed to us. If issued, the patents may not give us an advantage over competitors with similar technology. The issuance of a patent is not conclusive as to its validity or enforceability and it is uncertain how much protection, if any, will be given to our patents if we attempt to enforce them or they are challenged in court or in other proceedings. A third party may challenge the validity or enforceability of a patent after it is issued by the PTO. It is possible that a competitor may successfully challenge our patents or that a challenge will result in limiting their coverage. Moreover, the cost of litigation to uphold the validity of patents and to prevent infringement can be substantial. If the outcome of litigation is adverse to us, third parties may be able to use our patented invention without paying us. It is also possible that competitors may infringe our patents or successfully avoid them through design innovation. While we pursue patent protection for products and processes where appropriate, we also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. Therefore, others may independently develop substantially equivalent information or techniques, or otherwise gain access to or disclose our technology. We may not be able to effectively protect our rights in unpatented technology, trade secrets and confidential information. 21 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Our policy is to have each employee enter into a confidentiality agreement that contains provisions prohibiting the disclosure of confidential information to anyone outside Immunex. The research and development contracts we enter into with our scientific consultants generally contain confidentiality and nondisclosure provisions. These confidentiality agreements may not be honored and we may be unable to protect our rights to our unpatented trade secrets. We may be required to obtain licenses to patents or other proprietary rights from third parties to develop, manufacture and commercialize our products, to label and sell our products for new indications or, in the event we do not prevail in a dispute over the patent rights of others, in order to continue our current activities. Licenses required under third-party patents or proprietary rights may not be made available on terms acceptable to us, if at all. If we do not obtain the required licenses, we could encounter delays in product development while we attempt to redesign products or methods or we could be unable to develop, manufacture or sell products requiring these licenses at all. Our customers may not get reimbursed from third parties, which could adversely affect our sales. The affordability of our products depends substantially on governmental authorities, private health insurers and other organizations, such as health maintenance organizations, reimbursing most of the costs of our products and related treatments to our customers. Low reimbursement levels may reduce the demand for, or the price of, our products, which could prevent us from maintaining or achieving profitability on specific products. Since Medicare currently will not reimburse patients for self-administered drugs, Medicare does not cover prescriptions of Enbrel. Although we have been able to obtain sufficient reimbursement for most of our other products, governmental authorities or third parties, or both, may decrease their reimbursement rates or change their reimbursement policies. In addition, we may be unable to obtain sufficient reimbursement for our future products. Our selling practices for products reimbursed by Medicare or Medicaid may be challenged in court, which could result in claims for substantial money damages or changes in our pricing procedures. The federal government and several state agencies have initiated investigations into our pricing practices and could seek substantial money damages or changes in the manner in which we price our products. If changes are mandated, they could adversely affect the sales of those products. In the United States, pharmaceutical companies frequently grant discounts from list price to physicians and suppliers who purchase their products. Discounts on multiple- source, or generic, pharmaceuticals may be substantial. Government reports have noted that government programs that reimburse medical providers for drugs on the basis of the average wholesale price or wholesale acquisition cost, such as Medicare and Medicaid in many states, may provide significant margins to providers who are able to obtain large discounts from pharmaceutical companies. According to press reports, approximately 20 pharmaceutical companies are under investigation by the U.S. Department of Justice, U.S. Department of Health and Human Services and/or state agencies related to the pricing of their products. We have received notice from the U.S. Department of Justice requesting us to produce documents in connection with the Civil False Claims Act investigation of the pricing of our products for sale and eventual reimbursement by Medicare or state Medicaid programs. We also have received similar requests from the U.S. Department of Health and Human Services and state agencies. Several of our products are regularly sold at substantial discounts from list price. We have consistently required in our contracts of sale that the purchasers appropriately disclose to governmental 22 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- agencies the discounts that we give to them. We do not know what action, if any, the federal government or any state agency will take as a result of their investigations. We may be required to defend lawsuits or pay damages for product liability claims. Product liability is a major risk in testing and marketing biotechnology and pharmaceutical products. We face substantial product liability exposure in human clinical trials and for products that we sell after regulatory approval. Product liability claims, regardless of their merits, could be costly and divert management's attention, or adversely affect our reputation and the demand for our products. We currently maintain product liability insurance coverage based on our product portfolio, sales volumes and claims experienced to date. However, this insurance may not provide us with adequate coverage against potential liabilities either for clinical trials or commercial sales. In the future, insurers may not offer us product liability insurance, may raise the price of this insurance or may limit the coverage. We may be required to pay damages for environmental accidents and to incur significant costs for environmental compliance. Our research and development activities involve the controlled use of hazardous materials, chemicals, viruses and radioactive compounds. In the event of an environmental accident, we could be held liable for any resulting damages, and any liability could materially affect our financial condition. We cannot eliminate the risk of accidental contamination or injury from these materials. In addition, we may be required to incur significant costs to comply with federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and some types of waste products. If we are unable to attract and retain key employees and consultants, our business could be harmed. The success of our business depends, in large part, on our continued ability to attract and retain highly qualified management, scientific, manufacturing and sales and marketing personnel. Competition for personnel among companies in the biotechnology and pharmaceutical industries is intense. We cannot assure you that we will be able to attract or retain the personnel necessary to support the growth of our business. A deterioration in the financial condition of major pharmaceutical wholesalers could result in substantial lost receivables. In the first quarter of 2001, approximately 55% of our product sales were made to three pharmaceutical wholesalers. Financial insolvency by one or more of these wholesalers would require us to write off all or a portion of the amounts due us. As of March 31, 2001, the amount due us from these three wholesalers totaled $54.2 million. We currently maintain credit insurance coverage based on our credit exposure. However, this insurance coverage is limited and may not provide us with adequate coverage against losses. In the future, insurers may not offer us credit insurance, may raise the price of this insurance or may limit coverage. 23 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Foreign currency exchange rate fluctuations could cause our profits to decline. Adverse currency fluctuations between the U.S. dollar and the Euro could cause our manufacturing costs to increase and our profitability to decline. Under the terms of our supply agreement with BI Pharma for Enbrel, the price for our product orders initially is set in Euros. We have the option, at the time of any firm order, to pay the purchase price in Euros, or to fix the currency exchange rate on the date of the order and pay the purchase price in U.S. dollars. Accordingly, future currency exchange rate fluctuations could substantially increase the manufacturing cost of our future product orders, which typically are placed up to fifteen months in advance. In addition, if we elect to pay the purchase price of any future orders in Euros, currency fluctuations between the time of that order and the time of payment could substantially increase our manufacturing costs for that order. Future acquisitions of or investments in businesses, products or technologies could harm our business, operating results and stock price. We may acquire or invest in other businesses, products or technologies that are intended to complement our existing business. From time to time, we have had discussions and negotiations with companies regarding our acquiring or investing in these companies' businesses, products or technologies, and we regularly engage in these discussions and negotiations in the ordinary course of our business. Our management has limited prior experience in assimilating acquired companies. Any acquisitions or investments we complete will likely involve some or all of the following risks: . difficulty of assimilating the acquired operations and personnel, products or technologies; . commercial failure of acquired products; . disruption of our ongoing business; . diversion of resources; . inability of management to maintain uniform standards, controls, procedures and policies; . difficulty of managing our growth and information systems; . reduction in the overall growth rate of the combined organization; . risks of entering markets in which we have little or no prior experience; and . impairment of relationships with employees or customers. In addition, future acquisitions or investments could result in potentially dilutive issuances of equity securities, use of cash or incurrence of debt and assumption of contingent liabilities, any of which could have an adverse effect on our business and operating results or the price of our common stock. 24 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- Risks Related to our Share Price and Corporate Control Our stock price is volatile and the value of your investment may be subject to sudden decreases. Our common stock price, like that of other biotechnology companies, is volatile. Our common stock price may fluctuate due to factors such as: . actual or anticipated fluctuations in our quarterly and annual operating results; . actual or anticipated product supply constraints; . adverse developments regarding the safety or efficacy of our products or changes to the labels for our products; . clinical trial results and other product-development announcements by us or our competitors; . loss of any of our key executives; . regulatory announcements, proceedings or changes; . announcements in the scientific and research community; . competitive product developments; . intellectual property and legal developments; . changes in reimbursement policies or medical practices; . mergers or strategic alliances in the biotechnology and pharmaceutical industries; . any financing transactions we may propose or complete; or . broader industry and market trends unrelated to our performance. During periods of stock market price volatility, share prices of many biotechnology companies have often fluctuated in a manner not necessarily related to the companies' operating performance. Accordingly, our common stock may be subject to greater price volatility than the market as a whole. AHP has a substantial degree of corporate control over many of our strategic decisions, and the interests of AHP could conflict with those of the other holders of our common stock. The concentrated holdings of our common stock by AHP and its resulting control over many of our strategic decisions may result in a delay or the deterrence of possible changes in our control, which may reduce the market price of our common stock. As of March 31, 2001, AHP beneficially owned approximately 41% of the outstanding shares of our common stock. Under our governance agreement with AHP, unless and until AHP's percentage ownership of the outstanding shares of our common stock drops below 35%, AHP, through members of our board of directors designated by AHP, will continue to exercise significant control over many of our strategic and operational decisions. So long as AHP has the right to designate at least two directors, which applies if AHP's beneficial ownership of our common 25 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS (continued) --------------------------------- stock is at least 35%, many actions that we may wish to take will require the approval of at least one director designated by AHP. These actions include, with specified exceptions: . any change in the composition of our board (other than directors designated by us); . consolidations, mergers or similar transactions above a specified threshold; . any change in our capital stock; and . any change in our governing documents, as well as specified operating decisions, such as incurring incremental indebtedness above a specified threshold. The interests of AHP with regard to these matters may conflict with the interests of other holders of our common stock. Future sales of shares by AHP could affect our stock price. Sales of substantial amounts of our common stock, or the perception that these sales may occur, could adversely affect prevailing market prices for our common stock. Under our governance agreement, AHP has demand and piggyback registration rights with respect to its shares of our common stock. As a result, AHP could cause a significant number of shares of our common stock to be registered and sold in the public market, which could cause our stock price to decline. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- We maintain an investment portfolio of various holdings, types, and maturities. These securities are classified as available for sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. Readers are referred to page 46 of our fiscal 2000 Annual Report on Form 10-K for a more detailed discussion of quantitative and qualitative disclosures about market risk for investments with contractual maturity dates, which includes a sensitivity analysis. We also hold investments in equity securities that are sensitive to changes in the stock market. The fair value of our equity investments at March 31, 2001 was $36.5 million. For each one percent change in the fair value of the underlying securities, the fair value of our equity investments would change by $0.4 million. During the fourth quarter of 2000, we entered into foreign exchange forward contracts related to inventory purchases to offset the impact of currency fluctuations in the Euro. The forward contracts have original maturities ranging from seven to fifteen months. We do not enter into foreign exchange forward contracts for trading purposes. We do not expect gains or losses on these contracts to have a material impact on our financial statements. 26 PART II. OTHER INFORMATION ----------------- Item 1. LEGAL PROCEEDINGS ----------------- We are not a party to any material litigation. According to press reports, approximately 20 pharmaceutical companies are under investigation by the U.S. Department of Justice, U.S. Department of Health and Human Services and/or state agencies related to the pricing of their products. We have received notice from the U.S. Department of Justice requesting us to produce documents in connection with the Civil False Claims Act investigation of the pricing of our products for sale and eventual reimbursement by Medicare or state Medicaid programs. We also have received similar requests from the U.S. Department of Health and Human Services and state agencies. Several of our products are regularly sold at substantial discounts from list price. We have consistently required in our contracts of sale that the purchasers appropriately disclose to governmental agencies the discounts that we give to them. We do not know what action, if any, the federal government or any state agency will take as a result of their investigations. Item 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- a) Exhibit 10.1 Amendment No. 1 to Memorandum of Understanding Regarding Greenwich Holding's West Greenwich, RI Biopharmaceuticals Facility between Immunex Corporation and American Home Products Corporation dated April 19, 2001. b) Reports on Form 8-K We filed one report on Form 8-K during the quarter ended March 31, 2001. We disclosed that on March 2, 2001 we entered into a seven and one-half year lease to fund the initial phase of our new research and technology center in Seattle, Washington, known as the Helix Project. 27 SIGNATURES - ---------- Pursuant to 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. IMMUNEX CORPORATION Date: May 10, 2001 /s/ Edward V. Fritzky ------------ ----------------------------------------- Edward V. Fritzky Chief Executive Officer, President, Chairman of the Board and Director (Principal Executive Officer) Date: May 10, 2001 /s/ David A. Mann ------------ ----------------------------------------- David A. Mann Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 28 EX-10.1 2 dex101.txt AMEND. NO. 1 TO MEMORANDUM OF UNDERSTANDING Exhibit 10.1 [AHP Letterhead] April 19, 2001 Ms. Peggy Phillips Chief Operating Officer Immunex Corporation 51 University Street Seattle, WA 98101 Re: Amendment No. 1 to Memorandum of Understanding ----------------------------------------------- Regarding Greenwich Holding's West Greenwich, RI ------------------------------------------------ Biopharmaceutical Facility dated August 9, 2000 (the "MOU") ----------------------------------------------------------- Dear Ms. Phillips: This Amendment No. 1 to the MOU confirms our agreement that, if Immunex Corporation ("Immunex"), American Home Products Corporation ("AHPC"), and AHP Subsidiary Holding Corporation ("AHPS") have not executed the Definitive Agreement (as defined in the MOU) for the purchase by Immunex of the outstanding capital stock of Greenwich Holdings, Inc. ("Greenwich") by May 1, 2001, interest will begin to accrue on all funds which will be due from Immunex to Greenwich/AHPC in respect of Facility Costs upon the execution and delivery of the Definitive Agreement, and will continue to accrue until the Signing (as defined in the MOU) of the Definitive Agreement. Accordingly, a new Section 3(d) of the MOU shall be added as follows: "(d) If the Signing does not occur by May 1, 2001, interest at the Interest Rate (as defined below) shall thereupon begin to accrue with respect to the amounts that would have been payable by Immunex (assuming the Signing had occurred on May 1, 2001) pursuant to Paragraph 3(a) of the MOU in respect of Facility Costs incurred prior to May 1, 2001 and, thereafter, interest at the Interest Rate shall begin to accrue as of the last day of each month with respect to amounts that will be payable by Immunex pursuant to Paragraph 3(a) of the MOU in respect of Facility Costs incurred after May 1, 2001 and during the month then ending, in each case until the date of the Signing. Immunex shall not, under this Section 3(d), be obligated to pay interest with respect to any Facility Costs incurred after the Signing. "Interest Rate" shall be defined as "the three month LIBOR rate as published in the Wall Street Journal plus 50 basis points on May 1, 2001, and then on the first day of each calendar quarter, which shall be the interest rate for that next calendar quarter." As soon as practicable following the Signing, AHPC/Greenwich shall provide Immunex with an invoice and calculation detailing Facility Costs incurred through the date of Signing, and the accrued interest at the Interest Rate (the "Interest Payment"). Immunex shall pay Greenwich/AHPC the Interest Payment within thirty (30) days of delivery of such invoice. If AHPC agrees with Immunex that the results of Immunex's audit of such invoices properly indicate that Immunex has been overcharged, interest paid by Immunex on the overcharge under this Section 3(d) will be deducted from any further amount due AHPC. In the event 1 that the parties cannot agree on the proper amount of the Facility Costs, the parties agree to submit disputed items to a mutually agreed upon independent accounting firm, whose determination shall be binding on the parties. In the event that the amount finally owed to AHPC, as finally determined by the independent accounting firm, exceeds by ten percent (10%) or more the amount submitted by AHPC to the independent accounting firm, then AHPC shall bear the cost of the accounting firm. In all other cases, Immunex shall bear such costs. Notwithstanding the foregoing, the interest accruing pursuant to the terms of this Section 3(d) shall be tolled for such period(s) that AHPC/AHPS (x) fails to negotiate in good faith or (y) fails to respond to Immunex proposals in reasonable time periods; provided, however, that failure to execute the Definitive Agreement until a simultaneous execution of the Collaboration Agreement contemplated by the Memorandum of Understanding Regarding Long-Term Allocation of ENBREL Supplies (that was entered into the same date as this MOU) shall not be deemed to be bad faith. Kindly indicate Immunex's confirmation of our agreement by signing and returning the enclosed duplicate copy of this letter to: William M. Haskel Assistant General Counsel American Home Products Corporation Five Giralda Farms Madison, NJ 07940 upon which this Amendment No. 1 to the MOU shall be effective. Sincerely yours, /s/ Kenneth J. Martin Immunex Corporation Agreed and Accepted /s/ Peggy Phillips ________________________ Peggy Phillips Chief Operating Officer 2 -----END PRIVACY-ENHANCED MESSAGE-----